Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period ended September 30,2009**

 

**OR**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the Transition Period from                      to                      **

 

**Commission File Number 333-127409**

 

**BANKGREENVILLE FINANCIAL CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

| **South  Carolina**                                               | ** ** | **20-2645711**                         |
|-------------------------------------------------------------------|------------|----------------------------------------|
| (State or other  jurisdiction

of incorporation  or organization) |       | (I.R.S. Employer

Identification  No.) |

 

**499 Woodruff Road**

**Greenville,South Carolina 29607**

(Address ofprincipal executive offices) (Zip Code)

 

**(864)335-2200**

(Registrant’stelephone number, including area code)

 

**NotApplicable**

(Former name,former address and former fiscal year, if changed since last report)

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted 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 registrantwas required to submit and post such files). Yes  o  No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large  accelerated filer o                                              |   | Accelerated  filer o         |
|-------------------------------------------------------------------------|--------|------------------------------|
|                                                                    |   |                         |
| Non-accelerated  filer o  (Do not check if a smaller reporting company) |   | Smaller  reporting company x |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  o  No x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date: 1,180,000 shares ofcommon stock, no par value per share, were issued and outstanding as of November 12,2009.

 

 

 

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**BANKGREENVILLEFINANCIAL CORPORATION**

** **

**INDEX**

** **
| Part I -  Financial Information |
|--------------------------------------|
|                                 |   |
| Item 1.                              | Financial Statements (unaudited) |
| Item 2.                              | Management’s  Discussion and Analysis or Plan of Operation |
| Item 3.                              | Quantitative  and Qualitative Disclosures About Market Risk |
| Item 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 Securities |
| Item 4.                              | Submission of  Matters to a Vote of Security Holders |
| Item 5.                              | Other Information |
| Item 6.                              | Exhibits |
|                                 |   |
| SIGNATURES                           |
|                                 |   |
| EXHIBIT  INDEX                       |

 

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** **

**BANKGREENVILLE FINANCIAL CORPORATION**

** **

**PART I — FINANCIAL INFORMATION**

** **

**Item 1. Financial Statements**

** **

**Consolidated Balance Sheets**

*** ***
| ** **                                                                                                                                                | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                | ** ** | **2009**               | ** **  | **2008**              | ** ** |
| ** **                                                                                                                                                | ** ** | **(unaudited)**        | ** **  | **(audited)**         | ** ** |
| **Assets**                                                                                                                                                |       |                   |        |                  |       |
| Cash  and due from banks                                                                                                                                  |       | $                      | 1,727,201   |                  | $          | 1,171,498 |   |
| Federal  funds sold                                                                                                                                       |       | 10,600,175             |        | 2,153,000             |       |
| Total  cash and cash equivalents                                                                                                                          |       | 12,327,376             |        | 3,324,498             |       |
| Investment  securities, available for sale                                                                                                                |       | 24,720,885             |        | 21,149,100            |       |
| Federal  Home Loan Bank Stock                                                                                                                             |       | 799,300                |        | 755,900               |       |
| Loans,  net of allowance for loan losses of $841,525 and $665,442 at  September 30, 2009 and December 31, 2008, respectively                    |       | 58,856,012             |        | 53,994,983            |       |
| Property  and equipment, net                                                                                                                              |       | 2,708,377              |        | 2,772,907             |       |
| Accrued  interest receivable                                                                                                                              |       | 458,403                |        | 443,492               |       |
| Other  real estate                                                                                                                                        |       | 2,110,341              |        | —                |       |
| Other  assets                                                                                                                                             |       | 183,505                |        | 182,285               |       |
| **Total assets**                                                                                                                                          |       | $                      | 102,164,199 |                  | $          | 82,623,165 |   |
|                                                                                                                                                      |       |                   |        |                  |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                            |       |                   |        |                  |       |
| **Liabilities**                                                                                                                                           |       |                   |        |                  |       |
| Deposits                                                                                                                                                  |       |                   |        |                  |       |
| Non-interest  bearing                                                                                                                                     |       | $                      | 3,610,689   |                  | $          | 3,462,092 |   |
| Interest  bearing                                                                                                                                         |       | 74,815,205             |        | 54,216,125            |       |
| Total  deposits                                                                                                                                           |       | 78,425,894             |        | 57,678,217            |       |
| Federal  Home Loan Bank advances                                                                                                                          |       | 12,455,000             |        | 14,455,000            |       |
| Accrued  interest payable                                                                                                                                 |       | 319,823                |        | 301,016               |       |
| Accounts  payable and accrued liabilities                                                                                                                 |       | 269,741                |        | 601,506               |       |
| Total  liabilities                                                                                                                                        |       | 91,470,458             |        | 73,035,739            |       |
|                                                                                                                                                      |       |                   |        |                  |       |
| **Shareholders’ Equity**                                                                                                                             |       |                   |        |                  |       |
| Preferred stock, no par value; 10,000,000 shares  authorized; 1,000 shares of Series A issued and outstanding at  September 30, 2009, and       |       | 945,824                |        | —                |       |
| 50 shares of Series B issued and outstanding  at September 30, 2009                                                                             |       | 58,838                 |        | —                |       |
| Common  stock, no par value; 10,000,000 shares authorized; 1,180,000 shares issued  and outstanding at September 30, 2009 and December 31, 2008 |       | 11,238,183             |        | 11,197,692            |       |
| Accumulated  other comprehensive income (loss)                                                                                                            |       | 205,288                |        | (27,761               | )          |
| Accumulated  deficit                                                                                                                                      |       | (1,754,392             | )           | (1,582,505            | )          |
| Total  shareholders’ equity                                                                                                                          |       | 10,693,741             |        | 9,587,426             |       |
| **Total liabilities and shareholders’ equity**                                                                                                       |       | $                      | 102,164,199 |                  | $          | 82,623,165 |   |

 

The accompanying notes arean integral part of these financial statements.

 

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** **

**BANKGREENVILLE FINANCIAL CORPORATION**

**Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                                        | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                        | ** ** | **2009**                                    | ** ** | **2008**                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Interest income**                                               |       |                                        |       |                                       |       |   |   |   |   |
| Loans  and fees                                                   |       | $                                           | 765,167    |                                       | $          | 763,881 |   | $ | 2,251,303 |   | $ | 2,140,580 |   |
| Investment  securities and Federal Home Loan Bank stock           |       | 318,346                                     |       | 309,159                                    |       | 920,433 |   | 847,479 |   |
| Federal  funds sold                                               |       | 3,215                                       |       | 2,086                                      |       | 4,586 |   | 13,395 |   |
| Total  interest income                                            |       | 1,086,728                                   |       | 1,075,126                                  |       | 3,176,322 |   | 3,001,454 |   |
|                                                              |       |                                        |       |                                       |       |   |   |   |   |
| **Interest expense**                                              |       |                                        |       |                                       |       |   |   |   |   |
| Deposits                                                          |       | 461,346                                     |       | 471,600                                    |       | 1,310,423 |   | 1,445,128 |   |
| Federal funds purchased                                           |       | —                                      |       | 2,884                                      |       | 1,084 |   | 13,307 |   |
| Federal Home Loan Bank borrowings                                 |       | 109,921                                     |       | 87,319                                     |       | 336,751 |   | 167,765 |   |
| Total interest expense                                            |       | 571,267                                     |       | 561,803                                    |       | 1,648,258 |   | 1,626,200 |   |
|                                                              |       |                                        |       |                                       |       |   |   |   |   |
| Net  interest income                                              |       | 515,461                                     |       | 513,323                                    |       | 1,528,064 |   | 1,375,254 |   |
|                                                              |       |                                        |       |                                       |       |   |   |   |   |
| **Provision for loan losses**                                     |       | 75,000                                      |       | 70,382                                     |       | 428,185 |   | 182,990 |   |
|                                                              |       |                                        |       |                                       |       |   |   |   |   |
| Net  interest income after provision for loan losses              |       | 440,461                                     |       | 442,941                                    |       | 1,099,879 |   | 1,192,264 |   |
|                                                              |       |                                        |       |                                       |       |   |   |   |   |
| **Non-interest income**                                           |       |                                        |       |                                       |       |   |   |   |   |
| Gains  on investment securities sales and calls                   |       | 29,183                                      |       | —                                     |       | 172,281 |   | 38,924 |   |
| Mortgage  brokerage fees                                          |       | 8,975                                       |       | —                                     |       | 39,096 |   | 5,245 |   |
| Service  charges on deposit accounts                              |       | 20,746                                      |       | 14,787                                     |       | 55,662 |   | 41,531 |   |
| Other  income                                                     |       | 9,074                                       |       | —                                     |       | 8,974 |   | — |   |
| Total non-interest income                                         |       | 67,978                                      |       | 14,787                                     |       | 276,013 |   | 85,700 |   |
|                                                              |       |                                        |       |                                       |       |   |   |   |   |
| **Non-interest expense**                                          |       |                                        |       |                                       |       |   |   |   |   |
| Compensation  and employee benefits                               |       | 258,895                                     |       | 261,894                                    |       | 788,646 |   | 800,803 |   |
| Occupancy  and equipment                                          |       | 50,495                                      |       | 52,165                                     |       | 151,704 |   | 151,834 |   |
| Data  processing and related costs                                |       | 61,913                                      |       | 57,861                                     |       | 183,064 |   | 158,460 |   |
| Marketing,  advertising and shareholder communications            |       | 8,364                                       |       | 5,992                                      |       | 32,517 |   | 28,035 |   |
| Legal  and audit                                                  |       | 22,738                                      |       | 14,525                                     |       | 72,510 |   | 48,664 |   |
| Other  professional fees                                          |       | 13,043                                      |       | 11,601                                     |       | 31,997 |   | 31,075 |   |
| Supplies,  postage and telephone                                  |       | 9,150                                       |       | 8,077                                      |       | 29,354 |   | 26,689 |   |
| Insurance                                                         |       | 4,672                                       |       | 4,505                                      |       | 13,247 |   | 12,409 |   |
| Credit  related expenses                                          |       | 15,148                                      |       | 1,168                                      |       | 28,782 |   | 8,603 |   |
| Courier  and armored carrier service                              |       | 1,779                                       |       | 4,795                                      |       | 9,655 |   | 14,235 |   |
| Regulatory  fees and FDIC insurance                               |       | 44,610                                      |       | 15,208                                     |       | 138,196 |   | 39,162 |   |
| Other                                                             |       | 9,223                                       |       | 15,229                                     |       | 35,892 |   | 38,721 |   |
| Total  non-interest expense                                       |       | 500,030                                     |       | 453,020                                    |       | 1,515,564 |   | 1,358,690 |   |
|                                                              |       |                                        |       |                                       |       |   |   |   |   |
| Income  (loss) before income taxes                                |       | 8,409                                       |       | 4,708                                      |       | (139,672 | ) | (80,726 | ) |
|                                                              |       |                                        |       |                                       |       |   |   |   |   |
| Income  tax provision                                             |       | —                                      |       | —                                     |       | — |   | — |   |
|                                                              |       |                                        |       |                                       |       |   |   |   |   |
| **Net income (loss)**                                             |       | $                                           | 8,409      |                                       | $          | 4,708 |   | $ | (139,672 | ) | $ | (80,726 | ) |
| Dividends  and net accretion of discount on preferred stock       |       | 15,926                                      |       | —                                     |       | 39,482 |   | — |   |
| **Net income (loss) available to common  shareholders**           |       | (7,517                                      | )          | 4,708                                      |       | (179,154 | ) | (80,726 | ) |
| **Basic and diluted income (loss) per common share**              |       | $                                           | —     |                                       | $          | — |   | $ | (0.15 | ) | (0.07 | ) |
| **Weighted average common shares outstanding-basic and  diluted** |       | 1,180,000                                   |       | 1,180,000                                  |       | 1,180,000 |   | 1,180,000 |   |

 

The accompanying notes arean integral part of these financial statements.

 

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** **

**BANKGREENVILLEFINANCIAL CORPORATION**

**ConsolidatedStatements of Changes In Shareholders’ Equity**

**and Comprehensive Income (Loss)**

**(Unaudited)**

 
| ** **                                                                       | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** **    | **Accumulated    other  comprehensive** | ** **    | **Accumulated** | ** ** | **Total**          | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|---------------|-----------------------------------------|---------------|-----------------|------------|--------------------|------------|
| ** **                                                                       | ** ** | ** Shares**     | ** ** | **Amount**        | ** **    | **Shares**                              | ** **    | **Amount**      | ** ** | **income  (loss)** | ** ** | ** deficit** | ** ** | **shareholders’  equity** | ** ** |
| ** **                                                                       | ** ** | ** **           | ** ** | ** **        | ** **    | ** **                              | ** **    | ** **      | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance,  December 31, 2007                                                 |       | —               |       | $                 | —        |                                    | 1,180,000     |            | $          | 11,142,669         |       | $ | 57,834 |   | $ | (1,521,642 | ) | $ | 9,678,861 |   |
|                                                                             |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
| Stock  compensation expense                                                      |       | —               |       | —            |          | —                                  |          | 41,526          |       | —             |       | — |   | 41,526 |   |
|                                                                             |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
| **Comprehensive loss:**                                                          |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
|                                                                             |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
| Net  loss                                                                        |       | —               |       | —            |          | —                                  |          | —          |       | —             |       | (80,726 | ) | (80,726 | ) |
|                                                                             |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
| Unrealized  losses on investment securities available for sale, no tax effect    |       | —               |       | —            |          | —                                  |          | —          |       | (619,323           | )          | — |   | (619,323 | ) |
|                                                                             |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
| Total  comprehensive loss                                                        |       | —               |       | —            |          | —                                  |          | —          |       | —             |       | — |   | (700,049 | ) |
| ** **                                                                       |       |                 | ** ** | ** **        | ** **    | ** **                              | ** **    | ** **      | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance, September 30, 2008**                                             |       | —               | ** ** | **$**             | —        | ** **                              | **1,180,000** | ** **      | **$**      | **11,184,195**     | ** ** | **$** | **(561,489** | **)** | **$** | **(1,602,368** | **)** | **$** | **9,020,338** | ** ** |
| ** **                                                                       |       |                 | ** ** | ** **        | ** **    | ** **                              | ** **    | ** **      | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance,  December 31, 2008                                                 |       | —               |       | $                 | —        |                                    | 1,180,000     |            | $          | 11,197,692         |       | $ | (27,761 | ) | $ | (1,582,505 | ) | $ | 9,587,426 |   |
|                                                                             |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
| Issue  Series A preferred stock at a discount                               |       | 1,000                |       | 939,629           |          | —                                  |          | —          |       | —             |       | — |   | 939,629 |   |
|                                                                             |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
| Issue  Series B preferred stock at a premium                                |       | 50                   |       | 60,371            |          | —                                  |          | —          |       | —             |       | — |   | 60,371 |   |
|                                                                             |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
| Accretion  of Series A preferred stock discount                             |       | —               |       | 6,195             |          | —                                  |          | —          |       | —             |       | (6,195 | ) | — |   |
|                                                                             |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
| Amortization  of Series B preferred stock premium                           |       | —               |       | (1,533            | )             | —                                  |          | —          |       | —             |       | 1,533 |   | — |   |
|                                                                             |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
| Dividends  on preferred stock                                                    |       | —               |       | —            |          | —                                  |          | —          |       | —             |       | (27,553 | ) | (27,553 | ) |
|                                                                             |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
| Stock  compensation expense                                                      |       | —               |       | —            |          | —                                  |          | 40,491          |       | —             |       | — |   | 40,491 |   |
|                                                                             |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
| **Comprehensive loss:**                                                          |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
| ** **                                                                       |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
| Net  loss                                                                        |       | —               |       | —            |          | —                                  |          | —          |       | —             |       | (139,672 | ) | (139,672 | ) |
|                                                                             |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
| Unrealized  gains on investment securities available for sale, net of income tax |       | —               |       | —            |          | —                                  |          | —          |       | 233,049            |       | — |   | 233,049 |   |
|                                                                             |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
| Total  comprehensive income                                                      |       | —               |       | —            |          | —                                  |          | —          |       | —             |       | — |   | 93,377 |   |
|                                                                             |       |                 |       |              |          |                                    |          |            |       |               |       |   |   |   |   |
| **Balance, September 30, 2009**                                             | ** ** | **1,050**            | ** ** | **$**             | **1,004,662** | ** **                              | **1,180,000** | ** **      | **$**      | **11,238,183**     | ** ** | **$** | **205,288** | ** ** | **$** | **(1,754,392** | **)** | **$** | **10,693,741** | ** ** |

 

The accompanying notes are an integral part of thesefinancial statements.

 

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**BANKGREENVILLE FINANCIAL CORPORATION**

** **

**Consolidated Statements of Cash Flows**

**Forthe Nine Months Ended**

**(Unaudited)**

 
| ** **                                                             | ** ** | **September 30,  2009** | ** ** | ** September 30,  2008** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------------|------------|
| **Operating activities**                                               | ** ** | ** **                   | ** ** | ** **                         | ** ** |
| Net  loss                                                              |       | $                            | (139,672   | )                                  | $          | (80,726 | ) |
| Provision  for loan losses                                             |       | 428,185                      |       | 182,990                            |       |
| Stock  compensation expense                                            |       | 40,491                       |       | 41,526                             |       |
| Depreciation                                                           |       | 71,428                       |       | 78,578                             |       |
| Net  amortization of premiums on investment securities                 |       | 36,547                       |       | 8,166                              |       |
| Gains  on sales and calls of investment securities                     |       | (172,281                     | )          | (38,924                            | )          |
| Increase  in interest receivable                                       |       | (14,911                      | )          | (102,232                           | )          |
| Increase  in other assets                                              |       | (1,220                       | )          | (292,679                           | )          |
| Increase  (decrease) in accrued interest payable                       |       | 18,807                       |       | (96,981                            | )          |
| (Decrease)  increase in accounts payable and accrued liabilities       |       | (331,765                     | )          | 710,674                            |       |
| Net  cash (used for) provided by operating activities                  |       | (64,391                      | )          | 410,392                            |       |
| ** **                                                             | ** ** | ** **                   | ** ** | ** **                         | ** ** |
| **Investing activities**                                               | ** ** | ** **                   | ** ** | ** **                         | ** ** |
| Increase  in loans, net                                                |       | (7,399,555                   | )          | (16,408,726                        | )          |
| Purchase  of investment securities available for sale                  |       | (17,440,919                  | )          | (11,178,725                        | )          |
| Proceeds  from sales of investment securities available for sale       |       | 10,436,892                   |       | 3,356,522                          |       |
| Proceeds  from called investment securities available for sale         |       | 2,250,000                    |       | 3,748,575                          |       |
| Proceeds  from principal pay-downs on mortgage-backed securities       |       | 1,551,025                    |       | 1,460,139                          |       |
| Purchase  of FHLB Stock                                                |       | (43,400                      | )          | (572,900                           | )          |
| Purchase  of property and equipment                                    |       | (6,898                       | )          | (5,120                             | )          |
| Net cash used for investing activities                                 |       | (10,652,855                  | )          | (19,600,235                        | )          |
| ** **                                                             |       |                         |       |                               |       |
| **Financing activities**                                               |       |                         |       |                               |       |
| Proceeds from issuance of preferred stock                              |       | 1,000,000                    |       | —                             |       |
| Payment  of preferred stock dividend                                   |       | (27,553                      | )          | —                             |       |
| Increase  in deposits, net                                             |       | 20,747,677                   |       | 10,717,797                         |       |
| (Repayment  of) proceeds from Federal Home Loan Bank advances          |       | (2,000,000                   | )          | 12,015,000                         |       |
| Decrease  in federal funds purchased                                   |       | —                       |       | (1,648,000                         | )          |
| Net  cash provided by financing activities                             |       | 19,720,124                   |       | 21,084,797                         |       |
| Net  increase in cash and cash equivalents                             |       | 9,002,878                    |       | 1,894,954                          |       |
| **Cash and cash equivalents, beginning of period**                     |       | 3,324,498                    |       | 830,543                            |       |
| **Cash and cash equivalents, end of period**                           |       | $                            | 12,327,376 |                               | $          | 2,725,497 |   |
| ** **                                                             |       |                         |       |                               |       |
| **Supplemental information**                                           |       |                         |       |                               |       |
| **Cash paid for:**                                                     |       |                         |       |                               |       |
| Interest                                                               |       | $                            | 1,629,451  |                               | $          | 1,723,181 |   |
| **Non-cash activities:**                                               |       |                         |       |                               |       |
| Loans  transferred to other real estate                                |       | 2,110,341                    |       | —                             |       |
| Loans  charged-off                                                     |       | 252,102                      |       | 3,279                              |       |
| Unrealized  gains (losses) on investment securities available for sale |       | 233,049                      |       | (619,323                           | )          |
| Net  accretion of discount on preferred stock                          |       | 4,662                        |       | —                             |       |

 

The accompanying notes are an integral part of thesefinancial statements.

 

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**BANKGREENVILLE FINANCIAL CORPORATION**

 

**Notes to Consolidated Financial Statements**

 

**NOTE1 — NATURE OF BUSINESS AND BASIS OF PRESENTATION**

 

BankGreenville Financial Corporation(the “Company”) is a South Carolina corporation organized to operate as a bankholding company pursuant to the Federal Bank Holding Company Act of 1956 andthe South Carolina Bank Holding Company Act, and to own and control all of thecapital stock of BankGreenville (the “Bank”). The Bank is a state charteredinstitution organized under the laws of South Carolina to conduct generalbanking business in Greenville, South Carolina. From our inception on March 18,2005 and before opening the Bank for business on January 30, 2006, weengaged in organizational and pre-opening activities necessary to obtainregulatory approvals and to prepare the Bank to commence business as afinancial institution. The Company sold 1,180,000 shares of its common stock at$10.00 per share and raised $11.80 million in its initial public offering.Proceeds, net of brokerage commissions and other offering costs, totaledapproximately $11.04 million and the Bank was capitalized with $11 million ofthe net proceeds.  In addition, on February 13,2009 the Company issued shares of its Series A and Series B preferredstock to the U.S. Treasury under the Treasury’s Capital Purchase Program aspart of the Emergency Economic Stabilization Act of 2008.  The Bank is primarily engaged in the businessof accepting deposits, insured by the FDIC, and providing commercial, consumerand mortgage loans to the general public in Greenville County, South Carolina.

 

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

 

**Basis ofPresentation**

 

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

 

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiary, the Bank.  Inconsolidation, all significant intercompany transactions have beeneliminated.  The accounting and reportingpolicies conform to accounting principles generally accepted in the UnitedStates of America and to general practices in the banking industry. The Companyuses the accrual basis of accounting.

 

Operating results for thenine months ended September 30, 2009 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2009.  For further information, refer to the auditedconsolidated financial statements and footnotes thereto included in the Company’s10-K for the year ended December 31, 2008 as filed with the Securities andExchange Commission.

 

**SubsequentEvents**

 

In accordance with FASBASC 855, “Subsequent Events”, issued in May 2009 and effective for periodsending after June 15, 2009, management performed an evaluation todetermine whether or not there have been any subsequent events since thebalance sheet date.  The evaluation wasperformed through November 12, 2009, the date on which the Company’s 10-Qwas issued as filed with the Securities and Exchange Commission.

 

**NOTE 2 —SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

** **

A summary of the Company’ssignificant accounting policies is included in our Annual Report on Form 10-Kfiled with the Securities and Exchange Commission for the year ended December 31,2008.  For further information, refer tothe financial statements and footnotes thereto included in that filing.  Accounting standards that have been issued orproposed by the Financial Accounting Standards Board (“FASB”) that do notrequire adoption until a future date are not expected to have a material impacton the consolidated financial statements upon adoption.

 

**NetIncome (Loss) per Common Share**

** **

Basic income (loss) percommon share represents net income (loss) to common shareholders divided by theweighted-average number of common shares outstanding during the period.Potential common shares that may be issued by the Company relate to outstandingstock options and warrants and are determined using the treasury stockmethod.  For the quarters and nine monthsended September 30, 2009 and 2008, the stock options and warrants were not“in-the-money”, as the exercise price of the

 

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stock options andwarrants exceeded the weighted average fair market value of the commonstock.  The outstanding stock options andwarrants were anti-dilutive, and basic and dilutive shares and loss per commonshare, respectively, were the same.

 

**StockCompensation Plans**

 

Upon completion of theoffering, the Company issued stock warrants to the organizing directors for thepurchase of three shares of common stock at $10.00 per share for every fourshares purchased in the stock offering, up to a maximum of 10,000 warrants perdirector. The Company issued a total of 107,500 warrants, all of whichimmediately vested upon completion of the offering. Of these warrants, 10,000expired in February 2008 due to the death of one of our organizingdirectors in 2007. The average fair value per share of warrants issued amountedto approximately $1.83.  The fair value of each warrant granted wasestimated on the date of grant using the Black-Scholes pricing model with thefollowing assumptions used for grants:  expected volatility of 6.0%,risk-free interest rate of 4.0% and expected lives of five years.

 

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

 

On January 1, 2006,the Company adopted the fair value recognition provisions of FASB ASC 718, “Accountingfor Stock-Based Compensation”, to account for compensation costs under itsstock option plan.  Previously, stockoption plans were accounted for using the intrinsic value method underAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees (as amended)” (“APB 25”). Under the intrinsic value method prescribed by APB 25, the Company wouldnot have recognized compensation cost for stock options because the optionexercise price in its plan equals the market price on the date of grant.  In adopting ASC 718, the Company elected touse the modified prospective method to account for the transition from theintrinsic 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 optionsgranted and for any outstanding unvested awards, applying the fair value methodto those awards as of the date of grant, and is expensed over the employee’srequisite service period.

 

There were no optionsforfeited and no options granted during the nine months ended September 30,2009. At September 30, 2009 and December 31, 2008, the Company had 95,900options outstanding at $10.00 per share. Vested options amounted to 57,240 and 38,060 at September 30, 2009and December 31, 2008, respectively. Options outstanding at September 30, 2009 have a weighted averageremaining contractual term of approximately 6.50 years. Total unrecognizedcompensation cost related to non-vested options granted as of September 30,2009 was $67,060 and is expected to be expensed ratably over the remainingvesting periods of the stock options. Net loss, as reported, includedstock-based employee compensation expense of $13,497 for the three months endedSeptember 30, 2009 and $40,491for the nine month period ended September 30,2009, and net loss, as reported, included stock-based employee compensationexpense of $13,497 and $41,526 for the three months and nine months ended September 30,2008, respectively. The exercise or conversion ratio of all stock optionsgranted was 1:1 and the aggregate intrinsic value of the stock options was zerofor both periods.

 

**Statementof Cash Flows**

** **

For purposes of reportingcash flows, cash equivalents include amounts due from banks and federal fundssold.  Generally, federal funds are soldfor one-day periods.  Federal funds soldwere $10,600,175 and $1,936,000 at of September 30, 2009 and 2008,respectively.

 

**InvestmentSecurities**

** **

Investment securities areaccounted for in accordance with FASB ASC 320 “Investments-Debt and EquitySecurities.”  Management classifies securities at the time of purchaseinto securities held to maturity, trading securities and securities availablefor sale.  Securities held to maturityare securities which the Company has the positive intent and ability to hold tomaturity, and are reported at amortized cost. Trading securities are purchasedand held principally for the purpose of selling them in the near future and arereported at fair value, with unrealized gains and losses included in earnings.Securities available for sale are securities that may be sold under certainconditions, and are reported at fair value, with unrealized gains and lossesexcluded from earnings and reported as a separate component of shareholders’equity as accumulated other comprehensive income (loss). At September 30,2009, the Company’s investment securities were classified as available forsale. The amortization of premiums and accretion of discounts on investmentsecurities are recorded as adjustments to interest income. Gains or losses onsales of investment securities are based on the net proceeds and the adjustedcarrying amount of the securities sold using the specific identificationmethod. Unrealized losses on securities, reflecting a decline in value orimpairment judged by the Company to be other than temporary, are charged toearnings in the consolidated statements of operations.

 

**Management’sEstimates**

** **

Thepreparation of consolidated financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of

 

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contingent assets andliabilities at the date of the financial statements and the reported amounts ofincome and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

**Reclassifications**

** **

Certaincaptions and amounts in the prior financial statements were reclassified toconform to 2009 presentation.  Suchreclassifications had no effect on previously reported net income (loss) or onshareholders’ equity.

 

**NOTE 3 —FAIR VALUE**

** **

Effective January 1,2008, the Company adopted FASB ASC 820 “Fair Value Measurements and Disclosure”(“ASC 820”) which provides a framework for measuring and disclosing fair valueunder generally accepted accounting principles. ASC 820 requires disclosuresabout the fair value of assets and liabilities recognized in the balance sheetin periods subsequent to initial recognition, whether the measurements are madeon a recurring basis (for example, available for sale investment securities) oron a nonrecurring basis (for example, impaired loans).

 

ASC 820 defines fairvalue as the exchange price that would be received for an asset or paid totransfer a liability (an exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date. ASC 820 also establishes a fair valuehierarchy which requires an entity to maximize the use of observable inputs andminimize the use of unobservable inputs when measuring fair value. The standarddescribes three levels of inputs that may be used to measure fair value:

 
| **Level 1** | Quoted prices in active  markets for identical assets or liabilities. Level 1 assets and liabilities  include debt and equity securities and derivative contracts that are traded  in an active exchange market, as well as U.S. Treasury, other U.S. Government  and agency mortgage-backed debt securities that are highly liquid and are  actively traded in over-the-counter markets.                                                                                                                                                                                                                                                                                                                                                         |
|-------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **Level 2** | Observable inputs other  than Level 1 prices such as quoted prices for similar assets or liabilities;  quoted prices in markets that are not active; or other inputs that are observable  or can be corroborated by observable market data for substantially the full  term of the assets or liabilities. Level 2 assets and liabilities include  debt securities with quoted prices that are traded less frequently than  exchange-traded instruments and derivative contracts whose value is  determined using a pricing model with inputs that are observable in the  market or can be derived principally from or corroborated by observable  market data. This category generally includes certain derivative contracts  and impaired loans. |
| ** **  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **Level 3** | Unobservable inputs  that are supported by little or no market activity and that are significant  to the fair value of the assets or liabilities. Level 3 assets and  liabilities include financial instruments whose value is determined using  pricing models, discounted cash flow methodologies, or similar techniques, as  well as instruments for which the determination of fair value requires  significant management judgment or estimation. For example, this category  generally includes certain private equity investments, retained residual  interests in securitizations, residential mortgage servicing rights, and  highly-structured or long-term derivative contracts.                                                       |

 

Available for saleinvestment securities ($24,720,885 at September 30, 2009) are the onlyassets whose fair values are measured on a recurring basis using Level 1 inputs(active market quotes).

 

The Company ispredominantly a collateral-based lender with real estate serving as collateralon a substantial majority of loans. Loans which are deemed to be impaired areprimarily valued on a nonrecurring basis at the fair values of the underlyingreal estate collateral. Such fair values are obtained using independentappraisals, which the Company considers to be level 2 inputs. The aggregatecarrying amount of impaired loans at September 30, 2009 was $2.7 million.

 

Certain assets such asother real estate and repossessed collateral are measured at fair value lesscost to sell. The Company considers such fair values to be level 2 inputs.Management believes the fair value component in its valuation follows theprovisions of ASC 820.  The carryingamounts of other real estate and repossessed collateral were $2.1 million and$30 thousand, respectively, at September 30, 2009.

 

The Company has no assetsor liabilities whose fair values are measured using level 3 inputs and has noliabilities carried at fair value or measured at fair value on a nonrecurringbasis.  The table below presents assetsand liabilities measured at fair value (in thousands) on a recurring basis at September 30,2009.

 

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| ** **                                | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-------------------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|-------------|------------|
| Investment  securities available for sale |       | $         | 24,721     |        | $          | 24,721      |       | —      |       | — |   |
|                                           |            |           |            |             |            |             |            |             |            |  |  |

** **

The table below presentsassets and liabilities measured at fair value (in thousands) on a nonrecurringbasis at September 30, 2009.

 
| ** **              | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-------------------------|------------|-----------|------------|-------------|------------|-------------|------------|-------------|------------|
| Impaired  loans         |       | $         | 2,735      |        | —     |        | $          | 2,735       |       | — |   |
| Other  real estate      |       | 2,110     |       | —      |       | 2,110       |       | —      |       |
| Repossessed  collateral |       | 30        |       | —      |       | 30          |       | —      |       |
|                         |            |           |            |             |            |             |            |             |            |  |  |

 

The carrying amounts andestimated fair values (in thousands), of the Company’s financial instruments atDecember 31, 2008 and September 30, 2009 were as follows:

 
| ** **                               | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | **Carrying**                | ** ** | **Fair**                   | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                               | ** ** | **Amount**                  | ** ** | **Value**                  | ** ** | **Amount** | ** ** | **Value** | ** ** |
| **Financial Assets:**                    |       |                        |       |                       |       |   |   |   |   |
| Cash and due from banks                  |       | $                           | 1,727      |                       | $          | 1,727 |   | $ | 1,171 |   | $ | 1,171 |   |
| Federal funds sold                       |       | 10,600                      |       | 10,600                     |       | 2,153 |   | 2,153 |   |
| Investment securities available for sale |       | 24,721                      |       | 24,721                     |       | 21,149 |   | 21,149 |   |
| Federal Home Loan Bank stock             |       | 799                         |       | 799                        |       | 756 |   | 756 |   |
| Loans, net                               |       | 58,856                      |       | 55,818                     |       | 53,995 |   | 50,014 |   |
| Other real estate                        |       | 2,110                       |       | 2,110                      |       | — |   | — |   |
| Repossessed collateral                   |       | 30                          |       | 30                         |       | — |   | — |   |
| **Financial Liabilities:**               |       |                        |       |                       |       |   |   |   |   |
| Deposits                                 |       | 78,426                      |       | 78,034                     |       | 57,678 |   | 57,583 |   |
| Federal funds purchased                  |       | —                      |       | —                     |       | — |   | — |   |
| Federal Home Loan Bank borrowings        |       | 12,455                      |       | 12,372                     |       | 14,455 |   | 13,979 |   |
|                                          |            |                             |            |                            |            |  |  |  |  |  |  |  |  |

 

**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

 

*Thefollowing discussion reviews our results of operations and assesses ourfinancial condition. You should read the following discussion and analysis inconjunction with the accompanying consolidated financial statements. Thecommentary should be read in conjunction with the discussion of forward-lookingstatements, the financial statements, and the related notes and the otherstatistical information included in this report and in our 2008 Form 10-K.*

 

**DISCUSSIONOF FORWARD-LOOKING STATEMENTS**

 

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

 
|   | · | reduced earnings due to  higher credit losses generally and specifically because losses in the sectors  of our loan portfolio secured by real estate are greater than expected due to  economic factors, including declining real estate values, increasing interest  rates, increasing unemployment, or changes in payment behavior or other  factors; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | reduced earnings due to  higher credit losses because our loans are concentrated by loan type,  industry segment, borrower type, or location of the borrower or collateral;                                                                                                                                                                             |
|   | · | the amount of our real  estate-based loan portfolio collateralized by real estate, and the weakness  in the commercial real estate market;                                                                                                                                                                                                              |
|   | · | 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;                                                                                                                                                                                                                                                                                                |

 

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|   | · | 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.     |

 

Theabove risks are exacerbated by the recent developments in national and internationalfinancial markets, and we are unable to predict what effect these uncertainmarket conditions will have on our Company. During 2008 and thus far in 2009, the capital and credit markets haveexperienced unprecedented levels of extended volatility and disruption.  There can be no assurance that theseunprecedented recent developments will not materially and adversely affect ourbusiness, financial condition and results of operations.

 

Allforward-looking statements in this report are based on information available tous as of the date of this report.  Weundertake no obligation to publicly update or otherwise revise anyforward-looking statements, whether as a result of new information, futureevents, or otherwise.

 

**General**

** **

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

 

There are risks inherentin all loans, so we maintain an allowance for loan losses to absorb probablelosses on existing loans that may become uncollectible. We establish andmaintain this allowance by charging a provision for loan losses against ouroperating earnings. In the following section, we have included a detaileddiscussion of this process.

 

In addition to earninginterest on our loans and investments, we earn income through fees and otherexpenses we charge to our clients. We describe the various components of thisnon-interest income, as well as our non-interest expenses, in the followingdiscussion.

 

**Effect ofEconomic Trends**

** **

Following an economic decline and historically low interest rates thatended in the first six months of 2004, the Federal Reserve began increasingshort-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 425basis points. Between July 2006 and September 18,2007, the Federal Reserve allowed short-term rates to remain unchanged.  Beginning in July 2004 and continuinguntil September 18, 2007, rates on both short-term and variable rateinterest-earning assets and interest-bearing liabilities increased.  The momentum of the 17 rate increasesresulted in higher rates on interest-earning assets and interest-bearingliabilities 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 FederalReserve reversed their position and has since lowered the short-term rates by500 basis points through December 2008, causing the rates on ourshort-term or variable rate assets and liabilities to decline.  The majority of economic analysts predictlittle to no change in short-term rates throughout the remainder of 2009.  The following discussion may include ouranalysis of the effect that we anticipate changes in interest rates will haveon our financial condition.  However, wecan give no assurances as to the future actions of the Federal Reserve or tothe anticipated results that will actually occur.

 

**Recent Legislative and Regulatory Initiatives to Address Financial andEconomic Crises**

** **

Markets in the United States and elsewhere have experienced extremevolatility and disruption for more than 12 months.  These circumstances have exerted significantdownward pressure on prices of equity securities and virtually all other assetclasses, and have resulted in substantially increased market volatility,severely constrained credit and capital markets, particularly for financialinstitutions, and an overall loss of investor confidence.  Loan portfolio performances have deterioratedat many institutions resulting from, among other factors, a weak economy and adecline 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 andunemployment, 

 

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havecreated strains on financial institutions. Many borrowers are now unable to repay their loans, and the collateralsecuring these loans has, in some cases, declined below the loan balance.   In response to the challenges facing the financialservices sector, several regulatory and governmental actions have recently beenannounced 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 $700billion of mortgages, mortgage-backed securities and certain other financialinstruments from financial institutions for the purpose of stabilizing andproviding liquidity to the U.S. financial markets.  EESA also raised the basic limit of FDICdeposit insurance from $100,000 to $250,000 through  December 31, 2013;

 

·                  On October 7, 2008, the FDIC approved a plan toincrease the rates banks pay for deposit insurance;

 

·                  On October 14, 2008, the U.S. Treasury announcedthe creation of a new program, the Troubled Asset Relief Program (the “TARP”)Capital Purchase Program (the “CPP”) that encourages and allows financialinstitutions to build capital through the sale of senior preferred shares tothe U.S. Treasury on terms that are non-negotiable;

 

·                  On October 14, 2008, the FDIC announced thecreation of the Temporary Liquidity Guarantee Program (the “TLGP”), whichseeks to strengthen confidence and encourage liquidity in the bankingsystem.  The TLGP has two primary components that are available on avoluntary basis to financial institutions:

 

·                  The Transaction Account Guarantee Program (“TAGP”),which provides unlimited deposit insurance coverage through June 30, 2010for noninterest-bearing transaction accounts (typically business checkingaccounts) and certain funds swept into noninterest-bearing savingsaccounts.  Institutions participating inthe TLGP pay a 10 basis points fee (annualized) on the balance of each coveredaccount in excess of $250,000, while the extra deposit insurance is in place;

 

·                  The Debt Guarantee Program (“DGP”), under which theFDIC guarantees certain senior unsecured debt of FDIC-insured institutions andtheir holding companies.  The unsecureddebt 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 dateor June 30, 2012.  The DGP coveragelimit 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 certaininsured institutions, 2% of their liabilities as of September 30,2008.  Depending on the term of the debtmaturity, the nonrefundable DGP fee ranges from 50 to 100 basis points(annualized) for covered debt outstanding until the earlier of maturity or June 30,2012.  The TAGP and DGP are in effect forall eligible entities, unless the entity opted out on or before December 5,2008.

 

·                  On February 17, 2009 President Obamasigned into law The American Recovery and Reinvestment Act of 2009 (“ARRA”),more commonly known as the economic stimulus or economic recovery package. ARRAincludes a wide variety of programs intended to stimulate the economy andprovide for extensive infrastructure, energy, health, and education needs.  In addition, ARRA imposes certain newexecutive compensation and corporate expenditure limits on all current andfuture TARP recipients, including our Company, that are in addition to thosepreviously announced by the U.S. Treasury. These new limits are in place untilthe institution has repaid the Treasury, which is now permitted under ARRAwithout penalty and without the need to raise new capital, subject to theTreasury’s consultation with the recipient institution’s appropriate regulatoryagency.

 

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

 

·                  The Legacy Loan Program, in which theprimary purpose will be to facilitate the sale of troubled mortgage loans byeligible institutions, which include FDIC-insured federal or state banks andsavings associations. Eligible assets may not be strictly limited to loans;however, what constitutes an eligible asset will be determined by participatingbanks, their primary regulators, the FDIC and the Treasury. Additionally, theLoan Program’s requirements and structure will be subject to notice and commentrulemaking, which may take some time to complete.

 

·                  The Securities Program, which will beadministered by the Treasury, involves the creation of public-privateinvestment funds to target investments in eligible residential mortgage-backedsecurities and commercial mortgage-backed securities issued before 2009 thatoriginally were rated AAA or the equivalent by two or more nationallyrecognized statistical rating organizations, without regard to ratingenhancements (collectively, “Legacy Securities”). Legacy Securities must bedirectly secured by actual mortgage loans, leases or other assets, and may bepurchased only from financial institutions that meet TARP eligibilityrequirements.

 

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It islikely that further regulatory actions may arise as the Federal governmentcontinues to attempt to address the economic situation.

 

On December 26,2008, we received preliminary approval to participate in the CPP in the amountof $1,891,000, which represented the maximum 3% of our risk-weighted assets at September 30,2008.  After careful evaluation by ourexecutive management and board of directors, including the impact of ourparticipation on our capital ratios and operations as well as on our commonshareholders, we elected to participate at $1 million and were able toparticipate under the private company terms, which resulted in less dilution toour common shareholders than the public company terms.  The transaction closed on February 13,2009 and on that date we issued shares of our Series A and Series BPreferred Stock to the U.S. Treasury.

 

**Critical Accounting Policies**

 

Wehave adopted various accounting policies that govern the application ofaccounting principles generally accepted in the United States and with generalpractices within the banking industry in the preparation of our financialstatements. Our significant accounting policies are described in footnote 1 toour audited consolidated financial statements as of December 31, 2008, asfiled on our annual report on Form 10-K.

 

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

 

**Allowance for Loan Losses**

 

Webelieve the allowance for loan losses is the critical accounting policy thatrequires the most significant judgments and estimates used in preparation ofour consolidated financial statements. Some of the more critical judgmentssupporting the amount of our allowance for loan losses include judgments aboutthe creditworthiness of borrowers, the estimated value of the underlyingcollateral, cash flow assumptions, determination of loss factors for estimatingcredit losses, the impact of current events, and conditions, and other factorsimpacting the level of probable inherent losses.  Under different conditions or using differentassumptions, the actual amount of credit losses incurred by us may be differentfrom management’s estimates provided in our consolidated financial statements.Refer to the portion of this discussion that addresses our allowance for loanlosses for a more complete discussion of our processes and methodology fordetermining our allowance for loan losses.

 

**OtherReal Estate**

** **

Otherreal estate represents properties acquired through the foreclosure process andis recorded at the lower of net principal loan balance outstanding or estimatedfair market value less estimated selling costs. Estimated fair market values are based on appraisals obtained at thetime of acquisition of the properties by the Bank.  Holding period costs are charged to expenseas incurred.  Examples of holding periodcosts include real property taxes, maintenance and insurance.

 

**Income Taxes**

** **

We useassumptions and estimates in determining income taxes payable or refundable forthe current year, deferred income tax liabilities and assets for eventsrecognized differently in our financial statements and income tax returns, andincome tax benefit or expense. Determining these amounts requires analysis ofcertain transactions and interpretation of tax laws and regulations. Managementexercises judgment in evaluating the amount and timing of recognition ofresulting tax liabilities and assets. These judgments and estimates arere-evaluated on a continual basis as regulatory and business factorschange.  Valuation allowances areestablished to reduce deferred tax assets if it is determined that it is “morelikely than not” that all or some portion of the potential deferred tax assetwill not be realized. No assurance can be given that either the tax returnssubmitted by us or the income tax reported on the financial statements will notbe adjusted by either adverse rulings by the United States Tax Court, changesin the tax code, or assessments made by the Internal Revenue Service. We aresubject to potential adverse adjustments, including, but not limited to, anincrease in the statutory federal or state income tax rates, the permanentnon-deductibility of amounts currently considered deductible either now or infuture periods, and the dependency on the generation of future taxable income,including capital gains, in order to ultimately realize deferred income taxassets.

 

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**Results of Operations**

** **

***Three months ended September 30,2009 and 2008***

*** ***

*General*

* *

Ournet income for the quarter ended September 30, 2009 was $8,409 compared tonet income of $4,708 for the quarter ended September 30, 2008, for animprovement in net income of $3,701, or 79%.

 

*Net Interest Income*

* *

Ourprimary source of revenue is net interest income.  Net interest income is the difference betweenincome earned on interest-bearing assets and interest paid on deposits andborrowings used to support such assets. The level of net interest income isdetermined by the balances of interest-earning assets and interest-bearingliabilities and corresponding interest rates earned and paid on those assetsand liabilities, respectively.  Inaddition to the volume of and corresponding interest rates associated withthese interest-earning assets and interest-bearing liabilities, net interestincome is affected by the timing of re-pricing these interest-earning assetsand interest-bearing liabilities.

 

Netinterest income for the quarter ended September 30, 2009 was $515,461, anincrease of $2,138, or 0.42%, over net interest income of $513,323 for thequarter ended September 30, 2008. Interest income increased $11,602, or 1%, to $1,086,728 for the quarterended September 30, 2009.  Althoughthe volume of average interest-earning assets increased $20 million from September 30,2008 to September 30, 2009, as shown in the table below, we did notexperience as significant of an increase in corresponding interest income dueto the 175 basis point drop in the average prime rate from period toperiod.  Additionally, $2.4 million ofour loans were placed on non-accrual status in the third quarter of 2009compared to none during the quarter ended September 30, 2008.  Interest expense for the quarter ended September 30,2009 increased $9,464 over the same period in 2008.  Although average interest-bearing liabilitiesgrew $20.9 million from quarter to quarter, as interest rates declined andhigher-priced certificates of deposit matured, our deposits were re-priced atlower rates and resulted in a 2% decrease in interest expense on deposits.  Interest expense on Federal Home Loan Bankadvances grew 26% as the average balance outstanding increased $2.8 millionfrom quarter to quarter.

 

Thefollowing table sets forth information related to our average balance sheet,average yields on assets, and average costs of liabilities for the quartersended September 30, 2009 and 2008. We derived these yields and rates bydividing annualized income or expense by the average balance of thecorresponding assets or liabilities. We derived average balances from the dailybalances throughout the periods indicated. The net amount of capitalized loan fees is amortized into interestincome over the lives of the loans.

 

**Average Balances, Income and Expenses, Yields and Rates****for the Quarter Ended September 30,**

 
| ** **                                       | ** ** | **2009**             | ** ** | **2008**             | ** ** |
|--------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **Average  balance** | ** ** | **Income/  expense** | ** ** | **Yield  /rate** | ** ** | **Average  balance** | ** ** | **Income/  expense** | ** ** | **Yield  /rate** | ** ** |
| **Interest-earning assets:**                     | ** ** | ** **           | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal funds sold                               |       | $                    | 6,731,443  |                 | $          | 3,215 |   | 0.19 | % | $ | 387,692 |   | $ | 2,086 |   | 2.14 | % |
| Investment securities and  FHLB stock            |       | 25,062,296           |       | 318,346              |       | 5.04 |   | 21,936,987 |   | 309,159 |   | 5.61 |   |
| Loans (1)                                        |       | 60,327,368           |       | 765,167              |       | 5.03 |   | 49,752,270 |   | 763,881 |   | 6.11 |   |
| **Total interest-earning assets**                |       | 92,121,107           |       | 1,086,728            |       | 4.68 | % | 72,076,949 |   | 1,075,126 |   | 5.93 | % |
| Non-earning assets                               |       | 5,531,247            |       |                 |       |   |   | 3,781,863 |   |   |   |   |   |
| Total assets                                     |       | $                    | 97,652,354 |                 |       |   |   |   | $ | 75,858,812 |   |   |   |   |   |
| **Interest-bearing liabilities:**                | ** ** | ** **           | ** ** | ** **           | ** ** | ** ** |   |   |   |   |   |   |   |
| Interest checking                                |       | $                    | 5,884,251  |                 | $          | 36,877 |   | 2.49 | % | $ | 2,361,396 |   | $ | 13,057 |   | 2.20 | % |
| Savings and money market                         |       | 19,209,772           |       | 85,920               |       | 1.77 |   | 15,001,931 |   | 105,235 |   | 2.79 |   |
| Time deposits                                    |       | 44,932,730           |       | 338,549              |       | 2.99 |   | 34,187,150 |   | 353,308 |   | 4.11 |   |
| Federal funds purchased                          |       | —               |       | —               |       | — |   | 402,750 |   | 2,884 |   | 2.85 |   |
| FHLB advances                                    |       | 13,868,043           |       | 109,921              |       | 3.14 |   | 11,035,435 |   | 87,319 |   | 3.15 |   |
| **Total interest-bearing liabilities**           |       | 83,894,796           |       | 571,267              |       | 2.70 | % | 62,988,662 |   | 561,803 |   | 3.55 | % |
| Non-interest bearing  liabilities                |       | 3,553,634            |       |                 |       |   |   | 4,069,422 |   |   |   |   |   |
| Shareholders’ equity                        |       | 10,203,924           |       |                 |       |   |   | 8,800,728 |   |   |   |   |   |
| Total liabilities and  shareholders’ equity |       | $                    | 97,652,354 |                 |       |   |   |   | $ | 75,858,812 |   |   |   |   |   |
| **Net interest spread**                          |       |                 |       |                 |       | 1.98 | % |   |   |   |   | 2.38 | % |
| **Net interest income/margin**                   | ** ** | ** **           |       | $                    | 515,461    |   | 2.22 | % |   |   | $ | 513,323 |   | 2.83 | % |

 

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----

(1) Loan fees, which are immaterial, are included in interest income.  There were five nonaccrual loans totaling$2,362,104 at September 30, 2009 and no nonaccrual loans at September 30,2008.  Nonaccrual loans are included inthe average balances above and income on nonaccrual loans is included on thecash basis for yield computation purposes.

 

Ourconsolidated net interest margin for the quarter ended September 30, 2009was 2.22%, a decrease of 61 basis points from the net interest margin of 2.83%for the same period in 2008.  In September 2009,loans totaling $2,362,104 were placed on nonaccrual status and $34,121 ofpreviously accrued interest was reversed. This reversal of interest in the third quarter of 2009 was the primaryreason that our quarterly loan yield declined from 5.14% in the second quarterof 2009 to 5.03% in the quarter ended September 30, 2009.  The average prime interest rate was 5.00%during the three months ended September 30, 2008, while the average primeinterest rate during the three-month period ended September 30, 2009 was3.25%. With a 175 basis point decrease in the average prime rate during thecomparable periods, and with approximately 55% of our loan portfolio tied tothe prime rate, we experienced an immediate decrease in loan yields as theprime rate decreases occurred as evidenced by the 109 basis point decline inloan yield over the comparable periods. The cost of interest-bearing liabilities decreased 85 basis points, aswe reduced our rates on transaction deposit accounts, and as higher pricedcertificates of deposits matured and were replaced at lower interestrates.  Fixed maturity certificates ofdeposit are priced higher than core deposits and have stated maturity dates, sothere is not an immediate decrease in the interest rates paid on these timedeposits to offset the immediate decrease in loan yields.  The net interest margin is calculated bydividing annualized net interest income by year-to-date average earning assets.Our net interest spread was 1.98% and 2.38% for the quarters ended September 30,2009 and 2008, respectively. The net interest spread is the difference betweenthe yield we earn on our interest-earning assets and the rate we pay on ourinterest-bearing liabilities. In pricing deposits, we consider our liquidityneeds, the direction and levels of interest rates and local market conditions.

 

*Provision for Loan Losses*

* *

Wehave established an allowance for loan losses through a provision for loanlosses charged as a non-cash expense to our statements of operations. We reviewour loan portfolio periodically to evaluate our outstanding loans and tomeasure both the performance of the portfolio and the adequacy of the allowancefor loan losses.

 

Ourprovision for loan losses for the quarter ended September 30, 2009 was$75,000 compared to $70,382 for the quarter ended September 30, 2008.  Current economic conditions and creditchallenges resulted in the increase in the allowance for loan losses.  Management evaluates the adequacy of thereserve for probable loan losses given the size, mix, and quality of thecurrent loan portfolio as well as other factors, including local economicconditions.  Management also relies onour history of past-dues and charge-offs, as well as peer data to determine ourloan loss allowance.

 

Referto the discussion below under “Allowance for Loan Losses” for a description ofthe factors we consider in determining the amount of the provision we expenseeach period in order to maintain an appropriate allowance for loan losses.

 

*Non-interestIncome*

* *

Non-interest income totaled$67,978 for the three-month period ended September 30, 2009 compared to$14,787 for the same period in 2008 for an improvement of $53,191.  During the three months ended September 30,2009, we recorded gains of $29,183 on investment securities sold and calledduring the period compared to none for the quarter ended September 30,2008.  One agency bond was called and onecorporate and two municipal securities were sold during the quarter.  These proceeds were reinvested in agencybonds and taxable municipal bonds. Mortgage brokerage fees increased $8,975 for the three-month periodended September 30, 2009 from none in the comparable period in 2008 due tomortgage activity associated with the lower mortgage rate environment. Otherincome totaled $9,074 for the three-month period ended September 30, 2009compared to none in the same period in 2008. During the three months ended September 30, 2009, we recorded again of $8,260 on the sale of other real estate owned.  Service charges on deposit accounts increased$5,959, or 40%, from $14,787 for the period ended September 30, 2008 to$20,746 for the comparable period in 2009 due to deposit growth.

 

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*Non-interest Expenses*

* *

Thefollowing table sets forth our non-interest expenses for the third quarter of2009 and 2008.

 
| ** **                                             | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                             | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| Compensation and employee benefits                     |       | $                                          | 258,895    |   | $ | 261,894 |   |
| Occupancy and equipment                                |       | 50,495                                     |       | 52,165 |   |
| Data processing and related costs                      |       | 61,913                                     |       | 57,861 |   |
| Marketing, advertising and shareholder  communications |       | 8,364                                      |       | 5,992 |   |
| Legal and audit                                        |       | 22,738                                     |       | 14,525 |   |
| Other professional fees                                |       | 13,043                                     |       | 11,601 |   |
| Supplies, postage and telephone                        |       | 9,150                                      |       | 8,077 |   |
| Insurance                                              |       | 4,672                                      |       | 4,505 |   |
| Credit related expenses                                |       | 15,148                                     |       | 1,168 |   |
| Courier and armored carrier service                    |       | 1,779                                      |       | 4,795 |   |
| Regulatory fees and FDIC insurance                     |       | 44,610                                     |       | 15,208 |   |
| Other                                                  |       | 9,223                                      |       | 15,229 |   |
| Total non-interest expense                             |       | $                                          | 500,030    |   | $ | 453,020 |   |

 

Non-interestexpenses totaled $500,030 for the quarter ended September 30, 2009compared to $453,020 for the quarter ended September 30, 2008, for anincrease of $47,010, or 10%.  Legal andaudit fees totaled $22,738 for the quarter ended September 30, 2009compared to $14,525 for the quarter ended September 30, 2008, for anincrease of $8,213 or 57%.   Creditrelated expenses increased from $1,168 for the quarter ended September 30,2008 to $15,148 for the quarter ended September 30, 2009, due to attorneyfees incurred on loan-related collection and foreclosure efforts as well asreal estate taxes incurred on other real estate owned.  Regulatory and FDIC insurance expenseincreased from $15,208 for the quarter ended September 30, 2008 to$44,610, or 193% for the quarter ended September 30, 2009.  This increase was due to general increases inFDIC assessment rates associated with economic recovery programs and continuedgrowth in the Bank’s deposits.  The FDICcontinues to evaluate the insurance fund level and may impose further specialassessments in future quarters.  The FDICcurrently has submitted a proposal that would require us to prepay the depositinsurance premiums for a period of three years at our current assessmentrate.  In the event this proposal isfinalized we would recognize the expense over the three year prepayment period.

 

***Nine m******onths ended September 30, 2009 and 2008***

*** ***

*General*

* *

Ournet loss for the nine months ended September 30, 2009 was $139,672, or$0.15 per common share (after preferred stock dividends), compared to a netloss of $80,726 or $0.07 per share, for the nine months ended September 30,2008, for an increase in net loss of $58,946, or 73%.  The increase in net loss is attributableprimarily to net interest margin deterioration between the comparable periods,an increase in our provision for loan losses, and the FDIC special assessmentas well as general increases in FDIC insurance costs. This loss was partiallyoffset by improvements in gains on investment securities sales and calls,mortgage loan fees, deposit service charges and increase in net interest incomedue to growth in earning assets.

 

*Net Interest Income*

* *

Netinterest income was $1,528,064 for the nine months ended September 30,2009, which was an increase of $152,810, or 11%, over net interest income of$1,375,254 for the nine months ended September 30, 2008.  Interest income increased $174,868, or 6%, to$3,176,322 for the nine months ended September 30, 2009. Average earningassets increased to $85.5 million for the nine months ended September 30,2009 from $65.3 million for the nine months ended September 30, 2008, anincrease of $20.2 million, or 32%. Although the volume of average interest-earning assets increased $20.2million from September 30, 2008 to September 30, 2009, as shown inthe table below, we did not experience as significant of an increase incorresponding interest income due to the 218 basis point drop in the averageprime rate from period to period. Loan interest and related fees improved$110,723, or 5%, over the same period ended 2008 due to continued growth in theloan portfolio. Interest expense on deposits decreased $134,705, or 9%, for thenine months ended September 30, 2009 as higher-priced certificates of depositmatured and were replaced with lower rates and rates were lowered on alldeposit transaction accounts due to the market decrease in rates.  Interest expense on Federal Home Loan Bankadvances increased $168,986 due to growth of $7.1 million in the averagebalance from period to period.

 

Thefollowing table sets forth information related to our average balance sheet,average yields on assets, and average costs of liabilities for the nine monthsended September 30, 2009 and 2008. We derived these yields and rates bydividing

 

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annualized income orexpense by the average balance of the corresponding assets or liabilities. Wederived average balances from the daily balances throughout the periodsindicated.

 

**Average Balances, Income and Expenses, Yields and Rates forthe Nine Months Ended September 30,**

 
| ** **                                       | ** ** | **2009**             | ** ** | **2008**             | ** ** |
|--------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **Average  balance** | ** ** | **Income/  expense** | ** ** | **Yield  /rate** | ** ** | **Average  balance** | ** ** | **Income/   expense** | ** ** | **Yield  /rate** | ** ** |
| **Interest-earning assets:**                     | ** ** | ** **           | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal funds sold                               |       | $                    | 3,183,854  |                 | $          | 4,586 |   | 0.19 | % | $ | 806,165 |   | $ | 13,395 |   | 2.22 | % |
| Investment securities and  FHLB stock            |       | 24,121,725           |       | 920,433              |       | 5.10 |   | 20,430,230 |   | 847,479 |   | 5.54 |   |
| Loans (1)                                        |       | 58,227,158           |       | 2,251,303            |       | 5.17 |   | 44,106,205 |   | 2,140,580 |   | 6.48 |   |
| **Total interest-earning assets**                |       | 85,532,737           |       | 3,176,322            |       | 4.98 | % | 65,342,600 |   | 3,001,454 |   | 6.14 | % |
| Non-earning assets                               |       | 5,998,031            |       |                 |       |   |   | 3,793,348 |   |   |   |   |   |
| Total assets                                     |       | $                    | 91,530,768 |                 |       |   |   |   | $ | 69,135,948 |   |   |   |   |   |
| **Interest-bearing liabilities:**                | ** ** | ** **           | ** ** | ** **           | ** ** | ** ** |   |   |   |   |   |   |   |
| Interest checking                                |       | $                    | 4,637,227  |                 | $          | 83,763 |   | 2.42 | % | $ | 2,078,938 |   | $ | 32,474 |   | 2.09 | % |
| Savings and money market                         |       | 18,662,679           |       | 263,691              |       | 1.89 |   | 12,794,778 |   | 282,345 |   | 2.95 |   |
| Time deposits                                    |       | 40,334,158           |       | 962,969              |       | 3.19 |   | 33,448,151 |   | 1,130,309 |   | 4.51 |   |
| Federal funds purchased                          |       | 158,721              |       | 1,084                |       | 0.91 |   | 535,325 |   | 13,307 |   | 3.32 |   |
| FHLB borrowings                                  |       | 14,257,198           |       | 336,751              |       | 3.16 |   | 7,131,551 |   | 167,765 |   | 3.14 |   |
| **Total interest-bearing liabilities**           |       | 78,049,983           |       | 1,648,258            |       | 2.82 | % | 55,988,743 |   | 1,626,200 |   | 3.88 | % |
| Non-interest bearing  liabilities                |       | 3,377,836            |       |                 |       |   |   | 3,919,997 |   |   |   |   |   |
| Shareholders’ equity                        |       | 10,102,949           |       |                 |       |   |   | 9,227,208 |   |   |   |   |   |
| Total liabilities and  shareholders’ equity |       | $                    | 91,530,768 |                 |       |   |   |   | $ | 69,135,948 |   |   |   |   |   |
| **Net interest spread**                          |       |                 |       |                 |       | 2.15 | % |   |   |   |   | 2.26 | % |
| **Net interest income/margin**                   | ** ** | ** **           |       | $                    | 1,528,064  |   | 2.39 | % |   |   | $ | 1,375,254 |   | 2.81 | % |

 

----

(1) Loan fees, which are immaterial, are included in interest income.  There were $2,362,104 in nonaccrual loans at September 30,2009 and no nonaccrual loans at September 30, 2008.  Nonaccrual loans are included in the averagebalances above and income on nonaccrual loans is included on the cash basis foryield computation purposes.

 

Ourconsolidated net interest margin for the quarter ended September 30, 2009was 2.39%, a decrease of 42 basis points from the net interest margin of 2.81%for the same period in 2008.  The averageprime interest rate was 5.43% during the nine months ended September 30,2008, while the average prime interest rate during the nine-month period ended September 30,2009 was 3.25%. With a 218 basis point decrease in the average prime rateduring the comparable periods, and with approximately 55% of our loan portfoliotied to the prime rate, we experienced an immediate decrease in loan yields asthe prime rate decreases occurred as evidenced by the 131 basis point declinein loan yield over the comparable periods. The cost of interest-bearing liabilities decreased 106 basis points asrates on transaction deposit accounts were reduced and as higher priced certificatesof deposits matured and were replaced at lower interest rates.  Fixed maturity certificates of deposit arepriced higher than core deposits and have stated maturity dates, so there isnot an immediate decrease in the interest rates paid on these time deposits tooffset the immediate decrease in loan yields. The net interest margin is calculated by dividing annualized netinterest income by year-to-date average earning assets. Our net interest spreadwas 2.15% and 2.26% for the nine months ended September 30, 2009 and 2008,respectively. The net interest spread is the difference between the yield weearn on our interest-earning assets and the rate we pay on our interest-bearingliabilities. In pricing deposits, we consider our liquidity needs, thedirection and levels of interest rates and local market conditions.

 

*Provision for Loan Losses*

* *

Ourprovision for loan losses for the nine months ended September 30, 2009 was$428,185 compared to $182,990 for the nine months ended September 30,2008. This 134% increase was primarily due to continued growth in the loanportfolio as well as a general increase in the allowance for loan losses as apercentage of loans due to the current credit environment. Management evaluatesthe adequacy of the reserve for probable loan losses given the size, mix, andquality of the current loan portfolio. Management also relies on our limited history of past-dues andcharge-offs, as well as peer data to determine our loan loss allowance.  Refer to the discussion below under “Allowancefor Loan Losses” for a description of the factors we consider in determiningthe amount of provision we expense each period in order to maintain anappropriate allowance for loan losses.

 

Weincreased our allowance as a percentage of outstanding loans to 1.41% at September 30,2009 from 1.22% at September 30, 2008.

 

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*Non-interestIncome*

 

Non-interest income totaled$276,013 for the nine months ended September 30, 2009, an increase of$190,313, or 222%, over $85,700 during the nine months ended September 30,2008.  During the nine months ended September 30,2009, we recognized $172,281 in gains on investment securities called or soldduring the period, compared to $38,924 in gains for the nine months ended September 30,2008. Mortgage loan fees increased to $39,096 for the nine-month period endedSeptember, 30, 2009 from $5,245 in the comparable period in 2008 due toincreased mortgage volume associated with the lower mortgage rate environment.Service charges on deposit accounts increased $14,131, or 34%, from $41,531 forthe period ended September 30, 2008 to $55,662 for the comparable periodin 2009 due to continued growth in deposits.

 

*Non-interest Expenses*

 

Thefollowing table sets forth our non-interest expenses for the nine month periodsended September 30, 2009 and 2008.

 
|                                                   | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|
|                                                   | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| Compensation and employee benefits                     |       | $                                         | 788,646    |   | $ | 800,803 |   |
| Occupancy and equipment                                |       | 151,704                                   |       | 151,834 |   |
| Data processing and related costs                      |       | 183,064                                   |       | 158,460 |   |
| Marketing, advertising and shareholder  communications |       | 32,517                                    |       | 28,035 |   |
| Legal and audit                                        |       | 72,510                                    |       | 48,664 |   |
| Other professional fees                                |       | 31,997                                    |       | 31,075 |   |
| Supplies, postage and telephone                        |       | 29,354                                    |       | 26,689 |   |
| Insurance                                              |       | 13,247                                    |       | 12,409 |   |
| Credit related expenses                                |       | 28,782                                    |       | 8,603 |   |
| Courier and armored carrier service                    |       | 9,655                                     |       | 14,235 |   |
| Regulatory fees and FDIC insurance                     |       | 138,196                                   |       | 39,162 |   |
| Other                                                  |       | 35,892                                    |       | 38,721 |   |
| Total non-interest expense                             |       | $                                         | 1,515,564  |   | $ | 1,358,690 |   |

 

Non-interestexpenses were $1,515,564 for the nine months ended September 30, 2009compared to $1,358,690 for the same period ended September 30, 2008, foran increase of 12%. The most significant increase was in regulatory fees andFDIC insurance, which increased from $39,162 for the nine months ended September 30,2008 to $138,196 for the same period ended September 30, 2009.  The FDIC special assessment fee (charged toall federally-insured banks) of $41,840 as well as an increase in overallassessment rates to support economic recovery programs impacted thisincrease.  Our deposit growth alsocontributed to the increase in FDIC insurance assessments. Data processingcosts increased from $158,460 for the nine months ended September 30, 2008to $183,064 for the same period ended September 30, 2009.  This increase primarily represented our coreprocessor charges, which are, in part, based on growth of the Bank’s depositaccounts. Legal and audit fees increased from $48,664 for the nine months endedSeptember 30, 2008 to $72,510 for the same period ended September 30,2009 due to increases in the costs for both auditor and legal reviews of SECfilings for 2009. Credit related expenses increased from $8,603 for the ninemonths ended September 30, 2008 to $28,782 for the same period ended September 30,2009 due to attorney fees associated with loan-related collection andforeclosures efforts and real estate taxes paid on foreclosed properties.

 

**Balance Sheet Review**

 

*General*

 

At September 30,2009, total assets were $102.2 million compared to $82.6 million at December 31,2008, for an increase of $19.6 million, or 24%. The increase in assets included volume increases in our loan andinvestment portfolios as well as our federal funds sold balances, all of whichincreased primarily from growth in local deposits.  Interest-earning assets comprisedapproximately 94% and 95% of total assets at September 30, 2009 and December 31,2008, respectively. Gross loans totaled $59.7 million, an increase of $5.0million, or 9%, from $54.7 million at December 31, 2008.  Investment securities and Federal Home LoanBank stock amounted to $25.5 million at September 30, 2009.  At September 30, 2009, we had federalfunds sold balances of $10.6 million compared to $2.2 million at December 31,2008.

 

Depositstotaled $78.4 million at September 30, 2009, a $20.7 million, or 36%,increase from $57.7 million at December 31, 2008.  Federal Home Loan Bank advances totaled $12.5million at September 30, 2009, a $2.0 million, or 14% decrease from $14.5million at December 31, 2008. Shareholders’ equity was $10.7 million at September 30, 2009, a$1.1 million, or 12% increase from $9.6 million at December 31, 2008.  The increase in shareholders’ equity wasprimarily attributable to our sale of preferred stock pursuant to ourparticipation in the U.S. Treasury’s CPP as well as unrealized gains onavailable for sale investments.

 

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*Investments*

 

On September 30,2009 and December 31, 2008, the fair values of our investment securitiesportfolio amounted to $24.7 million and $21.1 million and represented 26% and27%, respectively, of interest-earning assets. Unrealized gain, net of income tax, on available for sale investmentsecurities amounted to $205,288 and unrealized losses, net of tax benefit, were$27,761 at September 30, 2009 and December 31, 2008,respectively.  Our portfolio consisted ofU.S. government sponsored agencies, mortgage-backed agencies, taxable municipalsecurities and corporate (bank) bonds. All of our investment securities are classified as available for sale.The amortized costs and the fair value of our investment securities are shownin the following table.

 
| ** **                         | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **Amortized  Cost**         | ** ** | **Fair  Value**            | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| U.S. Government sponsored agencies |       | $                           | 12,570,660 |                       | $          | 12,756,174 |   | $ | 7,519,147 |   | $ | 7,630,533 |   |
| Mortgage-backed agencies           |       | 2,554,383                   |       | 2,606,833                  |       | 8,342,833 |   | 8,477,722 |   |
| Taxable municipal securities       |       | 6,025,429                   |       | 6,111,642                  |       | 925,359 |   | 900,650 |   |
| Corporate bonds                    |       | 3,259,370                   |       | 3,246,236                  |       | 4,403,823 |   | 4,140,195 |   |
|                               |       |                        |       |                       |       |   |   |   |   |
| Total                              |       | $                           | 24,409,842 |                       | $          | 24,720,885 |   | $ | 21,191,162 |   | $ | 21,149,100 |   |

 

Duringthe nine-month period ended September 30, 2009, we sold the followinginvestment securities:  six mortgage-backed securities, two corporatebonds and two taxable municipal bonds. Additionally, three agency bonds were called. The proceeds from thesesales and calls were reinvested in agency bonds and taxable municipal bonds. Althoughthe corporate (bank) bonds were considered investment grade at the time ofsale, we had the opportunity to sell the bonds at a gain and believed disposalwas prudent in light of the current market conditions.  The overall yield, average lives orrisk-based asset ratios of our investment securities improved as a result ofthese transactions. The two out-of-state taxable municipal revenue bonds wereswapped for South Carolina municipal general obligation bonds, which improvedour risk-based asset percentages.  Allsales and calls resulted in gains totaling $172,281 for the nine months ended September 30,2009.

 

Ourcorporate (bank) bonds continue to be designated investment grade by Moody’sand Standard & Poors.  Three ofour corporate bonds had been in unrealized loss positions for more than 12months at September 30, 2009.  Webelieve, based on industry analyst reports and credit ratings, thatdeterioration in fair values of these bonds as well as other individualinvestment securities available for sale is attributed to changes in marketinterest rates and not in the credit quality of the issuer and therefore, theselosses are not considered other-than-temporary. We have the ability and intentto hold these securities until such time as the value recovers or thesecurities mature.

 

Investment securities with market values ofapproximately $7.3 million and $10.1 million at September 30, 2009 and December 31,2008, respectively, were pledged to secure public deposits and Federal HomeLoan Bank advances.

 

At September 30, 2009 and December 31,2008, we held non-marketable equity securities, which consisted of Federal HomeLoan Bank stock of $799,300 and $755,900, respectively.  Federal Home Loan Bank stock purchases arerequired as the level of Federal Home Loan Bank advances increase.  No ready market exists for this stock and ithas no quoted market value.  Redemptionsof this stock have historically been at par value. Accordingly, this investmentis carried at cost, which approximates fair market value.  The Federal Home Loan Bank may pay a dividendon its stock at their discretion.

 

*Loans*

 

Sinceloans typically provide higher interest yields than other interest-earningassets, it is our goal to ensure that the highest percentage of our earning assetsis invested in our loan portfolio. Gross loans outstanding at September 30,2009 and December 31, 2008 were $59.7 million and $54.7 million,respectively and represented 63% and 69% of interest-earning assets for each ofthe periods.  The loan portfolioincreased $5.0 million during the first nine months of 2009.  This measured growth level is indicative ofthe slowdown in the economy as well as of our desire to manage our credit riskin the current economic environment.

 

Thepercentage of loans in each category remained relatively stable from December 31,2008 to September 30, 2009, as shown in the table below.  Loans secured by real estate mortgagescomprised approximately 83% of loans outstanding at September 30, 2009 and82% at December 31, 2008. Most of our real estate loans are secured byresidential and commercial properties. We do not generally originatetraditional long-term residential mortgages, but we do issue traditional secondmortgage residential real estate loans and home equity lines of credit. Weobtain a security interest in real estate whenever possible, in 

 

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addition to any otheravailable collateral. This collateral is taken to increase the likelihood ofthe ultimate repayment of the loan. Generally, we limit the loan-to-value ratioon loans we make to 80%.

 

Due tothe short time our portfolio has existed, the loan mix shown below may not beindicative of the ongoing portfolio mix. Management believes that the loanportfolio is adequately diversified, although loans secured by real estatecomprise the majority of our portfolio.

 

The following table summarizes the composition of ourloan portfolio at September 30, 2009 and December 31, 2008.

 
| ** **                            | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **Amount**                   | ** ** | **Percentage  of Total**    | ** ** | **Amount** | ** ** | **Percentage  of Total** | ** ** |
| Real Estate:                          | ** ** | ** **                   | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Construction and development and land |       | $                            | 16,714,789 |                        | 28.0       | % | $ | 16,853,472 |   | 30.8 | % |
| Commercial                            |       | 18,664,230                   |       | 31.3                        |       | 14,971,240 |   | 27.4 |   |
| Residential mortgages                 |       | 7,172,861                    |       | 12.0                        |       | 6,188,461 |   | 11.3 |   |
| Home equity lines                     |       | 7,157,762                    |       | 12.0                        |       | 6,585,586 |   | 12.1 |   |
| Total real estate                     |       | 49,709,642                   |       | 83.3                        | %          | 44,598,759 |   | 81.6 | % |
| Commercial                            |       | 8,747,563                    |       | 14.7                        |       | 8,916,006 |   | 16.3 |   |
| Consumer                              |       | 1,240,332                    |       | 2.0                         |       | 1,145,660 |   | 2.1 |   |
| Gross loans                           |       | 59,697,537                   |       | 100.0                       | %          | 54,660,425 |   | 100.0 | % |
| Less allowance for loan losses        |       | (841,525                     | )          |                        |       | (665,442 | ) |   |   |
| Total loans, net                      |       | $                            | 58,856,012 |                        |       |   | $ | 53,994,983 |   |   |   |

 

Constructionand development and land loans represented approximately 28% and 31% of totalloans at September 30, 2009 and December 31, 2008, respectively.  Loans secured by land representedapproximately 74% of the construction and development and land category at September 30,2009.  We have concentrations of credit,generally defined as more than 25% of Tier 1 capital and the allowance for loanlosses, in the land loan category.  Webelieve that we have appropriate controls in place to monitor risks associatedwith these concentrations.

 

Loansoriginated as exceptions to our loan policy guidelines may pose additionalcredit risk to the Bank, if not monitored properly.  We regularly monitor and report to the boardof directors all loans approved with loan policy exceptions.

 

Commercialreal estate loans and construction and development loans generally entailadditional risks as these loans typically involve larger balances to singleborrowers or groups of related borrowers. The repayment of these loans is typically dependent upon the successfuloperation of the real estate project. These risks can be significantly affected by supply and demand in themarket, and, as such, are subject to a greater extent to adverse conditions inthe local economy.  In light of thecurrent economic conditions and supply and demand associated with real estatein our market, these categories of our loan portfolio pose additional creditrisk, and we have identified large performing loans, not considered impaired,within these categories, but with risk characteristics impacted by the currenteconomic environment.  We have allocatedan amount associated with significant individual credits not consideredimpaired, as a component of our overall allowance for loan losses.  In dealing with these risk factors, wegenerally limit our loans to our local real estate market or to borrowers withwhich we have experience.

 

*Non-performingLoans, Impairment and Potential Problem Loans*

 

Wediscontinue accrual of interest on a loan when we conclude that it is doubtfulthat we will be able to collect interest from the borrower. Generally, a loanwill be placed on nonaccrual status when it becomes 90 days past due as toprincipal or interest, or when management believes, after considering theborrower’s financial condition,  economicand the borrower’s industry conditions, if applicable,  and collection efforts, that the borrower’sfinancial condition is such that collection of the loan is doubtful. A loan onnonaccrual status is considered a non-performing loan.  A payment of interest on a loan that isclassified 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 fromreported interest income and earnings. Once a loan is placed on nonaccrual status, no additional interest isaccrued on the loan balance.  We hadthree loans 90 days or more past due and on nonaccrual status at September 30,2009.

 

Impairedloans are generally nonperforming loans or loans which are 90 days or moredelinquent as to principal and interest payments.  At September 30, 2009 we had identifiedimpaired loans of $2,734,955 compared to $1,223,942 at December 

 

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31, 2008. Of the impairedloans identified at September 30, 2009, $2,362,104 was on non-accrualstatus. While two of these loans were less than 90 days past-due, managementreceived information indicating that the borrowers are unable to repay theloan.  Interest reversed on these loanstotaled $34,121. Based on our evaluation of the deteriorating financialcondition of the borrowers and their inability to repay the loans, weconsidered these loans impaired under the criteria defined in FAS 114, “Accountingby Creditors for Impairment of a Loan”, at September 30, 2009. These loansare collateralized by various assets, including vacant land, residential lots,and commercial real estate. We have obtained or are in the process of obtainingupdated appraisals on the collateral associated with these loans.  Based on information available to managementat September 30, 2009, we have specifically allocated $240,000 of theallowance for loan losses to these impaired loans.  Management will continue to assess thecollateral value associated with these loans. There were no accruing loans which were contractually past due 90 daysor more as to principal or interest payments.

 

Wemaintain a list of potential problem loans that are not in nonaccrual statusand not considered impaired but that exhibit signs of credit issues.  We add loans to this list when we becomeaware of potential deterioration in the borrower’s ability to perform.  These loans are identified in order toclosely monitor the status.  At September 30,2009, we had identified potential problem loans totaling $637,000.

 

*Allowance for Loan Losses*

 

Wehave established an allowance for loan losses through a provision for loanlosses charged to expense on our consolidated statements of income. Theallowance for loan losses was $841,525 and $665,442 as of September 30,2009 and December 31, 2008, respectively, and represented 1.41% ofoutstanding loans at September 30, 2009 and 1.22% as of December 31,2008. The allowance for loan losses represents an amount which we believe willbe adequate to absorb probable losses on existing loans that may becomeuncollectible. Our allowance for loan losses covers estimated credit losses onindividually evaluated loans that are determined to be impaired, as well asestimated credit losses inherent in the remainder of the loan portfolio. Ourjudgment as to the adequacy of the allowance for loan losses is based on anumber 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 effectiveloan 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 loanlosses is based on evaluations of the collectibility of loans, includingconsideration of factors such as the balance of impaired loans, the quality,mix, and size of our overall loan portfolio, economic conditions that mayaffect the borrowers’ ability to repay, the amount and quality of collateralsecuring the loans, our historical loan loss experience, and a review ofspecific problem loans. We also consider subjective issues such as changes inthe lending policies and procedures, changes in the local/national economy,changes in volume or type of credits, changes in volume/severity of problemloans, quality of loan review and board of director oversight, concentrationsof credit, and peer group comparisons.

 

Due toour short operating history, the loans in our loan portfolio and our lendingrelationships are of very recent origin. In general, loans do not begin to showsigns of credit deterioration or default until they have been outstanding forsome period of time, a process known as seasoning. As a result, a portfolio ofolder loans will usually behave more predictably than a newer portfolio.Because our loan portfolio is new, the current level of delinquencies anddefaults may not be representative of the level that will prevail when theportfolio becomes more seasoned, which may be higher than current levels.  In recent months, many banks, including ourBank, have begun to see an overall decline in credit quality and have increasedtheir allowance for loan losses accordingly. We continue to carefully monitorour loan portfolio for deterioration.  Ifdelinquencies and defaults increase, we may be required to increase ourprovision for loan losses, which would adversely affect our results ofoperations and financial condition. Periodically, we will adjust the amount ofthe allowance based on changing circumstances. We charge recognized losses tothe allowance and add subsequent recoveries back to the allowance for loanlosses. There can be no assurance that charge-offs of loans in future periodswill not exceed the allowance for loan losses as estimated at any point in timeor that provisions for loan losses will not be significant to a particularaccounting period.

 

Incalculating the allowance for loan losses, we utilize a credit grading system,which we apply to each loan.  Wecalculate our general reserve based on historical and peer loss percentageallocations 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 thosedescribed above. We also analyze individual significant credits not consideredimpaired and maintain a general unallocated reserve in accordance with December 2006regulatory guidance in our assessment of the allowance for loan losses.  Significant individual credits criticized asspecial mention or classified as substandard or doubtful require individualanalysis.  Loans in the substandardcategory are characterized by deterioration in quality exhibited by any numberof well-defined weaknesses requiring corrective action such as declining ornegative earnings trends and declining or inadequate liquidity orcollateral.  Loans in the doubtfulcategory exhibit the same weaknesses found in the substandard category, but theweaknesses are more pronounced.  Theseloans are not yet rated as loss because certain events may occur which couldrepay the debt. Loans classified as substandard, but not impaired, totaled$637,000 at September 30, 2009. These loans were performing and were not past due 30 days or more at September 30,2009, but these borrowers have exhibited past performance issues. In situationswhere a loan is considered impaired, the loans are excluded from the generalreserve calculations and are assigned a specific reserve.  The specific reserve is based on our analysisof the most

 

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probable source ofrepayment which is usually the liquidation of the underlying collateral, butmay also include discounted future cash flows.

 

Wehave retained an independent consultant to review our loan files on a testbasis to assess the grading of samples of loans.  In addition, various regulatory agenciesreview our allowance for loan losses through their periodic examinations, andthey may require us to record additions to the allowance for loan losses basedon their judgment about information made available to them at the time of theirexamination.  Our losses will undoubtedlyvary from our estimates, and there is the possibility that charge-offs infuture periods will exceed the allowance for loan losses as estimated at anypoint in time.

 

We hadno loans classified as doubtful at September 30, 2009 and December 31,2008.  Charge-offs for the nine-monthperiod ended September 30, 2009 were $252,102 compared to none for thesame period in 2008.  There were nocharge-offs during the third quarter of 2009. Management pursues recoveries on loans charged-off; however, it is notpossible at this time to determine the amount, if any, which may berecovered.  Activity in the allowance forloan losses account is shown below.

 
| Beginning allowance for loan losses at  December 31, 2008 |   | $        | 665,442 |   |
|----------------------------------------------------------------|--------|----------|---------|--------|
| Additions to allowance for loan losses charged to  provision   |   | 428,185  |    |
| Loans charged-off:                                             |   |     |    |
| Commercial real estate                                         |   | (113,749 | )       |
| Commercial                                                     |   | (136,542 | )       |
| Consumer                                                       |   | (1,811   | )       |
| Total loans charged-off                                        |   | (252,102 | )       |
| Recoveries on loans previously charged-off                     |   | —   |    |
| Ending allowance for loan losses at  September 30, 2009   |   | $        | 841,525 |   |

 

*Otherreal estate*

 

Loanstransferred to other real estate totaled $2,110,341 at September 30, 2009compared to none at December 31, 2008. Other real estate is recorded at the lower of net principal loan balanceoutstanding or estimated fair market value less estimated selling costs.  Estimated fair market values are based onappraisals obtained at the time of acquisition of the properties by thebank.  Other real estate consisted ofresidential properties as well as vacant commercial-zoned land.  We obtained appraisals on each property atacquisition by the Bank.  Holding periodcosts are charged to expense as incurred. Examples of holding period costs include real property taxes,maintenance and insurance.  We sold oneresidential property during the third quarter of 2009.

 

*Deposits*

 

Ourprimary source of funds for our loans and investments is our deposits.  Deposits increased $20.7 million, from $57.7million at December 31, 2008 to $78.4 million at September 30,2009.  The following table shows thecomposition of deposits at September 30, 2009 and December 31, 2008.

 
| ** **                                 | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | **Amount**                  | ** ** | **Percent of  Total**      | ** ** | **Amount** | ** ** | **Percent of  Total** | ** ** |
| Non-interest bearing demand deposits       |       | $                           | 3,610,689  |                       | 4.60       | % | $ | 3,462,092 |   | 6.00 | % |
| Interest bearing checking                  |       | 6,090,446                   |       | 7.77                       |       | 3,040,574 |   | 5.27 |   |
| Money market and savings                   |       | 18,993,245                  |       | 24.22                      |       | 17,430,631 |   | 30.22 |   |
| Time deposits less than $100,000           |       | 10,347,154                  |       | 13.19                      |       | 4,808,562 |   | 8.34 |   |
| Time deposits $100,000 and over            |       | 17,350,360                  |       | 22.12                      |       | 10,180,358 |   | 17.65 |   |
| Brokered time deposits, less than $100,000 |       | 22,034,000                  |       | 28.10                      |       | 18,756,000 |   | 32.52 |   |
| Total                                      |       | $                           | 78,425,894 |                       | 100.00     | % | $ | 57,678,217 |   | 100.00 | % |

 

Coredeposits, which exclude time deposits of $100,000 or more and brokeredcertificates of deposit, provide a relatively stable funding source for ourloan portfolio and other earning assets. Our core deposits were $39.0 millionand $28.7 million at September 30, 2009 and December 31, 2008,respectively. Our loan-to-deposit ratio was 76% and 95% at September 30,2009 and December 31, 2008, respectively. Local deposits increased $17.5 million, or 85% of the total depositgrowth during the first nine months of 2009, and we were able to decrease ourreliance on brokered deposits in the first nine months of 2009. Brokered 

 

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deposits represented 28%and 33% at September 30, 2009 and December 31, 2008, respectively.All of our time deposits are certificates of deposits.

 

As aparticipant in the FDIC’s TLGP, our Bank incurred additional FDIC premium costsin 2009 associated with our participation.

 

*Borrowingsand lines of credit*

 

At September 30,2009, the Bank had short-term lines of credit with correspondent banks topurchase a maximum of $6.0 million in unsecured federal funds on a one tofourteen day basis for general corporate purposes. The interest rate onborrowings under these lines is the prevailing market rate for federal fundspurchased. These accommodation lines of credit are renewable annually and maybe terminated at any time at the correspondent banks’ sole discretion.  The Bank utilized these lines of credit inthe first quarter of 2009 only. The average amount outstanding during the ninemonths ended September 30, 2009 was $159,000. No amounts were outstandingat any month-end during the nine months ended September 30, 2009 and theaverage interest rate paid on these borrowings was .91%.  The average amount outstanding during theyear ended December 31, 2008 was $554,000 and the highest month-end amountoutstanding during 2008 was $2.2 million and the average interest rate paid onthese borrowings during the year was 2.94%. There were no outstanding amounts on these lines of credit at September 30,2009 and December 31, 2008.

 

We arealso a member of the Federal Home Loan Bank. At September 30, 2009 and December 31, 2008, we had $12.5million and $14.5 million outstanding, respectively in Federal Home Loan Bankborrowings.  At September 30, 2009,we had borrowing capacity with the Federal Home Loan Bank of approximately $8.0million based on a percentage of our total assets.  Average amounts outstanding were $14.3million and the maximum amount outstanding was $14.5 million during thenine-month period ended September 30, 2009 at an average interest rate of3.16%. 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**

 

Totalshareholders’ equity increased $1.1 million from $9.6 million at December 31,2008 to $10.7 million at September 30, 2009 primarily due to our issuanceof preferred stock of $1 million to the U. S. Treasury.   Common stock increased $40,491 due to stockoptions compensation expense accrued during the nine months ended September 30,2009. We recorded an unrealized gain, net of income tax, of $233,049 oninvestment securities available for sale, which increased shareholders’ equityduring the nine-month period.  Our netloss of $139,672 for the nine months ended September 30, 2009 anddividends declared of $27,553 on preferred stock decreased shareholders’equity.

 

TheFederal Reserve and bank regulatory agencies require bank holding companies andfinancial institutions to maintain capital at adequate levels based on apercentage of assets and off-balance sheet exposures, adjusted for risk weightsranging from 0% to 100%.  The FederalReserve guidelines contain an exemption from the capital requirements for “smallbank holding companies”, which in 2006 were amended to cover most bank holdingcompanies with less than $500 million in total assets that do not have amaterial amount of debt or equity securities outstanding registered with theSEC.  Although we file periodic reportswith the SEC, we believe that because our stock is not registered under Section 12of the Securities Exchange Act and is not listed on any exchange or otherwiseactively traded, the Federal Reserve Board will interpret its new guidelines tomean that we qualify as a small bank holding company.  Nevertheless, our Bank remains subject tothese capital requirements.  Failure tomeet minimum capital requirements can initiate certain mandatory and possiblyadditional discretionary actions by regulators that, if undertaken, could havea direct material effect on the Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities and certain off-balance sheet items as calculated under regulatoryaccounting practices.  The Bank’s capitalamounts and classifications are also subject to qualitative judgments by theregulators about components, risk weightings, and other factors.  Regardless, our Bank is “well capitalized”under these minimum capital requirements as set per bank regulatory agencies.

 

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

 

At thebank level, we are subject to various regulatory capital requirementsadministered by the federal banking agencies. To be considered “adequatelycapitalized” under these capital guidelines, we must maintain a minimum totalrisk-based capital of 

 

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8%, with at least 4%being Tier 1 capital. In addition, we must maintain a minimum Tier 1 leverageratio of at least 4%. To be considered “well-capitalized,” we must maintaintotal risk-based capital of at least 10%, Tier 1 capital of at least 6%, and aleverage ratio of at least 5%.

 

Thefollowing tables set forth the Bank’s capital ratios at September 30, 2009and December 31, 2008.

 

** **

 
| ** **                  | ** ** | ** ** | ** ** | ** **      | ** ** | **Well capitalized** | ** ** | **Adequately capitalized** | ** ** |
|-----------------------------|------------|------------|------------|-----------------|------------|----------------------|------------|----------------------------|------------|
| **September 30, 2009** | ** ** | **Actual** | ** ** | **requirement** | ** ** | **requirement**      | ** ** |
| **($ in thousands)**   | ** ** | **Amount** | ** ** | **Ratio**       | ** ** | **Amount**           | ** ** | **Ratio**                  | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Total risk-based capital    |       | $          | 11,236     |            | 15.6       | %                    | $          | 7,230                      |       | 10.0 | % | $ | 5,784 |   | 8.0 | % |
| Tier 1 risk-based capital   |       | 10,395     |       | 14.4            |       | 4,338                |       | 6.0                        |       | 2,892 |   | 4.0 |   |
| Tier 1 leverage capital     |       | 10,395     |       | 10.6            |       | 4,883                |       | 5.0                        |       | 3,906 |   | 4.0 |   |
|                        |       |       |       |            |       |                 |       |                       |       |   |   |   |   |
| ** **                  | ** ** | ** ** | ** ** | ** **      | ** ** | **Well capitalized** | ** ** | **Adequately capitalized** | ** ** |
| **December 31, 2008**  | ** ** | **Actual** | ** ** | **requirement** | ** ** | **requirement**      | ** ** |
| **($ in thousands)**   | ** ** | **Amount** | ** ** | **Ratio**       | ** ** | **Amount**           | ** ** | **Ratio**                  | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Total risk-based capital    |       | $          | 10,245     |            | 15.9       | %                    | $          | 6,433                      |       | 10.0 | % | $ | 5,147 |   | 8.0 | % |
| Tier 1 risk-based capital   |       | 9,580      |       | 14.9            |       | 3,860                |       | 6.0                        |       | 2,573 |   | 4.0 |   |
| Tier 1 leverage capital     |       | 9,580      |       | 11.9            |       | 4,023                |       | 5.0                        |       | 3,218 |   | 4.0 |   |

 

As stated previously, in the first quarter of 2009 weelected to participate in the U.S. Treasury’s CPP under EESA.  Because we were required to raisesubstantially more capital in our initial offering than we could immediatelyutilize and are still a relatively new enterprise, our capital ratios aresignificantly above the well-capitalized designation as shown in the tableabove.  While we do not need capital, webelieve that given the current economic and capital markets conditions and theimpact on credit risk as well as any future capital needs, it was prudent forus to participate.  The maximum amount ofcapital, for which we were preliminarily approved, was $1,891,000 and weelected to participate in the CPP by selling to the Treasury preferred stockfor the sum of $1 million.  We retained$100,000 in the holding company to cover dividend payments to the Treasury forapproximately two years.  We injected$900,000 into the Bank and this additional bank capital is reflected in thecapital ratios at September 30, 2009 shown above.

 

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

 

**Effect of Inflation and Changing Prices**

 

Theeffect of relative purchasing power over time due to inflation has not beentaken into account in our consolidated financial statements. Rather, ourfinancial statements have been prepared on an historical cost basis inaccordance with accounting principles generally accepted in the United Statesof America.

 

Unlikemost industrial companies, our assets and liabilities are primarily monetary innature. Therefore, the effect of changes in interest rates will have a moresignificant impact on our performance than will the effect of changing pricesand inflation in general. In addition, interest rates may generally increase asthe rate of inflation increases, although not necessarily in the same magnitude.We attempt to manage the relationships between interest-sensitive assets andliabilities in order to protect against wide rate fluctuations, including thoseresulting from inflation.

 

**Off-Balance Sheet Risk**

 

Throughthe Bank, we have made contractual commitments to extend credit in the ordinarycourse of its business activities. These commitments are legally bindingagreements to lend money to our clients at predetermined interest rates for aspecified period of time. We evaluate each client’s creditworthiness on acase-by-case basis. The amount of collateral obtained, if deemed necessary byus upon extension of credit, is based on our credit evaluation of the borrower.Collateral varies but may include accounts receivable, inventory, property, plantand equipment, commercial and residential real estate. We manage the creditrisk on these commitments by subjecting them to normal underwriting and riskmanagement processes.  At September 30,2009, the Bank had unfunded commitments to extend credit of $5.4 millionthrough various types of lending arrangements.

 

Commitmentsgenerally have fixed expiration dates or other termination clauses and mayrequire the payment of a fee. A significant portion of the unfunded commitmentsrelate to consumer equity lines of credit and commercial lines of credit. Basedon historical experience, we anticipate that a portion of these lines of creditwill not be funded.

 

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Except as disclosed in this document, we are notinvolved in off-balance sheet contractual relationships, unconsolidated relatedentities that have off-balance sheet arrangements or transactions that couldresult in liquidity needs or other commitments that significantly impactearnings.

 

**Liquidity**

** **

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

 

At September 30, 2009, our liquid assets,consisting of cash and due from banks and federal funds sold amounted to $12.3million, or approximately 12% of total assets. Our investment securitiesavailable for sale amounted to $24.7 million or approximately 24% of totalassets. Unpledged investment securities of $17.4 million at September 30,2009 traditionally provide a secondary source of liquidity since they can beconverted into cash in a timely manner. At September 30, 2009, $7.3million of our investment securities were pledged to secure public entitydeposits and as collateral for Federal Home Loan Bank borrowings.

 

Our ability to maintain and expand our deposit baseand borrowing capabilities serves as our primary source of liquidity. We planto meet our future cash needs primarily through the liquidation of temporaryinvestments and the generation of deposits. In addition, we will receive cashupon the maturities of loans and maturities, calls, sales and prepayments oninvestment securities. At September 30, 2009 we had no outstandingbalances on our federal funds purchased lines of credit. Availability on federalfunds purchased lines of credit from three correspondent banks was $6.0 millionat September 30, 2009.  We are alsoa member of the Federal Home Loan Bank, from which applications for borrowingscan be made.  The Federal Home Loan Bankrequires that investment securities or qualifying mortgage loans be pledged tosecure advances from them.  We are alsorequired to purchase Federal Home Loan Bank stock in a percentage of eachadvance.  There was approximately $8.0million in borrowing capacity available from the Federal Home Loan Bank basedon total assets at September 30, 2009. Federal Home Loan Bank borrowing capacity increases as our quarterlytotal assets increase and as long as we have sufficient collateral to pledgetoward these advances.  We believe thatour existing stable base of core deposits along with continued growth in ourdeposit base will enable us to successfully meet our long term liquidity needs.

 

**Market Risk**

** **

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

 

We actively monitor and manage our interest rate riskexposure principally by measuring our interest sensitivity “gap,” which is thepositive or negative dollar difference between assets and liabilities that aresubject to interest rate repricing within a given period of time.

 

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

 

At September 30, 2009 and December 31, 2008,we were liability-sensitive over a one-year timeframe.

 

**RecentlyIssued Accounting Standards**

** **

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

 

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In June 2009, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards (“SFAS”) No. 168, “The FASB Accounting Standards Codification TMand the Hierarchy of Generally Accepted Accounting Principles — a replacementof FASB Statement No. 162,” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification TM (“Codification”)as the source of authoritative generally accepted accounting principles (“GAAP”)for nongovernmental entities.  TheCodification does not change GAAP. Instead, it takes the thousands ofindividual pronouncements that currently comprise GAAP and reorganizes theminto approximately 90 accounting Topics, and displays all Topics using aconsistent structure.  Contents in eachTopic are further organized first by Subtopic, then Section and finallyParagraph. The Paragraph level is the only level that contains substantivecontent. Citing particular content in the Codification involves specifying theunique numeric path to the content through the Topic, Subtopic, Section andParagraph structure. FASB suggests that all citations begin with “FASB ASC,”where ASC stands for Accounting Standards Codification. Changes to the ASCsubsequent to June 30, 2009 are referred to as Accounting StandardsUpdates (“ASU”).

 

In conjunction with the issuance of SFAS 168, the FASBalso issued its first Accounting Standards Update No. 2009-1, “Topic 105 —GenerallyAccepted Accounting Principles” (“ASU 2009-1”) which includes SFAS 168 in itsentirety as a transition to the ASC.  ASU2009-1 is effective for interim and annual periods ending after September 15,2009 and will not have an impact on the Company’s financial position or resultsof operations but will change the referencing system for accountingstandards.  Certain of the followingpronouncements were issued prior to the issuance of the ASC and adoption of theASUs. For such pronouncements, citations to the applicable Codification byTopic, Subtopic and Section are provided where applicable in addition tothe original standard type and number.

 

FSP EITF 99-20-1, “Amendments to theImpairment Guidance of EITF Issue No. 99-20,” (FASB ASC 325-40-65) (“FSPEITF 99-20-1”) was issued in January 2009. Prior to the FSP, other-than-temporary impairment was determined byusing either Emerging Issues Task Force (“EITF”) Issue No. 99-20, “Recognitionof Interest Income and Impairment on Purchased Beneficial Interests andBeneficial Interests that Continue to be Held by a Transferor in SecuritizedFinancial Assets,” (“EITF 99-20”) or SFAS No. 115, “Accounting for CertainInvestments in Debt and Equity Securities,” (“SFAS 115”) depending on the typeof security.  EITF 99-20 required the useof market participant assumptions regarding future cash flows regarding theprobability of collecting all cash flows previously projected.  SFAS 115 determined impairment to be otherthan temporary if it was probable that the holder would be unable to collectall amounts due according to the contractual terms. To achieve a moreconsistent determination of other-than-temporary impairment, the FSP amendsEITF 99-20 to determine any other-than-temporary impairment based on theguidance in SFAS 115, allowing management to use more judgment in determiningany other-than-temporary impairment.  TheFSP was effective for reporting periods ending after December 15,2008.  Management has reviewed theCompany’s security portfolio and evaluated the portfolio for anyother-than-temporary impairments.

 

The FASB issued SFAS 166 (not yetreflected in FASB ASC), “Accounting for Transfers of Financial Assets — anamendment of FASB Statement No. 140,” (“SFAS 166”) in June 2009.  SFAS 166 limits the circumstances in which afinancial asset should be derecognized when the transferor has not transferredthe entire financial asset by taking into consideration the transferor’scontinuing involvement.  The standardrequires that a transferor recognize and initially measure at fair value allassets obtained (including a transferor’s beneficial interest) and liabilitiesincurred as a result of a transfer of financial assets accounted for as asale.  The concept of a qualifyingspecial-purpose entity is removed from SFAS 140 along with the exception fromapplying FIN 46(R).  The standard iseffective for the first annual reporting period that begins after November 15,2009, for interim periods within the first annual reporting period, and forinterim and annual reporting periods thereafter.  Earlier application is prohibited.  The Company does not expect the standard tohave any impact on the Company’s financial statements.

 

SFAS 167 (not yet reflected in FASBASC), “Amendments to FASB Interpretation No. 46(R),” (“SFAS 167”) was alsoissued in June 2009.  The standardamends FIN 46(R) to require a company to analyze whether its interest in avariable interest entity (“VIE”) gives it a controlling financialinterest.  A company must assess whetherit has an implicit financial responsibility to ensure that the VIE operates asdesigned when determining whether it has the power to direct the activities ofthe VIE that significantly impact its economic performance.  Ongoing reassessments of whether a company isthe primary beneficiary is also required by the standard.  SFAS 167 amends the criteria to qualify as aprimary beneficiary as well as how to determine the existence of a VIE.  The standard also eliminates certainexceptions that were available under FIN 46(R). SFAS 167 is effective as of the beginning of each reporting entity’sfirst annual reporting period that begins after November 15, 2009, forinterim periods within that first annual reporting period, and for interim andannual reporting periods thereafter. Earlier application is prohibited. Comparative disclosures will be required for periods after the effectivedate.  The Company does not expect thestandard to have any impact on the Company’s financial position.

 

The FASB issued ASU 2009—05, “Fair Value Measurementsand Disclosures (Topic 820) — Measuring Liabilities at Fair Value” in August,2009 to provide guidance when estimating the fair value of a liability.  When a quoted price in an active market forthe identical liability is not available, fair value should be measured using (a) thequoted price of an identical liability when traded as an asset; (b) quotedprices for similar liabilities or similar liabilities when traded as assets; or(c) another valuation technique consistent with the principles of Topic820 such as an income approach or a market approach.  If a restriction exists that prevents thetransfer of the liability, a separate adjustment related to the restriction isnot required when estimating fair value. The ASU was effective October 1, 2009 for the Company and will haveno impact on financial position or operations.

 

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ASU 2009-12, “Fair Value Measurements and Disclosures(Topic 820) - Investments in Certain Entities That Calculate Net Asset Valueper Share (or Its Equivalent),” issued in September, 2009, allows a company tomeasure the fair value of an investment that has no readily determinable fairmarket value on the basis of the investee’s net asset value per share asprovided by the investee. This allowance assumes that the investee hascalculated net asset value in accordance with the GAAP measurement principlesof Topic 946 as of the reporting entity’s measurement date.   Examples of such investments includeinvestments in hedge funds, private equity funds, real estate funds and venturecapital funds. The update also provides guidance on how the investment shouldbe classified within the fair value hierarchy based on the value for which the investmentcan be redeemed.  The amendment iseffective for interim and annual periods ending after December 15, 2009with early adoption permitted.  TheCompany does not have investments in such entities and, therefore, there willbe no impact to our financial statements.

 

ASU 2009-13, “Revenue Recognition (Topic 605):Multiple-Deliverable Revenue Arrangements — a consensus of the FASB EmergingIssues Task Force” was issued in October, 2009 and provides guidance onaccounting for products or services (deliverables) separately rather than as acombined unit utilizing a selling price hierarchy to determine the sellingprice of a deliverable.  The sellingprice is based on vendor-specific evidence, third-party evidence or estimatedselling price.  The amendments in theUpdate are effective prospectively for revenue arrangements entered into ormaterially modified in fiscal years beginning on or after June 15, 2010with early adoption permitted.  TheCompany does not expect the update to have an impact on its financialstatements.

 

Issued October, 2009, ASU 2009-15, “Accountingfor Own-Share Lending Arrangements in Contemplation of Convertible DebtIssuance or Other Financing” amends ASC Topic 470 and provides guidance foraccounting and reporting for own-share lending arrangements issued incontemplation of a convertible debt issuance. At the date of issuance, a share-lending arrangement entered into on anentity’s own shares should be measured at fair value in accordance with Topic820 and recognized as an issuance cost, with an offset to additional paid-incapital.  Loaned shares are excluded frombasic and diluted earnings per share unless default of the share-lendingarrangement occurs.  The amendments alsorequire several disclosures including a description and the terms of thearrangement and the reason for entering into the arrangement.  The effective dates of the amendments aredependent upon the date the share-lending arrangement was entered into andinclude retrospective application for arrangements outstanding as of thebeginning of fiscal years beginning on or after December 15, 2009.   The Company has no plans to issueconvertible debt and, therefore, does not expect the update to have an impacton its financial statements.

 

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

 

**Item 3. Quantitative andQualitative Disclosures About Market Risk.**

** **

Not applicable.

 

**Item 4. Controls and Procedures.**

** **

As of the end of theperiod covered by this report, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).Based upon that evaluation, our Chief Executive Officer and Chief FinancialOfficer have concluded that our current disclosure controls and procedures areeffective as of September 30, 2009. There have been no significant changesin our internal controls over financial reporting during the fiscal quarterended September 30, 2009 that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

 

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

 

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**PART II— OTHER INFORMATION**

** **

**Item1.   Legal Proceedings.**

** **

There are no materialpending legal proceedings to which we are a party or of which any of ourproperty is the subject.

 

**Item2.  Unregistered Sales of Equity Securities and Use of Proceeds.**

** **

Not applicable.

 

**Item3.   Default Upon Senior Securities.**

** **

Not applicable.

 

**Item4.   Submission of Matters to a Vote of Security Holders.**

** **

Not applicable.

 

**Item5.   Other Information.**

** **

Not applicable.

 

**Item 6. Exhibits**

** **

31.1         Rule 13a-14(a) Certificationof the Chief Executive Officer.

 

31.2         Rule 13a-14(a) Certificationof the Chief Financial Officer.

 

32            Section 1350Certifications.

 

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** **

**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 undersignedthereunto duly authorized.

 
|                                      | BANKGREENVILLE FINANCIAL CORPORATION |
|-------------------------------------------|--------------------------------------|
|                                      | (Registrant)                         |
|                                      |                                 |
| Dated:  November 12,  2009 | By:                                  | /s/ Russel T. Williams |
|                                      | Russel T. Williams                   |
|                                      | Chief Executive Officer              |
|                                      | (Principal Executive Officer)        |
|                                      |                                 |
| Dated:  November 12,  2009 | By:                                  | /s/ Paula S. King |
|                                      | Paula S. King                        |
|                                      | Chief Financial Officer              |
| ** **                                | (Principal Financial  Officer)       |

 

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** **

**BANKGREENVILLEFINANCIAL CORPORATION**

** **

**EXHIBIT INDEX**

** **
| **Exhibit** | ** ** | ** **                                                                  |
|-------------|------------|-----------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                             |
|        |       |                                                                        |
| 31.1        |       | Rule 13a-14(a) Certification of the  Principal Executive Officer. |
|        |       |                                                                        |
| 31.2        |       | Rule 13a-14(a) Certification of the  Principal Financial Officer. |
|        |       |                                                                        |
| 32          |       | Section 1350 Certifications.                                           |

 

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