# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

# FORM 10-Q

| | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
| | ---------------------------------------------------------------------------------

| | For the Quarterly Period ended March 31, 2009
| | ---------------------------------------------

| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
| | ----------------------------------------------------------------------------------------

| | For the Transition Period from ___________ to _____________
| | -----------------------------------------------------------

Commission file number
333-127409

BANKGREENVILLE FINANCIAL CORPORATION(Exact name of small business issuer as specified in its charter)

|South Carolina               |  | 20-2645711         
|---------------------------- |  | -------------------
|(State or other jurisdiction |  | (I.R.S. Employer   
|of incorporation)            |  | Identification No.)

499 Woodruff RoadGreenville, South Carolina 29607
(Address of principal executive offices)

(864) 335-2200(Issuers telephone number)

Not Applicable(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been subject to such filing requirements
for the past 90 days.      Yes        
No

Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).      Yes        
No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company.  See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

| |  | 
| |  | 
| |  | 
| |  | 

Indicate by check mark whether the registrant is shell company
as defined in Rule 12b-2 of the Exchange Act.  Yes          No

Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest
practicable date: 1,180,000 shares of common stock, no par value per share, were issued
and outstanding as of May 13, 2009.

---

# BANKGREENVILLE
FINANCIAL CORPORATION

# INDEX

Part I  Financial
Information

Item 1.        Financial Statements (unaudited)Item 2.        Managements Discussion and Analysis or Plan of OperationItem 3.        Quantitative and Qualitative Disclosures About Market RiskItem 4.        Controls and Procedures

Part II  Other
Information

Item 1.        Legal Proceedings Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds Item 3.        Default Upon Senior SecuritiesItem 4.        Submission of Matters to a Vote of Security HoldersItem 5.        Other InformationItem 6.        Exhibits

SIGNATURES

EXHIBIT INDEX

2

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# BANKGREENVILLE FINANCIAL CORPORATION

# PART I  FINANCIAL
INFORMATION

# Item 1.   Financial
Statements

# Consolidated Balance
Sheets

|                                                                                      | March 31, | December 31,
|------------------------------------------------------------------------------------- | --------- | ------------
|
|
|Assets                                                                                |           |             
|Cash and due from banks                                                               |           |             
|Federal funds sold                                                                    |           |             
|                                                                                      |           |             
|Total cash and cash equivalents                                                       |           |             
|Investment securities available for sale                                              |           |             
|Federal Home Loan Bank Stock                                                          |           |             
|Loans, net of allowance for loan losses of $737,542 and $665,442 at March 31, 2009    |           |             
|and December 31, 2008, respectively                                                   |           |             
|Property and equipment, net                                                           |           |             
|Accrued interest receivable                                                           |           |             
|Other assets                                                                          |           |             
|                                                                                      |           |             
|Total assets                                                                          |           |             
|                                                                                      |           |             
|Liabilities and Shareholders Equity                                                  |           |             
|Liabilities                                                                           |           |             
|Deposits                                                                              |           |             
|Non-interest bearing                                                                  |           |             
|Interest bearing                                                                      |           |             
|                                                                                      |           |             
|Total deposits                                                                        |           |             
|Federal Home Loan Bank advances                                                       |           |             
|Accrued interest payable                                                              |           |             
|Accounts payable and accrued liabilities                                              |           |             
|                                                                                      |           |             
|Total liabilities                                                                     |           |             
|                                                                                      |           |             
|Shareholders Equity                                                                  |           |             
|Preferred stock, no par value; 10,000,000 shares authorized; 1,000 shares of Series A |           |             
|issued and outstanding at March 31, 2009, and,                                        |           |             
|50 shares of Series B issued and outstanding at March 31, 2009                        |           |             
|Common stock, no par value; 10,000,000 shares                                         |           |             
|authorized; 1,180,000 shares issued and outstanding at                                |           |             
|March 31, 2009 and December 31, 2008                                                  |           |             
|Accumulated other comprehensive loss                                                  |           |             
|Accumulated deficit                                                                   |           |             
|                                                                                      |           |             
|Total shareholders equity                                                            |           |             
|                                                                                      |           |             
|Total liabilities and shareholders equity                                            |           |             
|                                                                                      |           |             

The accompanying notes are an integral part of these financial statements.

3

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# BANKGREENVILLE FINANCIAL
CORPORATIONConsolidated Statements of IncomeFor the Three Months Ended (Unaudited)

|                                                             | March 31, | March 31,
|------------------------------------------------------------ | --------- | ---------
|
|Interest income                                              |           |          
|Loans and fees                                               |           |          
|Investment securities and Federal Home Loan Bank stock       |           |          
|Federal funds sold                                           |           |          
|                                                             |           |          
|Total interest income                                        |           |          
|                                                             |           |          
|Interest expense                                             |           |          
|Deposits                                                     |           |          
|Federal funds purchased                                      |           |          
|Federal Home Loan Bank borrowings                            |           |          
|                                                             |           |          
|Total interest expense                                       |           |          
|                                                             |           |          
|Net interest income                                          |           |          
|                                                             |           |          
|Provision for loan losses                                    |           |          
|                                                             |           |          
|Net interest income after provision for loan losses          |           |          
|                                                             |           |          
|Non-interest income                                          |           |          
|Gains on investment securities sales and calls               |           |          
|Mortgage brokerage fees                                      |           |          
|Service charges on deposit accounts                          |           |          
|                                                             |           |          
|Total non-interest income                                    |           |          
|                                                             |           |          
|Non-interest expense                                         |           |          
|Compensation and employee benefits                           |           |          
|Occupancy and equipment                                      |           |          
|Data processing and related costs                            |           |          
|Marketing, advertising and shareholder communications        |           |          
|Legal and audit                                              |           |          
|Other professional fees                                      |           |          
|Supplies, postage and telephone                              |           |          
|Insurance                                                    |           |          
|Credit related expenses                                      |           |          
|Courier and armored carrier service                          |           |          
|Regulatory fees and FDIC insurance                           |           |          
|Other                                                        |           |          
|                                                             |           |          
|Total non-interest expense                                   |           |          
|                                                             |           |          
|Income before income taxes                                   |           |          
|                                                             |           |          
|Income tax provision                                         |           |          
|                                                             |           |          
|Net income                                                   |           |          
|                                                             |           |          
|Dividends and net accretion of discount on preferred stock   |           |          
|                                                             |           |          
|Net income available to common shareholders                  |           |          
|                                                             |           |          
|Basic and diluted income per common share                    |           |          
|                                                             |           |          
|Weighted average common shares outstanding-basic and diluted |           |          
|                                                             |           |          

The accompanying notes are an integral part of these financial statements.

4

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# BANKGREENVILLE FINANCIAL
CORPORATION Consolidated Statements of Changes In Shareholders Equity and Comprehensive
Income (Loss)(Unaudited)

|                                  |  |  |  |       | Accumulated |   |          
|--------------------------------- |  |  |  | ----- | ----------- | - | ---------
|
|
|
|
|Balance, December 31, 2007        |  |  |  | -     |             | $ | -        
|                                  |  |  |  |       |             |   |          
|Stock compensation expense        |  |  |  | -     |             |   | -        
|                                  |  |  |  |       |             |   |          
|Comprehensive income:             |  |  |  |       |             |   |          
|                                  |  |  |  |       |             |   |          
|Net income                        |  |  |  | -     |             |   | -        
|                                  |  |  |  |       |             |   |          
|Unrealized losses on investment   |  |  |  |       |             |   |          
|securities available for sale,    |  |  |  |       |             |   |          
|no tax effect                     |  |  |  | -     |             |   | -        
|                                  |  |  |  |       |             |   |          
|Total comprehensive income        |  |  |  | -     |             |   | -        
|                                  |  |  |  |       |             |   |          
|Balance, March 31, 2008           |  |  |  | -     |             | $ | -        
|                                  |  |  |  |       |             |   |          
|Balance, December 31, 2008        |  |  |  | -     |             | $ | -        
|                                  |  |  |  |       |             |   |          
|Issue Series A preferred stock at |  |  |  |       |             |   |          
|a discount                        |  |  |  | 1,000 |             |   | 939,629  
|                                  |  |  |  |       |             |   |          
|Issue Series B preferred stock at |  |  |  |       |             |   |          
|a premium                         |  |  |  | 50    |             |   | 60,371   
|                                  |  |  |  |       |             |   |          
|Accretion of Series A             |  |  |  |       |             |   |          
|preferred stock discount          |  |  |  | -     |             |   | 885      
|                                  |  |  |  |       |             |   |          
|Amortization of Series B          |  |  |  |       |             |   |          
|preferred stock premium           |  |  |  | -     |             |   | (219     
|                                  |  |  |  |       |             |   |          
|Stock compensation expense        |  |  |  | -     |             |   | -        
|                                  |  |  |  |       |             |   |          
|Comprehensive loss:               |  |  |  |       |             |   |          
|                                  |  |  |  |       |             |   |          
|Net income                        |  |  |  | -     |             |   | -        
|                                  |  |  |  |       |             |   |          
|Unrealized losses on investment   |  |  |  |       |             |   |          
|securities available for sale,    |  |  |  |       |             |   |          
|net of  tax benefit               |  |  |  | -     |             |   | -        
|                                  |  |  |  |       |             |   |          
|Total comprehensive loss          |  |  |  | -     |             |   | -        
|                                  |  |  |  |       |             |   |          
|Balance, March 31, 2009           |  |  |  | 1,050 |             | $ | 1,000,666
|                                  |  |  |  |       |             |   |          

The accompanying notes are an integral part of these financial statements.

5

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# BANKGREENVILLE FINANCIAL
CORPORATION

# Consolidated
Statements of Cash Flows For the Three Months Ended (Unaudited)

|                                                                | March 31, | March 31,
|--------------------------------------------------------------- | --------- | ---------
|
|Operating activities                                            |           |          
|Net income                                                      |           |          
|Provision for loan losses                                       |           |          
|Stock compensation expense                                      |           |          
|Depreciation                                                    |           |          
|Net amortization of premiums on investment securities           |           |          
|Gains on sales and calls of investment securities               |           |          
|Increase in interest receivable                                 |           |          
|Increase in other assets                                        |           |          
|Increase in accrued interest payable                            |           |          
|Decrease in accounts payable and accrued liabilities            |           |          
|                                                                |           |          
|Net cash used for operating activities                          |           |          
|                                                                |           |          
|Investing activities                                            |           |          
|Increase in loans, net                                          |           |          
|Purchase of investment securities available for sale            |           |          
|Proceeds from sales of investment securities available for sale |           |          
|Proceeds from called investment securities available for sale   |           |          
|Proceeds from principal paydowns on mortgage-backed securities  |           |          
|Purchase of FHLB Stock                                          |           |          
|Purchase of property and equipment                              |           |          
|                                                                |           |          
|Net cash used for investing activities                          |           |          
|                                                                |           |          
|Financing activities                                            |           |          
|Proceeds from issuance of preferred stock                       |           |          
|Increase in deposits, net                                       |           |          
|Proceeds from Federal Home Loan Bank advances                   |           |          
|Increase in federal funds purchased                             |           |          
|                                                                |           |          
|Net cash provided by financing activities                       |           |          
|                                                                |           |          
|Net increase (decrease) in cash and cash equivalents            |           |          
|Cash and cash equivalents, beginning of period                  |           |          
|                                                                |           |          
|Cash and cash equivalents, end of period                        |           |          
|                                                                |           |          
|Supplemental information                                        |           |          
|Cash paid for:                                                  |           |          
|Interest                                                        |           |          
|Schedule of non-cash investing and financing activities:        |           |          
|Unrealized losses on investment securities                      |           |          
|Net accretion of discount on preferred stock                    |           |          

The accompanying notes are an integral part of these financial statements.

6

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# BANKGREENVILLE FINANCIAL
CORPORATION

# Notes to Consolidated
Financial Statements

# NOTE 1  NATURE OF
BUSINESS AND BASIS OF PRESENTATION

BankGreenville
Financial Corporation (the Company) is a South Carolina corporation organized
to operate as a bank holding company pursuant to the Federal Bank Holding Company Act of
1956 and the South Carolina Bank Holding Company Act, and to own and control all of the
capital stock of BankGreenville (the Bank). The Bank is a state chartered
institution organized under the laws of South Carolina to conduct general banking business
in Greenville, South Carolina. From our inception on March 18, 2005 and before opening the
Bank for business on January 30, 2006, we engaged in organizational and pre-opening
activities necessary to obtain regulatory approvals and to prepare our subsidiary, the
Bank, to commence business as a financial institution. The Company sold 1,180,000 shares
of its common stock at $10.00 per share and raised $11.8 million in its initial public
offering. Proceeds, net of brokerage commissions and other offering costs totaled
approximately $11.04 million and the Bank was capitalized with $11 million of the net
proceeds. The Bank is primarily engaged in the business of accepting deposits, insured by
the FDIC, and providing commercial, consumer and mortgage loans to the general public in
Greenville County, South Carolina.

On
February 13, 2009 the Company issued shares of its Series A and Series B preferred stock
to the U.S. Treasury under the Treasurys Capital Purchase Program as part of the
Emergency Economic Stabilization Act of 2008. Refer to the accompanying Managements
Discussion and Analysis of Financial Condition and Results of Operations for additional
information.

The
following is a description of the more significant accounting and reporting policies that
the Company follows in preparing and presenting consolidated financial statements.

# Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q. Accordingly,
they do not include all information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements.
However, in the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.

The
accompanying consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, the Bank. In consolidation, all significant intercompany
transactions have been eliminated. The accounting and reporting policies conform to
accounting principles generally accepted in the United States of America and to general
practices in the banking industry. The Company uses the accrual basis of accounting.

Operating
results for the three months ended March 31, 2009 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2009. For further
information, refer to the audited consolidated financial statements and footnotes thereto
included in the Companys 10-K for the year ended December 31, 2008 as filed with the
Securities and Exchange Commission.

# NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

A
summary of the Companys significant accounting policies is included in our Annual
Report on Form 10-K filed with the Securities and Exchange Commission for the year ended
December 31, 2008. For further information, refer to the financial statements and
footnotes thereto included in that filing. Accounting standards that have been issued or
proposed by the Financial Accounting Standards Board (FASB) that do not
require adoption until a future date are not expected to have a material impact on the
consolidated financial statements upon adoption.

# Net Income per Common
Share

Basic
income per common share represents net income to common shareholders divided by the
weighted-average number of common shares outstanding during the period. Potential common
shares that may be issued by the Company relate to outstanding stock options and warrants,
and are determined using the treasury stock method. For the quarters ended March 31, 2009
and 2008, the stock options and warrants were not in-the-money, as the
exercise price of the stock options and warrants

7

---

exceeded the weighted average fair
market value of the common stock. The outstanding stock options and warrants were
anti-dilutive, and basic and dilutive shares and income per common share, respectively,
were the same.

# Stock Compensation Plans

Upon
completion of the offering, the Company issued stock warrants to the organizing directors
for the purchase of three shares of common stock at $10.00 per share for every four shares
purchased in the stock offering, up to a maximum of 10,000 warrants per director. The
Company issued a total of 107,500 warrants, all of which immediately vested upon
completion of the offering. Of these warrants, 10,000 warrants expired in February 2008,
due to the death of one of our organizing directors in 2007. The average fair value per
share of warrants issued amounted to approximately $1.83.  The fair value of each
warrant granted was estimated on the date of grant using the Black-Scholes pricing model
with the following assumptions used for grants:  expected volatility of 6%, risk-free
interest rate of 4.0% and expected lives of five years.

In
addition, during 2006 the Company adopted a stock option plan. The stock options for
212,400 shares which are authorized under the plan vest over a five-year period from the
date of grant and have a contractual term of ten years.

On
January 1, 2006, the Company adopted the fair value recognition provisions of FASB SFAS
No. 123(R), Accounting for Stock-Based Compensation, to account for
compensation costs under its stock option plan. Previously, stock option plans were
accounted for using the intrinsic value method under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (as amended) (APB
25). Under the intrinsic value method prescribed by APB 25, the Company would not
have recognized compensation cost for stock options because the option exercise price in
its plan equals the market price on the date of grant. In adopting SFAS No. 123(R), the
Company elected to use the modified prospective method to account for the transition from
the intrinsic value method to the fair value recognition method. Under the modified
prospective method, compensation cost is recognized from the grant date for all new stock
options granted and for any outstanding unvested awards, applying the fair value method to
those awards as of the date of grant, and is expensed over the employees requisite
service period.

There
were no options forfeited and no options granted during the three months ended March 31,
2009. At March 31, 2009 and December 31, 2008, the Company had 95,900 options outstanding
at $10.00 per share. Vested options amounted to 56,940 and 38,060 at March 31, 2009 and
December 31, 2008, respectively. Options outstanding at March 31, 2009 have a weighted
average remaining contractual term of approximately seven years. Total unrecognized
compensation cost related to non-vested options granted as of March 31, 2009 was $94,054
and is expected to be expensed ratably over the remaining vesting periods of the stock
options. Net income, as reported, included stock-based employee compensation expense of
$13,497 for the three months ended March 31, 2009. Net income, as reported, included
stock-based employee compensation expense of $14,532 for the three months ended March 31,
2008. The exercise or conversion ratio of all stock options granted was 1:1 and the
aggregate intrinsic value of the stock options was zero for both periods.

# Statement of Cash Flows

For
purposes of reporting cash flows, cash equivalents include amounts due from banks and
federal funds sold. Generally, federal funds are sold for one-day periods. Federal funds
sold were $-0- as of March 31, 2009 and $2,153,000 at December 31, 2008. Due to the low
interest rates offered on federal funds sold and the participation of our primary
correspondent bank in the FDICs Temporary Liquidity Guarantee Program, we elected to
transfer our outstanding federal fund sold balance to a non-interest bearing demand
deposit account with this correspondent bank during the first quarter of 2009. The funds
in this demand deposit account are 100% guaranteed by the FDIC and we receive an earnings
credit to offset a portion of our monthly correspondent bank charges.

# Investment Securities

Investment
securities are accounted for in accordance with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities.  Management classifies securities at
the time of purchase into securities held to maturity, trading securities and securities
available for sale. Securities held to maturity are securities which the Company has the
positive intent and ability to hold to maturity, and are reported at amortized cost.
Trading securities are purchased and held principally for the purpose of selling them in
the near future and are reported at fair value, with unrealized gains and losses included
in earnings. Securities available for sale are securities that may be sold under certain
conditions, and are reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders equity as accumulated
other comprehensive income (loss). At March 31, 2009, the Companys investment
securities were classified as available for sale. The amortization of premiums and
accretion of discounts on investment securities are recorded as adjustments to interest
income. Gains or losses on sales of investment securities are based on the net proceeds
and the adjusted carrying amount of the securities sold using the specific identification
method. Unrealized losses on securities, reflecting a decline in value or impairment
judged by the Company to be other than temporary, are charged to earnings in the
consolidated statements of operations.

8

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# NOTE 3  FAIR VALUE

Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements
(SFAS 157) which provides a framework for measuring and disclosing fair value
under generally accepted accounting principles. SFAS 157 requires disclosures about the
fair value of assets and liabilities recognized in the balance sheet in periods subsequent
to initial recognition, whether the measurements are made on a recurring basis (for
example, available for sale investment securities) or on a nonrecurring basis (for
example, impaired loans).

SFAS
157 defines fair value as the exchange price that would be received for an asset or paid
to transfer a liability (an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants on the
measurement date. SFAS 157 also establishes a fair value hierarchy which requires an
entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The standard describes three levels of inputs that may
be used to measure fair value:

|        | 
|------- | 
|Level 1 | 
|        | 
|        | 
|        | 
|        | 
|        | 
|Level 2 | 
|        | 
|        | 
|        | 
|        | 
|        | 
|        | 
|        | 
|        | 
|        | 
|Level 3 | 
|        | 
|        | 
|        | 
|        | 
|        | 
|        | 
|        | 

Available
for sale investment securities ($23,765,993 at March 31, 2009) are the only assets whose
fair values are measured on a recurring basis using Level 1 inputs (active market quotes).

The
Company is predominantly a collateral-based lender with real estate serving as collateral
on a substantial majority of loans. Loans which are deemed to be impaired are primarily
valued on a nonrecurring basis at the fair values of the underlying real estate
collateral. Such fair values are obtained using independent appraisals, which the Company
considers to be level 2 inputs. The aggregate carrying amount of impaired loans at March
31, 2009 was $1.3 million.

The
Company has no assets or liabilities whose fair values are measured using level 3 inputs.

The Company
has no liabilities carried at fair value or measured at fair value on a nonrecurring
basis.

# NOTE 4 
SHAREHOLDERS EQUITY

As
discussed in Note 1 above, the Company participated in the U.S. Treasurys Capital
Purchase Program and issued Series A and Series B preferred stock to the Treasury. The
proceeds for the issuance of the Series A and Series B were allocated based on the
relative fair value of each series based on a discounted cash flow model. As a result,
$939,629 and $60,371 were allocated to the Series A and Series B preferred stock,
respectively. The discount and premium are being accreted and amortized, respectively,
through retained earnings over a five-year estimated life using the effective interest
method. For the quarter ended March 31, 2009, accretion of the Series A Preferred Stock
discount totaled $885 and amortization of the Series B Preferred Stock premium totaled
$219. The net amount of the accretion and amortization was treated as a deemed dividend to
preferred shareholders in the computation of earnings per share.

9

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# Item 2.   
Managements Discussion and Analysis of Financial Condition and Results of
Operations.

The following discussion reviews our results of operations and assesses our financial
condition. You should read the following discussion and analysis in conjunction with the
accompanying consolidated financial statements. The commentary should be read in
conjunction with the discussion of forward-looking statements, the financial statements,
and the related notes and the other statistical information included in this report and in
our 2008 Form 10-K.

# DISCUSSION OF
FORWARD-LOOKING STATEMENTS

This
report contains forward-looking statements relating to, without limitation,
future economic performance, plans and objectives of management for future operations, and
projections of revenues and other financial items that are based on the beliefs of
management, as well as assumptions made by and information currently available to
management. The words may, will, anticipate,
should, would, believe, contemplate,
expect, estimate, continue, and intend, as
well as other similar words and expressions of the future, are intended to identify
forward-looking statements. Our actual results may differ materially from the results
discussed in the forward-looking statements, and our operating performance each quarter is
subject to various risks and uncertainties that are discussed in detail in our 2008 Form
10-K under the Risk Factors heading as filed with the Securities and Exchange
Commission (the SEC) and that include, without limitation, the following:

| |  | our short operating history;
| | - | ----------------------------

| |  | significant increases in competitive pressure in the banking and financial services
industries;
| | - | -----------------------------------------------------------------------------------------------

| |  | changes in the interest rate environment which could reduce
anticipated or actual margins;
| | - | ------------------------------------------------------------------------------------------

| |  | our ability to control costs, expenses and loan delinquency rates;
| | - | ------------------------------------------------------------------

| |  | changes in political conditions or the legislative or regulatory environment;
| | - | -----------------------------------------------------------------------------

| |  | general economic conditions, either nationally or regionally and especially in our primary service area, becoming
less favorable than expected resulting in, among other things, a deterioration in credit quality;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | changes occurring in business conditions and inflation;
| | - | -------------------------------------------------------

| |  | changes in technology;
| | - | ----------------------

| |  | changes in deposit flows;
| | - | -------------------------

| |  | the lack of seasoning of our loan portfolio;
| | - | --------------------------------------------

| |  | changes in monetary and tax policies;
| | - | -------------------------------------

| |  | the level of allowance for loan loss;
| | - | -------------------------------------

| |  | the rate of delinquencies and amounts of charge-offs;
| | - | -----------------------------------------------------

| |  | the rates of loan growth;
| | - | -------------------------

| |  | adverse changes in asset quality and resulting credit risk-related losses and
expenses;
| | - | ---------------------------------------------------------------------------------------

| |  | loss of consumer confidence and economic disruptions resulting from terrorist activities;
| | - | -----------------------------------------------------------------------------------------

| |  | changes in the securities markets; and
| | - | --------------------------------------

| |  | other risks and uncertainties detailed from time to time in our filings with the
SEC.
| | - | -------------------------------------------------------------------------------------

The
above risks are exacerbated by the recent developments in national and international
financial markets, and we are unable to predict what effect these uncertain market
conditions will have on our Company. During 2008 and thus far in 2009, the capital and
credit markets have experienced extended volatility and disruption. There can be no
assurance that these unprecedented recent developments will not materially and adversely
affect our business, financial condition and results of operations.

We
undertake no obligation to publicly update or otherwise revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.

# General

Like
most community banks, we derive the majority of our income from interest we receive on our
loans and investments. Our primary source of funds for making these loans and investments
is our deposits, on which we pay interest. Consequently, one of the key measures of our
success is our amount of net interest income, also known as net interest margin, or the
difference between the income on our interest-earning assets, such as loans and
investments, and the expense on our interest-bearing liabilities, such as deposits.
Another key measure is the spread between the yield we earn on these interest-earning
assets and the rate we pay on our interest-bearing liabilities, which is referred to as
net interest spread.

There
are risks inherent in all loans, so we maintain an allowance for loan losses to absorb
probable losses on existing loans that may become uncollectible. We establish and maintain
this allowance by charging a provision for loan losses against our operating earnings. In
the following section, we have included a detailed discussion of this process.

10

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In
addition to earning interest on our loans and investments, we earn income through fees and
other expenses we charge to our clients. We describe the various components of this
non-interest income, as well as our non-interest expenses, in the following discussion.

# Effect of Economic Trends

Following
an economic decline and historically low interest rates that ended in the first six months
of 2004, the Federal Reserve began increasing short-term rates as the economy showed signs
of strengthening. Between July 2004 and July 2006, the Federal Reserve increased rates at
17 of their meetings for a total of 425 basis points. Between July 2006 and September 18,
2007, the Federal Reserve allowed short-term rates to remain unchanged. Beginning in July
2004 and continuing until September 18, 2007, rates on both short-term or variable
rate interest-earning assets and interest-bearing liabilities increased. The momentum of
the 17 rate increases resulted in higher rates on interest-earning assets and
interest-bearing liabilities during the first nine months of 2007 and as fixed rate loans,
deposits, and borrowings matured they repriced at higher interest rates. In late September
2007, the Federal Reserve reversed their position and has since lowered the short-term
rates by 500 basis points through December 2008, causing the rates on our short-term or
variable rate assets and liabilities to decline. The majority of economic analysts predict
little to no change in short-term rates throughout the remainder of 2009. The following
discussion includes our analysis of the effect that we anticipate changes in interest
rates will have on our financial condition. However, we can give no assurances as to the
future actions of the Federal Reserve or to the anticipated results that will actually
occur.

# Recent Legislative and
Regulatory Initiatives to Address Financial and Economic Crises

Markets in
the United States and elsewhere have experienced extreme volatility and disruption for
more than 12 months. These circumstances have exerted significant downward pressure on
prices of equity securities and virtually all other asset classes, and have resulted in
substantially increased market volatility, severely constrained credit and capital
markets, particularly for financial institutions, and an overall loss of investor
confidence. Loan portfolio performances have deteriorated at many institutions resulting
from, among other factors, a weak economy and a decline in the value of the collateral
supporting their loans. Dramatic slowdowns in the housing industry, due in part to falling
home prices and increasing foreclosures and unemployment, have created strains on
financial institutions. Many borrowers are now unable to repay their loans, and the
collateral securing these loans has, in some cases, declined below the loan balance. In
response to the challenges facing the financial services sector, several regulatory and
governmental actions have recently been announced including:

| |  | The Emergency Economic Stabilization Act of 2008 (EESA), approved by Congress
and signed by President Bush on October 3, 2008, which, among other provisions, allowed
the U.S. Treasury to purchase up to $700 billion of mortgages, mortgage-backed securities
and certain other financial instruments from financial institutions for the purpose of
stabilizing and providing liquidity to the U.S. financial markets. EESA also temporarily
raised the basic limit of FDIC deposit insurance from $100,000 to $250,000; the
legislation contemplated a return to the $100,000 limit on December 31, 2009;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On October 7, 2008, the FDIC approved a plan to increase the rates banks pay for deposit insurance;
| | - | ---------------------------------------------------------------------------------------------------

| |  | On October 14, 2008, the U.S. Treasury announced the creation of a new program, the
Troubled Asset Relief Program (the TARP) Capital Purchase Program (the
CPP) that encourages and allows financial institutions to build capital
through the sale of senior preferred shares to the U.S. Treasury on terms that are
non-negotiable;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On October 14, 2008, the FDIC announced the creation of the Temporary Liquidity
Guarantee Program (the TLGP), which seeks to strengthen confidence and
encourage liquidity in the banking system.  The TLGP has two primary components that
are available on a voluntary basis to financial institutions:
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Transaction Account Guarantee Program (TAGP), which provides unlimited
deposit insurance coverage through December 31, 2009 for noninterest-bearing transaction
accounts (typically business checking accounts) and certain funds swept into
noninterest-bearing savings accounts. Institutions participating in the TLGP pay a 10
basis points fee (annualized) on the balance of each covered account in excess of
$250,000, while the extra deposit insurance is in place;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Debt Guarantee Program (DGP), under which the FDIC guarantees certain
senior unsecured debt of FDIC-insured institutions and their holding companies. The
unsecured debt must be issued on or after October 14, 2008 and not later than June 30,
2009, and the guarantee is effective through the earlier of the maturity date or June 30,
2012. The DGP coverage limit is generally 125% of the eligible entitys eligible debt
outstanding on September 30, 2008 and scheduled to mature on or before June 30, 2009 or,
for certain insured institutions, 2% of their liabilities as of September 30, 2008.
Depending on the term of the debt maturity, the nonrefundable DGP fee ranges from 50 to
100 basis points (annualized) for covered debt outstanding until the earlier of
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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| |  | maturity or June 30, 2012. The TAGP and DGP are in effect for all eligible entities, unless the
entity opted out on or before December 5, 2008.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------

| |  | On February 17, 2009 President Obama signed into law The American Recovery and
Reinvestment Act of 2009 (ARRA), more commonly known as the economic stimulus
or economic recovery package. ARRA includes a wide variety of programs intended to
stimulate the economy and provide for extensive infrastructure, energy, health, and
education needs. In addition, ARRA imposes certain new executive compensation and
corporate expenditure limits on all current and future TARP recipients, including our
Company, that are in addition to those previously announced by the U.S. Treasury. These
new limits are in place until the institution has repaid the Treasury, which is now
permitted under ARRA without penalty and without the need to raise new capital, subject to
the Treasurys consultation with the recipient institutions appropriate
regulatory agency.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On March 23, 2009, the U.S. Treasury, in conjunction with the FDIC and the Federal
Reserve, announced the Public-Private Partnership Investment Program for Legacy Assets
which consists of two separate plans, addressing two distinct asset groups:
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Legacy Loan Program, in which the primary purpose will be to facilitate the sale of
troubled mortgage loans by eligible institutions, which include FDIC-insured federal or
state banks and savings associations. Eligible assets may not be strictly limited to
loans; however, what constitutes an eligible asset will be determined by participating
banks, their primary regulators, the FDIC and the Treasury. Additionally, the Loan
Programs requirements and structure will be subject to notice and comment
rulemaking, which may take some time to complete.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Securities Program, which will be administered by the Treasury, involves the creation
of public-private investment funds to target investments in eligible residential
mortgage-backed securities and commercial mortgage-backed securities issued before 2009
that originally were rated AAA or the equivalent by two or more nationally recognized
statistical rating organizations, without regard to rating enhancements (collectively,
Legacy Securities). Legacy Securities must be directly secured by actual
mortgage loans, leases or other assets, and may be purchased only from financial
institutions that meet TARP eligibility requirements.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

It
is likely that further regulatory actions may arise as the Federal government continues to
attempt to address the economic situation.

On
December 26, 2008, we received preliminary approval to participate in the CPP in the
amount of $1,891,000, which represented the maximum 3% of our risk-weighted assets at
September 30, 2008. After careful evaluation by our executive management and board of
directors, including the impact of our participation on our capital ratios and operations
as well as on our common shareholders, we elected to participate at $1 million and were
able to participate under the private company terms, which limited dilution to our common
shareholders. The transaction closed on February 13, 2009 and on that date we issued
shares of our Series A and Series B Preferred Stock to the U.S. Treasury. Refer to the
Capital Resources section of Managements Discussion and Analysis
or Plan of Operation for additional details.

# Critical Accounting
Policies

We
have adopted various accounting policies that govern the application of accounting
principles generally accepted in the United States and with general practices within the
banking industry in the preparation of our financial statements. Our significant
accounting policies are described in footnote 1 to our audited consolidated financial
statements as of December 31, 2008, as filed on our annual report on Form 10-K.

Certain
accounting policies involve significant judgments and assumptions by us that have a
material impact on the carrying value of certain assets and liabilities. We consider these
accounting policies to be critical accounting policies. The judgment and assumptions we
use are based on historical experience and other factors, which we believe to be
reasonable under the circumstances. Because of the nature of the judgment and assumptions
we make, actual results could differ from these judgments and estimates that could have a
material impact on the carrying values of our assets and liabilities and our results of
operations.

# Allowance for Loan Losses

We
believe the allowance for loan losses is the critical accounting policy that requires the
most significant judgments and estimates used in preparation of our consolidated financial
statements. Some of the more critical judgments supporting the amount of our allowance for
loan losses include judgments about the creditworthiness of borrowers, the estimated value
of the underlying collateral, cash flow assumptions, determination of loss factors for
estimating credit losses, the impact of current events, and conditions, and other factors
impacting the level of probable inherent losses. Under different conditions or using
different

12

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assumptions, the actual amount of
credit losses incurred by us may be different from managements estimates provided in
our consolidated financial statements. Refer to the portion of this discussion that
addresses our allowance for loan losses for a more complete discussion of our processes
and methodology for determining our allowance for loan losses.

# Income Taxes

We
use assumptions and estimates in determining income taxes payable or refundable for the
current year, deferred income tax liabilities and assets for events recognized differently
in our financial statements and income tax returns, and income tax benefit or expense.
Determining these amounts requires analysis of certain transactions and interpretation of
tax laws and regulations. Management exercises judgment in evaluating the amount and
timing of recognition of resulting tax liabilities and assets. These judgments and
estimates are re-evaluated on a continual basis as regulatory and business factors change.
Valuation allowances are established to reduce deferred tax assets if it is determined
that it is more likely than not that all or some portion of the potential
deferred tax asset will not be realized. No assurance can be given that either the tax
returns submitted by us or the income tax reported on the financial statements will not be
adjusted by either adverse rulings by the United States Tax Court, changes in the tax
code, or assessments made by the Internal Revenue Service. We are subject to potential
adverse adjustments, including, but not limited to, an increase in the statutory federal
or state income tax rates, the permanent non-deductibility of amounts currently considered
deductible either now or in future periods, and the dependency on the generation of future
taxable income, including capital gains, in order to ultimately realize deferred income
tax assets.

# Results of Operations Three months ended March 31, 2009 and 2008

General

Our
net income for the quarter ended March 31, 2009 was $28,129, or $ .02 per basic and
diluted common share, compared to net income of $6,731, or $0.00 per share, for the
quarter ended March 31, 2008, for an improvement of $21,398, or 318%. As described below,
the increase in net income is attributable primarily to an increase in our net interest
income, which reflects the continued growth of our Bank and the volume increases in our
interest-earning assets as well as an increase in non-interest income for the three months
ended March 31, 2009 compared to the same period in 2008.

Net Interest Income

Our
primary source of revenue is net interest income. Net interest income is the difference
between income earned on interest-bearing assets and interest paid on deposits and
borrowings used to support such assets. The level of net interest income is determined by
the balances of interest-earning assets and interest-bearing liabilities and corresponding
interest rates earned and paid on those assets and liabilities, respectively. In addition
to the volume of and corresponding interest rates associated with these interest-earning
assets and interest-bearing liabilities, net interest income is affected by the timing of
re-pricing these interest-earning assets and interest-bearing liabilities.

Net
interest income was $508,649 for the quarter ended March 31, 2009, an increase of $78,990,
or 18%, over net interest income of $429,659 for the quarter ended March 31, 2008.
Interest income increased $76,836, or 8%, to $1,028,483 for the quarter ended March 31,
2009. Although the volume of average interest-earning assets increased $20.4 million from
March 31, 2008 to March 31, 2009, as shown in the table below, we did not experience as
significant an increase in corresponding interest income due to the 297 basis point drop
in the average prime rate from period to period. Interest expense for the quarter ended
March 31, 2009 decreased $2,154, or 0.41%, over the same period in 2008 as higher-priced
CDs matured and were replaced with lower rates and rates were lowered on all deposit
transaction accounts due to the market decrease in rates.

The
following table sets forth information related to our average balance sheet, average
yields on assets, and average costs of liabilities for the quarters ended March 31, 2009
and 2008. We derived these yields and rates by dividing annualized income or expense by
the average balance of the corresponding assets or liabilities. We derived average
balances from the daily balances throughout the periods indicated. The net amount of
capitalized loan fees is amortized into interest income over the lives of the loans.

13

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|Average Balances, Income and Expenses, Yields and Rates
|-------------------------------------------------------
|
|
|
|
|
|Interest-earning assets:                               
|Federal funds sold                                     
|Investment securities and FHLB stock                   
|Loans (1)                                              
|                                                       
|Total interest-earning  assets                         
|Non-earning assets                                     
|                                                       
|Total assets                                           
|                                                       
|                                                       
|Interest-bearing liabilities:                          
|Interest checking                                      
|Savings and money market                               
|Time deposits                                          
|Federal funds purchased                                
|FHLB borrowings                                        
|                                                       
|Total interest-bearing liabilities                     
|                                                       
|Non-interest bearing liabilities                       
|Shareholders equity                                   
|                                                       
|Total liabilities and shareholders' equity             
|                                                       
|Net interest spread                                    
|                                                       
|Net interest income/margin                             
|                                                       

(1)  
          Loan fees, which are immaterial, are included in interest income. There were
          $1.2 million in nonaccrual loans at March 31, 2009 and no nonaccrual loans at
          March 31, 2008. Nonaccrual loans are included in the average balances above and
          income on nonaccrual loans is included on the cash basis for yield computation
          purposes.

Our
consolidated net interest margin for the quarter ended March 31, 2009 was 2.63%, a
decrease of 35 basis points from the net interest margin of 2.98% for the same period in
2008. The average prime interest rate was 6.22% during the three months ended March 31,
2008, while the average prime interest rate during the three-month period ended March 31,
2009 was 3.25%. With a 297 basis point decrease in the average prime rate during the
comparable periods, and with approximately 56% of our loan portfolio tied to the prime
rate, we experienced an immediate decrease in loan yields as the prime rate decreases
occurred as evidenced by the 181 basis point decline in loan yield over the comparable
periods. Cost of interest-bearing liabilities decreased 138 basis points as rates on
transaction deposit accounts were reduced and as higher priced certificates of deposits
matured and were replaced at lower interest rates. These fixed maturity certificates of
deposit are priced higher than core deposits and have stated maturity dates, so there is
not an immediate decrease in the interest rates paid on these time deposits to offset the
immediate decrease in loan yields. The net interest margin is calculated by dividing
annualized net interest income by year-to-date average earning assets. Our net interest
spread was 2.37% and 2.28% for the quarters ended March 31, 2009 and 2008, respectively.
The net interest spread is the difference between the yield we earn on our
interest-earning assets and the rate we pay on our interest-bearing liabilities. In
pricing deposits, we consider our liquidity needs, the direction and levels of interest
rates and local market conditions.

Provision for Loan Losses

We
have established an allowance for loan losses through a provision for loan losses charged
as a non-cash expense to our statements of income. We review our loan portfolio
periodically to evaluate our outstanding loans and to measure both the performance of the
portfolio and the adequacy of the allowance for loan losses.

Our
provision for loan losses for the quarter ended March 31, 2009 was $72,100 compared to
$33,608 for the quarter ended March 31, 2008. Management evaluates the adequacy of the
reserve for probable loan losses given the size, mix, and quality of the current loan
portfolio as well as other factors including local economic conditions. Management also
relies on our history of past-dues and charge-offs, as well as peer data to determine our
loan loss allowance.

Refer
to the discussion below under Allowance for Loan Losses for a description of
the factors we consider in determining the amount of the provision we expense each period
in order to maintain an appropriate allowance for loan losses. Despite the three potential
problem borrowing relationships that we were aware of as of March 31, 2009, and discussed
under

14

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Loans below, we believe
that our provision for loan losses for the quarter ended March 31, 2009 is adequate. We
maintained an allowance as a percentage of outstanding loans of 1.30% at March 31, 2009
compared to 1.12% at March 31, 2008.

Non-interest Income

Non-interest
income totaled $86,332 for the quarter ended March 31, 2009 compared to $50,353 for the
quarter ended March 31, 2008, for an improvement of $35,979, or 71%. During the three
months ended March 31, 2009 we recorded $56,096 in gains on investment securities sold
during the period, compared to gains of $38,924 for the three months ended March 31, 2008.

Mortgage
brokerage fees increased $9,889, or 279% from $3,545 for the three-month period ended
March, 31, 2008 to $13,434 for the same period in 2009 due to increased mortgage volume
associated with the lower mortgage rate environment. Service charges on deposit accounts
increased $8,918, or 113%, from $7,884 for the period ended March 31, 2008 to $16,802 for
the comparable period in 2009 due to deposit growth.

Non-interest Expenses

The
following table sets forth our non-interest expenses for the first quarter of 2009 and
2008.

|                                                      | Three Months Ended
|----------------------------------------------------- | ------------------
|
|
|Compensation and employee benefits                    |                   
|Occupancy and equipment                               |                   
|Data processing and related costs                     |                   
|Marketing, advertising and shareholder communications |                   
|Legal and audit                                       |                   
|Other professional fees                               |                   
|Supplies, postage and telephone                       |                   
|Insurance                                             |                   
|Credit related expenses                               |                   
|Courier and armored carrier service                   |                   
|Regulatory fees and FDIC insurance                    |                   
|Other                                                 |                   
|                                                      |                   
|Total non-interest expense                            |                   
|                                                      |                   

Non-interest
expenses totaled $494,752 for the quarter ended March 31, 2009 compared to $439,673 for
the quarter ended March 31, 2008, for an increase of $55,079, or 13%. Data processing
costs increased from $46,926 for the quarter ended March 31, 2008 to $61,298, or 31% for
the quarter ended March 31, 2009. This increase was due to an increase in costs associated
with our core processing provider, whose fees are based on growth of the Banks
deposit accounts. Legal and audit fees increased from $19,535 for the quarter ended March
31, 2008 to $35,054 for the quarter ended March 31, 2009, due to increases in the costs
for both auditor and legal reviews of SEC filings for 2009. Regulatory and FDIC insurance
expense increased from $11,613 for the quarter ended March 31, 2008 to $24,330, or 110%
for the quarter ended March 31, 2009, due to continued increases in FDIC assessment rates
associated with the FDICs TLGP and related increases in federal deposit insurance
coverage, as well as continued growth in the Banks deposits.

# Balance Sheet Review

General

At
March 31, 2009, total assets were $89.5 million compared to $82.6 million at December 31,
2008, for an increase of $6.9 million, or 8%. The increase in assets included volume
increases in our loan and investment portfolios as well as our cash balances, all of which
were increased primarily from growth in local deposits. Interest-earning assets comprised
approximately 91% and 95% of total assets at March 31, 2009 and December 31, 2008,
respectively. Gross loans totaled $56.7 million, an increase of $2.1 million, or 3.8%,
from $54.7 million at December 31, 2008. Investment securities and Federal Home Loan Bank
stock amounted to $24.6 million at March 31, 2009. At March 31, 2009, we had cash balances
of $5.6 million with $4.8 million in a demand deposit account with our primary
correspondent bank. Refer to Statement of Cash Flows included in Note 2 of the
Notes to Consolidated Financial Statements.

Deposits
totaled $64.1 million at March 31, 2009, a $6.4 million, or 11%, increase from $57.7
million at December 31, 2008. Federal Home Loan Bank borrowings remained unchanged at
$14.5 million. Shareholders equity totaled $10.6 million at March 31, 2009, a $1.0
million, or 10%, increase from $9.6 million at December 31, 2008.

15

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Investments

On
March 31, 2009 and December 31, 2008, our investment securities portfolio amounted to
$23.8 million and $21.1 million and represented 29% and 27%, respectively, of
interest-earning assets. Unrealized losses, net of tax benefit, on available for sale
investment securities amounted to $100,264 and $27,761 at March 31, 2009 and December 31,
2008, respectively. Our portfolio consisted of U.S. government sponsored agencies of $8.8
million, mortgage-backed agencies of $9.0 million, taxable municipal securities of $2.6
million and corporate bonds of $3.3 million. All of our investment securities are
classified as available for sale.

The amortized costs and the fair
value of our investment securities are shown in the following table.

|                                   | March 31, 2009 | December 31, 2008
|---------------------------------- | -------------- | -----------------
|
|
|
|
|U.S. Government sponsored agencies |                |                  
|Mortgage-backed agencies           |                |                  
|Taxable municipal securities       |                |                  
|Corporate bonds                    |                |                  
|                                   |                |                  
|Total                              |                |                  
|                                   |                |                  

During
the three-month period of 2009, one corporate bond and two agency mortgage-backed bonds
were sold. The proceeds from the sales of the mortgage-backed bonds were reinvested in an
agency bond and a taxable municipal bond. Although the corporate (bank) bond was still an
investment grade bond, we had the opportunity to sell the bond at a gain and believed
disposal was prudent in light of the current market conditions. The overall yield improved
on the sale of the mortgage-backed bonds and replacement bonds. All sales resulted in
gains totaling $56,096 for the quarter ended March 31, 2009.

All
of our corporate bonds continue to be designated as investment grade by Moodys and
Standard & Poors. We believe, based on industry analyst reports and credit ratings,
the deterioration in fair values of individual investment securities available for sale is
attributed to changes in market interest rates and not in the credit quality of the issuer
and therefore, these losses are not considered other-than-temporary. We have the ability
and intent to hold these securities until such time as the value recovers or the
securities mature.

Investment
securities with market values of approximately $9.0 million and $10.1 million at March 31,
2009 and December 31, 2008, respectively, were pledged to secure public deposits and
Federal Home Loan Bank borrowings.

At
March 31, 2009 and December 31, 2008, we held non-marketable equity securities, which
consisted of Federal Home Loan Bank stock of $799,300 and $755,900, respectively. Federal
Home Loan Bank stock purchases are required as the level of Federal Home Loan Bank
advances increase. Federal Home Loan Bank stock increased $43,400 during the three-month
period ended March 31, 2009, to reflect the annual recalculation of our minimum stock
requirement in March. No ready market exists for this stock and it has no quoted market
value. Redemptions of this stock have historically been at par value. Accordingly, this
investment is carried at cost, which approximates fair market value. This stock has
historically paid a quarterly dividend, but is currently not paying a dividend due to the
current economic environment and we are no longer accruing a dividend on this stock.

We
have not had any Fannie Mae or Freddie Mac stock since we opened in 2006.

Loans

Since
loans typically provide higher interest yields than other interest-earning assets, it is
our goal to ensure that the highest percentage of our earning assets is invested in our
loan portfolio. Gross loans outstanding at March 31, 2009 and December 31, 2008 were $56.7
million and $54.7 million, respectively and represented 70% and 69% of interest-earning
assets for each of the periods. The loan portfolio increased $2.1 million during the first
three months of 2009. Historically, the first quarter has been associated with weaker loan
demand for our Bank and in light of the current economic conditions, loan demand has
slowed. Additionally, in reviewing loan opportunities in the current environment, we are
continuing to be selective in the loans we choose to originate.

The
percentage of loans in each category remained relatively stable from December 31, 2008 to
March 31, 2009, as shown in the table below. Loans secured by real estate mortgages
comprised approximately 83% of loans outstanding at March 31, 2009 and 82% at December 31,
2008. Most of our real estate loans are secured by residential and commercial properties.
We do not generally originate traditional long-term residential mortgages, but we do issue
traditional second mortgage residential real

16

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estate loans and home equity lines of
credit. We obtain a security interest in real estate whenever possible, in addition to any
other available collateral. This collateral is taken to increase the likelihood of the
ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans we
make to 80%.

Due
to the short time our portfolio has existed, the loan mix shown below may not be
indicative of the ongoing portfolio mix. We attempt to maintain a relatively diversified
loan portfolio to help reduce the risk inherent in concentration of certain types of
collateral.

The
following table summarizes the composition of our loan portfolio at March 31, 2009 and
December 31, 2008.

|                                      | March 31, | December 31,
|------------------------------------- | --------- | ------------
|
|
|
|Real Estate:                          |           |             
|Construction and development and land |           |             
|Commercial                            |           |             
|Residential mortgages                 |           |             
|Home equity lines                     |           |             
|                                      |           |             
|Total real estate                     |           |             
|                                      |           |             
|Commercial                            |           |             
|Consumer                              |           |             
|                                      |           |             
|Gross loans                           |           |             
|                                      |           |             
|Less allowance for loan losses        |           |             
|                                      |           |             
|Total loans, net                      |           |             
|                                      |           |             

Construction
and development and land loans represented approximately 32% and 31% of total loans at
March 31, 2009 and December 31, 2008, respectively. Loans secured by land represented
approximately 75% of the construction and development and land category at March 31, 2009.
We have concentrations of credit, generally defined as more than 25% of Tier 1 capital and
the allowance for loan losses, in the residential construction and land loan categories.
We believe that we have appropriate controls in place to monitor risks associated with
these concentrations.

Loans
originated as exceptions to our loan policy guidelines may pose additional credit risk to
the Bank, if not monitored properly. We regularly monitor and report to the board of
directors all loans approved with loan policy exceptions.

Commercial
real estate loans and construction and development loans generally entail additional risks
as these loans typically involve larger balances to single borrowers or groups of related
borrowers. The repayment of these loans is typically dependent upon the successful
operation of the real estate project. These risks can be significantly affected by supply
and demand in the market, and, as such, are subject to a greater extent to adverse
conditions in the local economy. In light of the current economic conditions and supply
and demand associated with real estate in our market, these categories of our loan
portfolio pose additional credit risk, and we have identified large performing loans, not
considered impaired, within these categories, but with risk characteristics impacted by
the current economic environment. We have allocated an amount associated with significant
individual credits not considered impaired, as a component of our overall allowance for
loan losses. In dealing with these risk factors, we generally limit our loans to our local
real estate market or to borrowers with which we have experience.

We
discontinue accrual of interest on a loan when we conclude that it is doubtful that we
will be able to collect interest from the borrower. Generally, a loan will be placed on
nonaccrual status when it becomes 90 days past due as to principal or interest, or when
management believes, after considering the borrowers financial condition, economic
and the borrowers industry conditions, if applicable, and collection efforts, that
the borrowers financial condition is such that collection of the loan is doubtful. A
payment of interest on a loan that is classified as nonaccrual will be recognized as
income when received. When a loan is placed on nonaccrual status, all previously accrued
but unpaid interest is reversed and is deducted from reported interest income and
earnings. Once a loan is placed on nonaccrual status, no additional interest is accrued on
the loan balance.

Nonaccrual
or nonperforming loans 90 days or more past due totaled $1,224,000 and represented two
borrowing relationships at March 31, 2009 and December 31, 2008. We began foreclosure
proceedings against both of these borrowers and anticipate outcomes on these proceedings
during the second quarter of 2009. Based on our evaluation of the deteriorating financial
condition of the borrowers and their inability to repay the loans, we considered these
loans impaired under the criteria

17

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defined in FAS 114, Accounting
by Creditors for Impairment of a Loan, at March 31, 2009 and at December 31, 2008.
These loans are collateralized by commercial and residential real estate. We believe that
in a more stable economic environment, we would have sufficient collateral value to cover
the outstanding balances on these loans based on our knowledge of the market and recent
appraisal information. However, based on our assessment of the collateral value and our
estimate of an adequate fair value less selling costs for the properties under current
market conditions, we identified an impairment charge or specific reserve amount of
$150,000 for these loans. Additionally, we identified two loans totaling $123,000, which
were less than 90 days past due, as impaired and have allocated a specific reserve amount
of $85,000 to these loans. The total amount of our specific reserve for impaired loans was
$235,000 at March 31, 2009. We were not aware of any other potential problem loans at
March 31, 2009. Refer to our discussion below in the Allowance for Loan Losses
section. There were no accruing loans which were contractually past due 90 days or more as
to principal or interest payments.

Allowance for Loan Losses

We
have established an allowance for loan losses through a provision for loan losses charged
to expense on our consolidated statements of income. The allowance for loan losses was
$737,542 and $665,442 as of March 31, 2009 and December 31, 2008, respectively, and
represented 1.30% of outstanding loans at March 31, 2009 and 1.22% as of December 31,
2008. The allowance for loan losses represents an amount which we believe will be adequate
to absorb probable losses on existing loans that may become uncollectible. Our allowance
for loan losses covers estimated credit losses on individually evaluated loans that are
determined to be impaired, as well as estimated credit losses inherent in the remainder of
the loan portfolio. Our judgment as to the adequacy of the allowance for loan losses is
based on a number of assumptions about future events, which we believe to be reasonable,
but which may or may not prove to be accurate. We believe we have an effective loan review
system and loan grading system that is designed to identify, monitor and address asset
quality problems in an accurate and timely manner. Our determination of the allowance for
loan losses is based on evaluations of the collectibility of loans, including
consideration of factors such as the balance of impaired loans, the quality, mix, and size
of our overall loan portfolio, economic conditions that may affect the borrowers
ability to repay, the amount and quality of collateral securing the loans, our historical
loan loss experience, and a review of specific problem loans. We also consider subjective
issues such as changes in the lending policies and procedures, changes in the
local/national economy, changes in volume or type of credits, changes in volume/severity
of problem loans, quality of loan review and board of director oversight, concentrations
of credit, and peer group comparisons.

Due
to our short operating history, the loans in our loan portfolio and our lending
relationships are of very recent origin. In general, loans do not begin to show signs of
credit deterioration or default until they have been outstanding for some period of time,
a process known as seasoning. As a result, a portfolio of older loans will usually behave
more predictably than a newer portfolio. Because our loan portfolio is new, the current
level of delinquencies and defaults may not be representative of the level that will
prevail when the portfolio becomes more seasoned, which may be higher than current levels.
In recent months, many banks, including our Bank, have begun to see an overall decline in
credit quality and have increased their allowance for loan losses accordingly. We continue
to carefully monitor our loan portfolio for deterioration. If delinquencies and defaults
increase, we may be required to increase our provision for loan losses, which would
adversely affect our results of operations and financial condition. Periodically, we will
adjust the amount of the allowance based on changing circumstances. We charge recognized
losses to the allowance and add subsequent recoveries back to the allowance for loan
losses. There can be no assurance that charge-offs of loans in future periods will not
exceed the allowance for loan losses as estimated at any point in time or that provisions
for loan losses will not be significant to a particular accounting period.

In
calculating the allowance for loan losses, we utilize a credit grading system, which we
apply to each loan. We calculate our general reserve based on historical and peer loss
percentage allocations of each of the categories of unclassified loan types, including
commercial, commercial real estate, construction and development, residential mortgages,
home equity lines of credit and consumer loans. The loss factors are adjusted for
qualitative factors, including those described above. We also analyze individual
significant credits not considered impaired and maintain a general unallocated reserve in
accordance with December 2006 regulatory guidance in our assessment of the allowance for
loan losses. Significant individual credits criticized as special mention or classified as
substandard or doubtful require individual analysis. Loans in the substandard category are
characterized by deterioration in quality exhibited by any number of well-defined
weaknesses requiring corrective action such as declining or negative earnings trends and
declining or inadequate liquidity or collateral. Loans in the doubtful category exhibit
the same weaknesses found in the substandard category, but the weaknesses are more
pronounced. These loans are not yet rated as loss because certain events may occur which
could repay the debt. Loans classified as substandard totaled $1,982,000 at March 31,
2009. Loans totaling $1.3 million, within the substandard category, were considered
impaired under the criteria of FAS 114 at March 31, 2009 due to the deteriorating
financial condition and inability of the borrowers to repay the loans. In situations where
a loan is considered impaired, the loans are excluded from the general reserve
calculations and are assigned a specific reserve. The specific reserve is based on our
analysis of the most probable source of repayment which is usually the liquidation of the
underlying collateral, but may also include discounted future cash flows. These loans are
primarily collateralized by real estate, and we believe, based on our knowledge of the
properties and the market and recent appraisals, as well as our loan to value percentage,
that the fair value less estimated costs to sell the property, under more stable market
conditions, would be sufficient to cover the principal balances on these loans. However,
because of current economic conditions and supply and demand in our real estate market, we
have identified an impairment charge or specific reserve of $235,000 associated with these
loans.

18

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We
have retained an independent consultant to review our loan files on a test basis to assess
the grading of samples of loans. In addition, various regulatory agencies review our
allowance for loan losses through their periodic examinations, and they may require us to
record additions to the allowance for loan losses based on their judgment about
information made available to them at the time of their examination. Our losses will
undoubtedly vary from our estimates, and there is the possibility that charge-offs in
future periods will exceed the allowance for loan losses as estimated at any point in
time.

We
had no loans classified as doubtful at March 31, 2009 and December 31, 2008. There were no
charge-offs during the three-month periods ended March 31, 2009 and 2008. The only
addition to the allowance for loan losses for both periods was the accrual of the loan
loss provision.

Deposits

Our
primary source of funds for our loans and investments is our deposits. Deposits increased
$6.4 million, from $57.7 million at December 31, 2008 to $64.1 million at March 31, 2009.
The following table shows the composition of deposits at March 31, 2009 and December 31,
2008.

|                                           | March 31, 2009 | December 31, 2008
|------------------------------------------ | -------------- | -----------------
|
|
|
|Non-interest bearing demand deposits       |                |                  
|Interest bearing checking                  |                |                  
|Money market and savings                   |                |                  
|Time deposits less than $100,000           |                |                  
|Time deposits $100,000 and over            |                |                  
|Brokered time deposits, less than $100,000 |                |                  
|                                           |                |                  
|Total                                      |                |                  
|                                           |                |                  

Core
deposits, which exclude time deposits of $100,000 or more and brokered certificates of
deposit, provide a relatively stable funding source for our loan portfolio and other
earning assets. Our core deposits were $31.8 million and $28.7 million at March 31, 2009
and December 31, 2008, respectively. Our loan-to-deposit ratio was 89% and 95% at March
31, 2009 and December 31, 2008, respectively. Local deposits increased $5.2 million, or
81% of the total deposit growth during the first quarter of 2009, and we were able to
decrease our reliance on brokered deposits in the first quarter of 2009 compared to the
fourth quarter of 2008. Brokered deposits increased $1.2 million during the three months
ended March 31, 2009. All of our time deposits are certificates of deposits.

The
maturity distribution of our time deposits of $100,000 or more and our brokered time
deposits as of March 31, 2009 was as follows:

|                               | 
|------------------------------ | 
|Three months or less           | 
|Over three through six months  | 
|Over six through twelve months | 
|Over twelve months             | 
|                               | 
|Total                          | 
|                               | 

Upon
expiration of the initial grace period, our Bank elected to continue participation in the
FDICs TLGP, which provides unlimited guarantees on newly issued senior unsecured
debt issued on or before June 30, 2009, as well as unlimited deposit insurance coverage on
funds held in non-interest bearing transaction deposit accounts. Our Bank will incur
additional FDIC premium costs associated with our participation in the TLGP in 2009.

Borrowings and lines of
credit

At
March 31, 2009, the Bank had short-term lines of credit with correspondent banks to
purchase a maximum of $5.8 million in unsecured federal funds on a one to fourteen day
basis for general corporate purposes. The interest rate on borrowings under these lines is
the prevailing market rate for federal funds purchased. These accommodation lines of
credit are renewable annually and may be terminated at any time at the correspondent
banks sole discretion. The Bank utilized these lines of credit during the three
months ended March 31, 2009. The average amount outstanding during the three months ended
March 31, 2009 was $481,000. No amounts were outstanding at any month-end during the three
months ended March 31, 2009 and the average

19

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interest rate paid on these
borrowings was .91%. The average amount outstanding during the year ended December 31,
2008 was $554,000 and the highest month-end amount outstanding during 2008 was $2.2
million. The average interest rate paid on these borrowings during the year was 2.94%.
There were no outstanding amounts on these lines of credit at March 31, 2009 and December
31, 2008.

We
are also a member of the Federal Home Loan Bank. At March 31, 2009 and December 31, 2008,
we had $14.5 million outstanding in Federal Home Loan Bank borrowings. At March 31, 2009,
we had borrowing capacity with the Federal Home Loan Bank of approximately $3.4 million
based on a percentage of our total assets. The average amount outstanding during the year
ended December 31, 2008 was $8.9 million and the maximum amount outstanding during the
period was $14.5 million at an average interest rate of 3.23%.

# Capital Resources

Total
shareholders equity increased $962,123 from $9.6 million at December 31, 2008 to
$10.6 million at March 31, 2009. Common stock increased $13,497 due to stock options
compensation expense accrued during the three months ended March 31, 2009. We incurred an
unrealized loss, net of tax benefit, of $72,503 on investment securities available for
sale, which decreased shareholders equity during the three-month period. Our net
income of $28,129 for the three months ended March 31, 2009 contributed to the net
increase in shareholders equity.

The
Federal Reserve and bank regulatory agencies require bank holding companies and financial
institutions to maintain capital at adequate levels based on a percentage of assets and
off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. The
Federal Reserve guidelines contain an exemption from the capital requirements for
small bank holding companies, which in 2006 were amended to cover most bank
holding companies with less than $500 million in total assets that do not have a material
amount of debt or equity securities outstanding registered with the SEC. Although we file
periodic reports with the SEC, we believe that because our stock is not registered under
Section 12 of the Securities Exchange Act and is not listed on any exchange or otherwise
actively traded, the Federal Reserve Board will interpret its new guidelines to mean that
we qualify as a small bank holding company. Nevertheless, our Bank remains subject to
these capital requirements. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Banks financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative measures
of the Banks assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Banks capital amounts and classifications
are also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Regardless, our Bank is well capitalized under
these minimum capital requirements as set per bank regulatory agencies.

Under
the capital adequacy guidelines, regulatory capital is classified into two tiers. These
guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital
to risk-weighted assets. Tier 1 capital consists of common shareholders equity,
excluding the unrealized gain or loss on securities available for sale, minus certain
intangible assets. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0%
to 100% based on the risks believed to be inherent in the type of asset. Tier 2 capital
consists of Tier 1 capital plus the general reserve for loan losses, subject to certain
limitations. We are also required to maintain capital at a minimum level based on total
average assets, which is known as the Tier 1 leverage ratio.

At
the bank level, we are subject to various regulatory capital requirements administered by
the federal banking agencies. To be considered adequately capitalized under
these capital guidelines, we must maintain a minimum total risk-based capital of 8%, with
at least 4% being Tier 1 capital. In addition, we must maintain a minimum Tier 1 leverage
ratio of at least 4%. To be considered well-capitalized, we must maintain
total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage
ratio of at least 5%.

The
following tables set forth the Banks capital ratios at March 31, 2009 and December
31, 2008.

|                          |  |  | Well capitalized | Adequately capitalized
|------------------------- |  |  | ---------------- | ----------------------
|
|
|($ in thousands)          |  |  |                  |                       
|Total risk-based capital  |  |  | $                | 11,273                
|Tier 1 risk-based capital |  |  |                  | 10,535                
|Tier 1 leverage capital   |  |  |                  | 10,535                

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|                          |  |  | Well capitalized | Adequately capitalized
|------------------------- |  |  | ---------------- | ----------------------
|
|
|($ in thousands)          |  |  |                  |                       
|Total risk-based capital  |  |  | $                | 10,245                
|Tier 1 risk-based capital |  |  |                  | 9,580                 
|Tier 1 leverage capital   |  |  |                  | 9,580                 

We
believe that our capital is sufficient to fund the activities of the Bank and that the
rate of asset growth will not negatively impact the capital base. We have no plans for
significant capital expenditures for the remainder of 2009.

As
stated previously, we elected to participate in the U.S. Treasurys CPP under EESA as
described below. Because we were required to raise substantially more capital in our
initial offering than we could immediately utilize and are still a relatively new
enterprise, our capital ratios are significantly above the well-capitalized designation as
shown in the table above. While we do not need capital, we believe that given the current
economic and capital markets conditions and the impact on credit risk as well as any
future capital needs, it was prudent for us to participate. The maximum amount of capital,
for which we were preliminarily approved, was $1,891,000 and we elected to participate in
the CPP by selling to the Treasury preferred stock for the sum of $1 million. We retained
$100,000 in the holding company to cover dividend payments to the Treasury for
approximately two years. We injected $900,000 into the Bank and this additional bank
capital is reflected in the capital ratios at March 31, 2009 shown above.

On
February 13, 2009, we entered into a Letter Agreement and Securities Purchase Agreement
(collectively, the Purchase Agreement) with the Treasury dated February 13,
2009, pursuant to which we issued and sold to the Treasury (i) 1,000 shares of our Fixed
Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of
$1,000 per share (the Series A Preferred Stock), and (ii) a ten-year warrant
(the Warrant) to purchase 50 shares of our Fixed Rate Cumulative Perpetual
Preferred Stock, Series B, having a liquidation preference of $1,000 per share (the
Series B Preferred Stock), at an initial exercise price of $0.01, for an
aggregate purchase price of $1,000,000 in cash. The Warrant was immediately exercised.

Cumulative
dividends on the Series A Preferred Stock accrue on the liquidation preference at a rate
of 5% per annum for the first five years, and at a rate of 9% per annum thereafter, but
will be paid only if, as, and when declared by our board of directors. The Series A
Preferred Stock has no maturity date and ranks senior to our common stock with respect to
the payment of dividends and distributions and amounts payable upon liquidation,
dissolution and winding up of the Company. The Series A Preferred Stock generally is
non-voting.

We
may redeem the Series A Preferred Stock at par after February 13, 2012. Prior to this
date, we may redeem the Series A Preferred Stock at par if (i) we have raised aggregate
gross proceeds in one or more Qualified Equity Offerings (as defined in the Purchase
Agreement) in excess of approximately $250,000, and (ii) the aggregate redemption price
does not exceed the aggregate net proceeds from such Qualified Equity Offerings. Any
redemption is subject to the consent of the Board of Governors of the Federal Reserve
System. However, pursuant to the terms of the ARRA we may, upon consultation with our
primary federal regulator, repay the amount received for the Series A Preferred Stock at
any time, without regard to whether we have replaced such funds from any source or to any
waiting period. Upon repayment of the amount received for the Series A Preferred Stock, we
may also redeem the Series B Preferred Stock issued pursuant to the Warrant in accordance
with the ARRA and any rules and regulations thereunder.

Immediately
following the issuance of the Series A Preferred Stock and the Warrant, the Treasury
exercised its rights under the Warrant and received 50 shares of Series B Preferred Stock,
with a liquidation preference of $50,000. Cumulative dividends on the Series B Preferred
Stock accrue on the liquidation preference at a rate of 9% per annum, but will be paid
only if, as, and when declared by our board of directors. The Series B Preferred Stock
ranks senior to our common stock with respect to the payment of dividends and
distributions and amounts payable upon liquidation, dissolution and winding up of the
Company. The Series B Preferred Stock generally is non-voting. Pursuant to the terms of
the ARRA, we may, upon consultation with our primary federal regulator, repay the amount
received for the Series B Preferred Stock at any time after redemption of Series A
Preferred Stock, without regard to whether we have replaced such funds from any source or
to any waiting period.

Prior
to February 13, 2012, unless we have redeemed the Series A Preferred Stock and the Series
B Preferred Stock or the Treasury has transferred the Series A Preferred Stock and the
Series B Preferred Stock to a third party, the consent of the Treasury will be required
for us to declare or pay any dividend or make any distribution on our common stock. Prior
to February 9, 2019, unless we have redeemed the Series A Preferred Stock and the Series B
Preferred Stock or Treasury has transferred all of the Series A Preferred Stock and the
Series B Preferred Stock to a third party, the consent of Treasury will be required for us
to redeem, purchase or acquire any shares of our common stock or other equity or capital
securities of the Company or our

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subsidiary, other than in connection
with benefit plans consistent with past practice and certain other circumstances specified
in the Purchase Agreement.

The
Series A Preferred Stock, the Warrant, and the Series B Preferred Stock were issued in a
private placement exempt from registration pursuant to Section 4(2) of the Securities Act
of 1933, as amended. Upon the request of Treasury at any time, we have agreed to promptly
enter into a deposit arrangement pursuant to which the Series A Preferred Stock or the
Series B Preferred Stock may be deposited and depositary shares, representing fractional
shares of Series A Preferred Stock or Series B Preferred Stock, as applicable, may be
issued. Neither the Series A Preferred Stock nor the Series B Preferred Stock are subject
to any contractual restrictions on transfer.

If
we had chosen to participate in the CPP pursuant to the public company terms (as compared
to the private company terms which we chose instead), in place of the 50 shares of Series
B Preferred Stock, Treasury would have received a warrant to purchase additional common
shares at 15% of the senior preferred amount, at the 20-day trailing fair market price of
our common stock, which at this time is trading below book value.

The Series A and Series B Preferred
Stock is treated as Tier 1 capital.

# Effect of Inflation and
Changing Prices

The
effect of relative purchasing power over time due to inflation has not been taken into
account in our consolidated financial statements. Rather, our financial statements have
been prepared on an historical cost basis in accordance with accounting principles
generally accepted in the United States of America.

Unlike
most industrial companies, our assets and liabilities are primarily monetary in nature.
Therefore, the effect of changes in interest rates will have a more significant impact on
our performance than will the effect of changing prices and inflation in general. In
addition, interest rates may generally increase as the rate of inflation increases,
although not necessarily in the same magnitude. We attempt to manage the relationships
between interest-sensitive assets and liabilities in order to protect against wide rate
fluctuations, including those resulting from inflation.

# Off-Balance Sheet Risk

Through
the Bank, we have made contractual commitments to extend credit in the ordinary course of
its business activities. These commitments are legally binding agreements to lend money to
our clients at predetermined interest rates for a specified period of time. We evaluate
each clients creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by us upon extension of credit, is based on our credit
evaluation of the borrower. Collateral varies but may include accounts receivable,
inventory, property, plant and equipment, commercial and residential real estate. We
manage the credit risk on these commitments by subjecting them to normal underwriting and
risk management processes. At March 31, 2009, the Bank had unfunded commitments to extend
credit of $5.8 million through various types of lending arrangements.

Commitments
generally have fixed expiration dates or other termination clauses and may require the
payment of a fee. A significant portion of the unfunded commitments relate to consumer
equity lines of credit and commercial lines of credit. Based on historical experience, we
anticipate that a portion of these lines of credit will not be funded.

Except
as disclosed in this document, we are not involved in off-balance sheet contractual
relationships, unconsolidated related entities that have off-balance sheet arrangements or
transactions that could result in liquidity needs or other commitments that significantly
impact earnings.

# Liquidity

Liquidity
represents the ability of a company to convert assets into cash or cash equivalents
without significant loss, and the ability to raise additional funds by increasing
liabilities. Liquidity management involves monitoring our sources and uses of funds in
order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity
management is made more complicated because different balance sheet components are subject
to varying degrees of management control. For example, the timing of maturities of our
investment portfolio is fairly predictable and subject to a high degree of control at the
time investment decisions are made. However, net deposit inflows and outflows are far less
predictable and are not subject to the same degree of control.

At
March 31, 2009, our liquid assets, consisting of cash and due from banks amounted to $5.6
million, or approximately 6% of total assets. Our investment securities available for sale
amounted to $23.8 million or approximately 27% of total assets. Unpledged investment
securities of $14.7 million at March 31, 2009 traditionally provide a secondary source of
liquidity since they can be converted into cash in a timely manner. At March 31, 2009,
$9.0 million of our investment securities were pledged to secure public entity deposits
and as collateral for Federal Home Loan Bank borrowings.

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Our
ability to maintain and expand our deposit base and borrowing capabilities serves as our
primary source of liquidity. We plan to meet our future cash needs primarily through the
liquidation of temporary investments and the generation of deposits. In addition, we will
receive cash upon the maturities of loans and maturities, calls, sales and prepayments on
investment securities. We maintain federal funds purchased lines of credit with
correspondent banks totaling $5.8 million. Availability on these lines of credit was $5.8
million at March 31, 2009. Of that total availability, $3.9 million represents a federal
funds purchased line of credit with Silverton Bank, N.A., which was closed by the OCC and
the FDIC named Receiver on May 1, 2009. This line of credit will remain outstanding at
least through the end of July 2009, and we are currently evaluating other correspondent
banks from which we will seek a new federal funds line of credit. We are also a member of
the Federal Home Loan Bank, from which applications for borrowings can be made. The
Federal Home Loan Bank requires that investment securities or qualifying mortgage loans be
pledged to secure advances from them. We are also required to purchase Federal Home Loan
Bank stock in a percentage of each advance. There was approximately $3.4 million in
borrowing capacity available from the Federal Home Loan Bank based on total assets at
March 31, 2009. Federal Home Loan Bank borrowing capacity increases as our quarterly total
assets increase and as long as we have sufficient collateral to pledge toward these
advances. We believe that our existing stable base of core deposits along with continued
growth in our deposit base will enable us to successfully meet our long term liquidity
needs.

# Market Risk

Market
risk is the risk of loss from adverse changes in market prices and rates, which
principally arises from interest rate risk inherent in our lending, investing, deposit
gathering, and borrowing activities. Other types of market risks, such as foreign currency
exchange rate risk and commodity price risk, do not generally arise in the normal course
of our business.

We
actively monitor and manage our interest rate risk exposure principally by measuring our
interest sensitivity gap, which is the positive or negative dollar difference
between assets and liabilities that are subject to interest rate repricing within a given
period of time.

Interest
rate sensitivity can be managed by repricing assets or liabilities, selling securities
available for sale, replacing an asset or liability at maturity, or adjusting the interest
rate during the life of an asset or liability. Managing the amount of assets and
liabilities repricing in this same time interval helps to hedge the risk and minimize the
impact on net interest income of rising or falling interest rates. We generally would
benefit from increasing market rates of interest when we have an asset-sensitive gap
position and generally would benefit from decreasing market rates of interest when we are
liability-sensitive. The analysis presents only a static view of the timing of maturities
and repricing opportunities, without taking into consideration that changes in interest
rates do not affect all assets and liabilities equally. For example, rates paid on a
substantial portion of core deposits may change contractually within a relatively short
time frame, but those rates are viewed by us as significantly less interest-sensitive than
market-based rates such as those paid on noncore deposits. Net interest income may be
affected by other significant factors in a given interest rate environment, including
changes in the volume and mix of interest-earning assets and interest-bearing liabilities.

At
March 31, 2009 and December 31, 2008, we were liability-sensitive over a one-year
timeframe.

# Recently Issued
Accounting Standards

The
following is a summary of recent authoritative pronouncements that could impact the
accounting, reporting and/or disclosure of financial information by the Company.

FSP
EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20,
(FSP EITF 99-20-1) was issued in January 2009. Prior to the FSP,
other-than-temporary impairment was determined by using either Emerging Issues Task Force
(EITF) Issue No. 99-20, Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a
Transferor in Securitized Financial Assets, (EITF 99-20) or SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities,
(SFAS 115) depending on the type of security. EITF 99-20 required the use of
market participant assumptions regarding future cash flows regarding the probability of
collecting all cash flows previously projected. SFAS 115 determined impairment to be other
than temporary if it was probable that the holder would be unable to collect all amounts
due according to the contractual terms. To achieve a more consistent determination of
other-than-temporary impairment, the FSP amends EITF 99-20 to determine any
other-than-temporary impairment based on the guidance in SFAS 115, allowing management to
use more judgment in determining any other-than-temporary impairment. The FSP was
effective for reporting periods ending after December 15, 2008. Management has reviewed
the Companys security portfolio and evaluated the portfolio for any
other-than-temporary impairments.

On
April 9, 2009, the FASB issued three staff positions related to fair value which are
discussed below.

FSP
SFAS 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary
Impairments, (FSP SFAS 115-2 and SFAS 124-2) categorizes losses on debt
securities available-for-sale or held-to-maturity determined by management to

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be other-than-temporarily impaired
into losses due to credit issues and losses related to all other factors.
Other-than-temporary impairment (OTTI) exists when it is more likely than not that the
security will mature or be sold before its amortized cost basis can be recovered. An OTTI
related to credit losses should be recognized through earnings. An OTTI related to other
factors should be recognized in other comprehensive income. The FSP does not amend
existing recognition and measurement guidance related to other-than-temporary impairments
of equity securities. Annual disclosures required in SFAS 115 and FSP SFAS 115-1 and SFAS
124-1 are also required for interim periods (including the aging of securities with
unrealized losses).

FSP
SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not
Orderly recognizes that quoted prices may not be determinative of fair value when
the volume and level of trading activity has significantly decreased. The evaluation of
certain factors may necessitate that fair value be determined using a different valuation
technique. Fair value should be the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction, not a forced liquidation or distressed
sale. If a transaction is considered to not be orderly, little, if any, weight should be
placed on the transaction price. If there is not sufficient information to conclude as to
whether or not the transaction is orderly, the transaction price should be considered when
estimating fair value. An entitys intention to hold an asset or liability is not
relevant in determining fair value. Quoted prices provided by pricing services may still
be used when estimating fair value in accordance with SFAS 157; however, the entity should
evaluate whether the quoted prices are based on current information and orderly
transactions. Inputs and valuation techniques are required to be disclosed in addition to
any changes in valuation techniques.

FSP
SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments requires disclosures about the fair value of financial instruments for
interim reporting periods of publicly traded companies as well as in annual financial
statements and also requires those disclosures in summarized financial information at
interim reporting periods A publicly traded company includes any company whose securities
trade in a public market on either a stock exchange or in the over-the-counter market, or
any company that is a conduit bond obligor. Additionally, when a company makes a filing
with a regulatory agency in preparation for sale of its securities in a public market it
is considered a publicly traded company for this purpose.

The
three staff positions are effective for periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009, in which case all three must
be adopted. The Company will adopt the staff positions for its second quarter 10-Q but
does not expect the staff positions to have a material impact on the consolidated
financial statements.

The
SEC issued Staff Accounting Bulletin (SAB) No. 111 on April 9, 2009 to amend
Topic 5.M., Other Than Temporary Impairment of Certain Investments in Debt and
Equity Securities and to supplement FSP SFAS 115-2 and SFAS 124-2. SAB 111 maintains
the staffs previous views related to equity securities; however debt securities are
excluded from its scope. The SAB provides that other-than-temporary impairment
is not necessarily the same as permanent impairment and unless evidence exists
to support a value equal to or greater than the carrying value of the equity security
investment, a write-down to fair value should be recorded and accounted for as a realized
loss. The SAB was effective upon issuance and had no impact on the Companys
financial position.

Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies are not expected to have a material impact on the Companys
financial position, results of operations or cash flows.

# Item 3.   Quantitative and
Qualitative Disclosures About Market Risk.

Not applicable.

# Item 4.   Controls and
Procedures.

As
of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our current
disclosure controls and procedures are effective as of March 31, 2009. There have been no
significant changes in our internal controls over financial reporting during the fiscal
quarter ended March 31, 2009 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.

The
design of any system of controls and procedures is based in part upon certain assumptions
about the likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions, regardless of
how remote.

24

---

# PART II  OTHER
INFORMATION

# Item 1.   Legal Proceedings.

There are no material pending legal
proceedings to which we are a party or of which any of our property is the subject.

# Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

# Item 3.   Default Upon Senior Securities.

Not applicable.

# Item 4.   Submission of Matters to a Vote of Security Holders.

Not applicable.

# Item 5.   Other Information.

Not applicable.

# Item 6.   Exhibits

|     | 
|---- | 
|3.1  | 
|     | 
|     | 
|3.2  | 
|     | 
|     | 
|4.1  | 
|     | 
|     | 
|     | 
|4.2  | 
|     | 
|     | 
|4.3  | 
|     | 
|     | 
|4.4  | 
|     | 
|     | 
|10.1 | 
|     | 
|     | 
|     | 
|10.2 | 
|     | 
|     | 
|10.3 | 
|     | 
|     | 
|31.1 | 
|     | 
|31.2 | 
|     | 
|32   | 

25

---

# BANKGREENVILLE FINANCIAL CORPORATION

# SIGNATURES

Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

| |  | BANKGREENVILLE FINANCIAL CORPORATION
| |  | ------------------------------------
| |  | (Registrant)                        

|                    |  |                                                     
|------------------- |  | ----------------------------------------------------
|                    |  |                                                     
|Date:  May 13, 2009 |  | By:   /s/  Russel T. Williams                       
|                    |  | Russel T. Williams                                  
|                    |  | Chief Executive Officer(Principal Executive Officer)

|                    |  |                                                     
|------------------- |  | ----------------------------------------------------
|                    |  |                                                     
|Date:  May 13, 2009 |  | By:   /s/  Paula S. King                            
|                    |  | Paula S. King                                       
|                    |  | Chief Financial Officer(Principal Financial Officer)

26

---

# BANKGREENVILLE
FINANCIAL CORPORATION

# EXHIBIT INDEX

Exhibit Number
             Description

|     | 
|---- | 
|3.1  | 
|     | 
|     | 
|3.2  | 
|     | 
|     | 
|4.1  | 
|     | 
|     | 
|     | 
|4.2  | 
|     | 
|     | 
|4.3  | 
|     | 
|     | 
|4.4  | 
|     | 
|     | 
|10.1 | 
|     | 
|     | 
|     | 
|10.2 | 
|     | 
|     | 
|10.3 | 
|     | 
|     | 
|31.1 | 
|     | 
|31.2 | 
|     | 
|32   | 

27