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

# FORM 10-Q

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

| | For the Quarterly Period ended June 30, 2009
| | --------------------------------------------

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

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

Commission file number
333-127409

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

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

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

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

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

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

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

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

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

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

Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest
practicable date: 1,180,000 shares of common stock, no par value per share, were issued
and outstanding as of August 12, 2009.

---

# BANKGREENVILLE
FINANCIAL CORPORATION

# INDEX

Part I  Financial
Information

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

Part II  Other
Information

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

SIGNATURES

EXHIBIT INDEX

2

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# BANKGREENVILLE
FINANCIAL CORPORATION

# PART I  FINANCIAL
INFORMATION

# Item 1.   Financial
Statements

# Consolidated Balance
Sheets

|                                                                                      | June 30, | December 31,
|------------------------------------------------------------------------------------- | -------- | ------------
|
|
|Assets                                                                                |          |             
|Cash and due from banks                                                               |          |             
|Federal funds sold                                                                    |          |             
|                                                                                      |          |             
|Total cash and cash equivalents                                                       |          |             
|Investment securities available for sale                                              |          |             
|Federal Home Loan Bank Stock                                                          |          |             
|Loans, net of allowance for loan losses of $769,878 and $665,442 at June 30, 2009 and |          |             
|December 31, 2008, respectively                                                       |          |             
|Property and equipment, net                                                           |          |             
|Accrued interest receivable                                                           |          |             
|Other real estate                                                                     |          |             
|Other assets                                                                          |          |             
|                                                                                      |          |             
|Total assets                                                                          |          |             
|                                                                                      |          |             
|Liabilities and Shareholders Equity                                                  |          |             
|                                                                                      |          |             
|Liabilities                                                                           |          |             
|Deposits                                                                              |          |             
|Non-interest bearing                                                                  |          |             
|Interest bearing                                                                      |          |             
|                                                                                      |          |             
|Total deposits                                                                        |          |             
|Federal Home Loan Bank advances                                                       |          |             
|Accrued interest payable                                                              |          |             
|Accounts payable and accrued liabilities                                              |          |             
|                                                                                      |          |             
|Total liabilities                                                                     |          |             
|                                                                                      |          |             
|Shareholders Equity                                                                  |          |             
|Preferred stock, no par value; 10,000,000 shares authorized; 1,000 shares of Series A |          |             
|issued and outstanding at June 30, 2009, and                                          |          |             
|50 shares of Series B issued and outstanding at June 30, 2009                         |          |             
|Common stock, no par value; 10,000,000 shares                                         |          |             
|authorized; 1,180,000 shares issued and outstanding at                                |          |             
|June 30, 2009 and December 31, 2008                                                   |          |             
|Accumulated other comprehensive loss                                                  |          |             
|Accumulated deficit                                                                   |          |             
|                                                                                      |          |             
|Total shareholders equity                                                            |          |             
|                                                                                      |          |             
|Total liabilities and shareholders equity                                            |          |             
|                                                                                      |          |             

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

3

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# BANKGREENVILLE FINANCIAL
CORPORATION Consolidated Statements of Operations (Unaudited)

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

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

4

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# BANKGREENVILLE
FINANCIAL CORPORATION

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

|                                    |  |  |  |       | Accumulated |   |          
|----------------------------------- |  |  |  | ----- | ----------- | - | ---------
|
|
|
|
|Balance, December 31, 2007          |  |  |  | -     |             | $ | -        
|                                    |  |  |  |       |             |   |          
|Stock compensation expense          |  |  |  | -     |             |   | -        
|                                    |  |  |  |       |             |   |          
|Comprehensive loss:                 |  |  |  |       |             |   |          
|                                    |  |  |  |       |             |   |          
|Net loss                            |  |  |  | -     |             |   | -        
|                                    |  |  |  |       |             |   |          
|Unrealized losses on investment     |  |  |  |       |             |   |          
|securities available for sale,      |  |  |  |       |             |   |          
|no tax effect                       |  |  |  | -     |             |   | -        
|                                    |  |  |  |       |             |   |          
|Total comprehensive loss            |  |  |  | -     |             |   | -        
|                                    |  |  |  |       |             |   |          
|Balance, June 30, 2008              |  |  |  | -     |             | $ | -        
|                                    |  |  |  |       |             |   |          
|Balance, December 31, 2008          |  |  |  | -     |             | $ | -        
|                                    |  |  |  |       |             |   |          
|Issue Series A preferred stock at a |  |  |  |       |             |   |          
|discount                            |  |  |  | 1,000 |             |   | 939,629  
|                                    |  |  |  |       |             |   |          
|Issue Series B preferred stock at a |  |  |  |       |             |   |          
|premium                             |  |  |  | 50    |             |   | 60,371   
|                                    |  |  |  |       |             |   |          
|Accretion of Series A preferred     |  |  |  |       |             |   |          
|stock discount                      |  |  |  | -     |             |   | 3,540    
|                                    |  |  |  |       |             |   |          
|Amortization of Series B preferred  |  |  |  |       |             |   |          
|stock premium                       |  |  |  | -     |             |   | (876     
|                                    |  |  |  |       |             |   |          
|Dividends on preferred stock        |  |  |  | -     |             |   | -        
|                                    |  |  |  |       |             |   |          
|Stock compensation expense          |  |  |  | -     |             |   | -        
|                                    |  |  |  |       |             |   |          
|Comprehensive loss:                 |  |  |  |       |             |   |          
|                                    |  |  |  |       |             |   |          
|Net loss                            |  |  |  | -     |             |   | -        
|                                    |  |  |  |       |             |   |          
|Unrealized losses on investment     |  |  |  |       |             |   |          
|securities available for sale,      |  |  |  |       |             |   |          
|net of  tax benefit                 |  |  |  | -     |             |   | -        
|                                    |  |  |  |       |             |   |          
|Total comprehensive loss            |  |  |  | -     |             |   | -        
|                                    |  |  |  |       |             |   |          
|Balance, June 30, 2009              |  |  |  | 1,050 |             | $ | 1,002,664
|                                    |  |  |  |       |             |   |          

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

5

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# BANKGREENVILLE FINANCIAL
CORPORATION

# Consolidated
Statements of Cash FlowsFor the Six Months Ended (Unaudited)

|                                                                | June 30, | June 30,
|--------------------------------------------------------------- | -------- | --------
|
|Operating activities                                            |          |         
|Net loss                                                        |          |         
|Provision for loan losses                                       |          |         
|Stock compensation expense                                      |          |         
|Depreciation                                                    |          |         
|Net amortization of premiums on investment securities           |          |         
|Gains on sales and calls of investment securities               |          |         
|Increase in interest receivable                                 |          |         
|Increase in other assets                                        |          |         
|Increase (decrease) in accrued interest payable                 |          |         
|Decrease in accounts payable and accrued liabilities            |          |         
|                                                                |          |         
|Net cash used for operating activities                          |          |         
|                                                                |          |         
|Investing activities                                            |          |         
|Increase in loans, net                                          |          |         
|Purchase of investment securities available for sale            |          |         
|Proceeds from sales of investment securities available for sale |          |         
|Proceeds from called investment securities available for sale   |          |         
|Proceeds from principal paydowns on mortgage-backed securities  |          |         
|Purchase of FHLB Stock                                          |          |         
|Purchase of property and equipment                              |          |         
|                                                                |          |         
|Net cash used for investing activities                          |          |         
|                                                                |          |         
|Financing activities                                            |          |         
|Proceeds from issuance of preferred stock                       |          |         
|Preferred stock dividend                                        |          |         
|Increase in deposits, net                                       |          |         
|Proceeds from Federal Home Loan Bank advances                   |          |         
|Decrease in federal funds purchased                             |          |         
|                                                                |          |         
|Net cash provided by financing activities                       |          |         
|                                                                |          |         
|Net increase in cash and cash equivalents                       |          |         
|Cash and cash equivalents, beginning of period                  |          |         
|                                                                |          |         
|Cash and cash equivalents, end of period                        |          |         
|                                                                |          |         
|Supplemental information                                        |          |         
|Cash paid for:                                                  |          |         
|Interest                                                        |          |         
|Non-cash activities:                                            |          |         
|Loans transferred to other real estate                          |          |         
|Loans charged-off                                               |          |         
|Unrealized losses on investment securities                      |          |         
|Net accretion of discount on preferred stock                    |          |         

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

6

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# BANKGREENVILLE FINANCIAL
CORPORATION

# Notes to Consolidated
Financial Statements

# NOTE 1  NATURE OF
BUSINESS AND BASIS OF PRESENTATION

BankGreenville
Financial Corporation (the Company) is a South Carolina corporation organized
to operate as a bank holding company pursuant to the Federal Bank Holding Company Act of
1956 and the South Carolina Bank Holding Company Act, and to own and control all of the
capital stock of BankGreenville (the Bank). The Bank is a state chartered
institution organized under the laws of South Carolina to conduct general banking business
in Greenville, South Carolina. From our inception on March 18, 2005 and before opening the
Bank for business on January 30, 2006, we engaged in organizational and pre-opening
activities necessary to obtain regulatory approvals and to prepare our subsidiary, the
Bank, to commence business as a financial institution. The Company sold 1,180,000 shares
of its common stock at $10.00 per share and raised $11.80 million in its initial public
offering. Proceeds, net of brokerage commissions and other offering costs totaled
approximately $11.04 million and the Bank was capitalized with $11 million of the net
proceeds. In addition, on February 13, 2009 the Company issued shares of its Series A and
Series B preferred stock to the U.S. Treasury under the Treasurys Capital Purchase
Program as part of the Emergency Economic Stabilization Act of 2008. The Bank is primarily
engaged in the business of accepting deposits, insured by the FDIC, and providing
commercial, consumer and mortgage loans to the general public in Greenville County, South
Carolina.

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

# Basis of Presentation

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

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

Operating
results for the six months ended June 30, 2009 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2009. For further
information, refer to the audited consolidated financial statements and footnotes thereto
included in the Companys 10-K for the year ended December 31, 2008 as filed with the
Securities and Exchange Commission.

In
accordance with SFAS 165, Subsequent Events, issued in May 2009 and effective
for periods ending after June 15, 2009, management performed an evaluation to determine
whether or not there have been any subsequent events since the balance sheet date. The
evaluation was performed through August 12, 2009, the date on which the Companys
10-Q was issued as filed with the Securities and Exchange Commission.

# NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

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

# Net Loss per Common Share

Basic
loss per common share represents net loss to common shareholders divided by the
weighted-average number of common shares outstanding during the period. Potential common
shares that may be issued by the Company relate to outstanding stock options and warrants,
and are determined using the treasury stock method. For the quarters and six months ended
June 30, 2009 and 2008, the stock options and warrants were not in-the-money,
as the exercise price of the stock options and warrants exceeded the weighted average fair
market value of the common stock. The outstanding stock options and warrants were
anti-dilutive, and basic and dilutive shares and loss per common share, respectively, were
the same.

7

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# Stock Compensation Plans

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

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

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

There
were no options forfeited and no options granted during the six months ended June 30,
2009. At June 30, 2009 and December 31, 2008, the Company had 95,900 options outstanding
at $10.00 per share. Vested options amounted to 57,240 and 38,060 at June 30, 2009 and
December 31, 2008, respectively. Options outstanding at June 30, 2009 have a weighted
average remaining contractual term of approximately 6.75 years. Total unrecognized
compensation cost related to non-vested options granted as of June 30, 2009 was $80,557
and is expected to be expensed ratably over the remaining vesting periods of the stock
options. Net loss, as reported, included stock-based employee compensation expense of
$13,497 for the three months ended June 30, 2009 and $26,994 for the six month period
ended June 30, 2009, and net loss, as reported, included stock-based employee compensation
expense of $13,497 and $28,029 for the three months and six months ended June 30, 2008,
respectively. The exercise or conversion ratio of all stock options granted was 1:1 and
the aggregate intrinsic value of the stock options was zero for both periods.

# Statement of Cash Flows

For
purposes of reporting cash flows, cash equivalents include amounts due from banks and
federal funds sold. Generally, federal funds are sold for one-day periods. Federal funds
sold were $6,001,218 as of June 30, 2009 and $1,078,000 at June 30, 2008.

# Investment Securities

Investment securities are accounted for in accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.  Management classifies
securities at the time of purchase into securities held to maturity, trading securities
and securities available for sale. Securities held to maturity are securities which the
Company has the positive intent and ability to hold to maturity, and are reported at
amortized cost. Trading securities are purchased and held principally for the purpose of
selling them in the near future and are reported at fair value, with unrealized gains and
losses included in earnings. Securities available for sale are securities that may be sold
under certain conditions, and are reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of shareholders equity
as accumulated other comprehensive income (loss). At June 30, 2009, the Companys
investment securities were classified as available for sale. The amortization of premiums
and accretion of discounts on investment securities are recorded as adjustments to
interest income. Gains or losses on sales of investment securities are based on the net
proceeds and the adjusted carrying amount of the securities sold using the specific
identification method. Unrealized losses on securities, reflecting a decline in value or
impairment judged by the Company to be other than temporary, are charged to earnings in
the consolidated statements of operations.

# NOTE 3  FAIR VALUE

Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements
(SFAS 157) which provides a framework for measuring and disclosing fair value
under generally accepted accounting principles. SFAS 157 requires disclosures about the
fair value of assets and liabilities recognized in the balance sheet in periods subsequent
to initial recognition,

8

---

whether the measurements are made on
a recurring basis (for example, available for sale investment securities) or on a
nonrecurring basis (for example, impaired loans).

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

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

Available
for sale investment securities ($23,042,497 at June 30, 2009) are the only assets whose
fair values are measured on a recurring basis using Level 1 inputs (active market quotes).

The
Company is predominantly a collateral-based lender with real estate serving as collateral
on a substantial majority of loans. Loans which are deemed to be impaired are primarily
valued on a nonrecurring basis at the fair values of the underlying real estate
collateral. Such fair values are obtained using independent appraisals, which the Company
considers to be level 2 inputs. The aggregate carrying amount of impaired loans at June
30, 2009 was $1.2 million.

Certain
assets such as Other Real Estate are measured at fair value less cost to sell. The Company
considers such fair values to be level 2 inputs. Management believes the fair value
component in its valuation follows the provisions of SFAS 157. The carrying amount of
Other Real Estate was $1.1 million at June 30, 2009.

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

|                                         | Total | Level 1 | Level 2 | Level 3
|---------------------------------------- | ----- | ------- | ------- | -------
|Investment securities available for sale |       |         | $       | 23,042 

The
table below presents assets and liabilities measured at fair value (in thousands) on a
nonrecurring basis at June 30, 2009.

|                  | Total | Level 1 | Level 2 | Level 3
|----------------- | ----- | ------- | ------- | -------
|Impaired loans    |       |         | $       | 1,168  
|Other real estate |       |         |         | 1,126  

The
carrying amounts and estimated fair values (in thousands), of the Companys financial
instruments at December 31, 2008 and June 30, 2009 were as follows:

9

---

|                                         | June 30, 2009 | December 31, 2008
|---------------------------------------- | ------------- | -----------------
|
|
|Assets:                                  |               |                  
|Cash and due from banks                  |               |                  
|Federal funds sold                       |               |                  
|Investment securities available for sale |               |                  
|Federal Home Loan Bank stock             |               |                  
|Loans, net                               |               |                  
|Other real estate                        |               |                  
|Liabilities:                             |               |                  
|Deposits                                 |               |                  
|Federal funds purchased                  |               |                  
|Federal Home Loan Bank borrowings        |               |                  

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

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

# DISCUSSION OF
FORWARD-LOOKING STATEMENTS

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

| |  | 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;
| | - | -------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

The
above risks are exacerbated by the recent developments in national and international
financial markets, and we are unable to predict what effect these uncertain market
conditions will have on our Company. During 2008 and thus far in 2009, the capital and
credit markets have experienced unprecedented levels of extended volatility and
disruption. There can be no assurance

10

---

that these unprecedented recent
developments will not materially and adversely affect our business, financial condition
and results of operations.

All
forward-looking statements in this report are based on information available to us as of
the date of this report. We undertake no obligation to publicly update or otherwise revise
any forward-looking statements, whether as a result of new information, future events, or
otherwise.

# General

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

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

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

# Effect of Economic Trends

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

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

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

| |  | The Emergency Economic Stabilization Act of 2008 (EESA), approved by Congress
and signed by President Bush on October 3, 2008, which, among other provisions, allowed
the U.S. Treasury to purchase up to $700 billion of mortgages, mortgage-backed securities
and certain other financial instruments from financial institutions for the purpose of
stabilizing and providing liquidity to the U.S. financial markets. EESA also raised the
basic limit of FDIC deposit insurance from $100,000 to $250,000 through December 31, 2013;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

11

---

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

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

| | o | The Debt Guarantee Program (DGP), under which the FDIC guarantees certain
senior unsecured debt of FDIC-insured institutions and their holding companies. The
unsecured debt must be issued on or after October 14, 2008 and not later than June 30,
2009, and the guarantee is effective through the earlier of the maturity date or June 30,
2012. The DGP coverage limit is generally 125% of the eligible entitys eligible debt
outstanding on September 30, 2008 and scheduled to mature on or before June 30, 2009 or,
for certain insured institutions, 2% of their liabilities as of September 30, 2008.
Depending on the term of the debt maturity, the nonrefundable DGP fee ranges from 50 to
100 basis points (annualized) for covered debt outstanding until the earlier of maturity
or June 30, 2012. The TAGP and DGP are in effect for all eligible entities, unless the
entity opted out on or before December 5, 2008.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

On
December 26, 2008, we received preliminary approval to participate in the CPP in the
amount of $1,891,000, which represented the maximum 3% of our risk-weighted assets at
September 30, 2008. After careful evaluation by our executive management and board of
directors, including the impact of our participation on our capital ratios and operations
as well as on our common shareholders, we elected to participate at $1 million and were
able to participate under the private company terms, which resulted in less dilution to
our 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 B Preferred Stock to
the U.S. Treasury.

12

---

# Critical Accounting
Policies

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

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

# Allowance for Loan Losses

We
believe the allowance for loan losses is the critical accounting policy that requires the
most significant judgments and estimates used in preparation of our consolidated financial
statements. Some of the more critical judgments supporting the amount of our allowance for
loan losses include judgments about the creditworthiness of borrowers, the estimated value
of the underlying collateral, cash flow assumptions, determination of loss factors for
estimating credit losses, the impact of current events, and conditions, and other factors
impacting the level of probable inherent losses. Under different conditions or using
different assumptions, the actual amount of credit losses incurred by us may be different
from managements estimates provided in our consolidated financial statements. Refer
to the portion of this discussion that addresses our allowance for loan losses for a more
complete discussion of our processes and methodology for determining our allowance for
loan losses.

# Income Taxes

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

# Results of Operations

Three months ended June
30, 2009 and 2008

General

Our
net loss for the quarter ended June 30, 2009 was $176,209, or $0.16 per basic and diluted
common share, compared to net loss of $92,165, or $0.08 per share, for the quarter ended
June 30, 2008, for an increase in net loss of $84,044, or 91%. As described below, the
increase in net loss is attributable primarily to: 1) continued pressure on our net
interest margin, 2) an increase in our provision for loan losses and 3) an emergency
special assessment of $42,000 from the FDIC insurance fund. Partially offsetting these
negative factors were gains of $87,002 on investment securities sales.

Net Interest Income

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

Net
interest income for the quarter ended June 30, 2009 was $503,955, an increase of $71,683,
or 17%, over net interest income of $432,272 for the quarter ended June 30, 2008. Interest
income increased $86,430, or 9%, to $1,061,111 for the quarter ended June 30, 2009.
Although the volume of average interest-earning assets increased $20.2 million from June
30, 2008 to June

13

---

30, 2009, as shown in the table
below, we did not experience as significant of an increase in corresponding interest
income due to the 183 basis point drop in the average prime rate from period to period.
Interest expense for the quarter ended June 30, 2009 increased $14,747 over the same
period in 2008. Although interest-bearing liabilities grew $22.2 million, as interest
rates declined and higher-priced certificates of deposit matured, our deposits were
re-priced at lower rates and resulted in only a 3% increase in interest expense.

The
following table sets forth information related to our average balance sheet, average
yields on assets, and average costs of liabilities for the quarters ended June 30, 2009
and 2008. We derived these yields and rates by dividing annualized income or expense by
the average balance of the corresponding assets or liabilities. We derived average
balances from the daily balances throughout the periods indicated. The net amount of
capitalized loan fees is amortized into interest income over the lives of the loans.

|Average Balances, Income and Expenses, Yields and Rates for the Quarter Ended June 30,
|--------------------------------------------------------------------------------------
|
|
|
|Interest-earning assets:                                                              
|Federal funds sold                                                                    
|Investment securities and FHLB stock                                                  
|Loans (1)                                                                             
|                                                                                      
|Total interest-earning  assets                                                        
|Non-earning assets                                                                    
|                                                                                      
|Total assets                                                                          
|                                                                                      
|Interest-bearing liabilities:                                                         
|Interest checking                                                                     
|Savings and money market                                                              
|Time deposits                                                                         
|Federal funds purchased                                                               
|FHLB borrowings                                                                       
|                                                                                      
|Total interest-bearing liabilities                                                    
|                                                                                      
|Non-interest bearing liabilities                                                      
|Shareholders equity                                                                  
|                                                                                      
|Total liabilities and shareholders' equity                                            
|                                                                                      
|Net interest spread                                                                   
|                                                                                      
|Net interest income/margin                                                            
|                                                                                      

(1)  
          Loan fees, which are immaterial, are included in interest income. There was one
          nonaccrual loan of $1,168,000 at June 30, 2009 and no nonaccrual loans at June
          30, 2008. Nonaccrual loans are included in the average balances above and income
          on nonaccrual loans is included on the cash basis for yield computation
          purposes.

Our
consolidated net interest margin for the quarter ended June 30, 2009 was 2.37%, a decrease
of 27 basis points from the net interest margin of 2.64% for the same period in 2008. In
May 2009, a loan of $1,168,000 was placed on nonaccrual status and $28,000 of previously
accrued interest was reversed. This reversal of interest in the second quarter of 2009 was
the primary reason that our quarterly loan yield declined from 5.35% in the first quarter
of 2009 to 5.14% in the quarter ended June 30, 2009. The average prime interest rate was
5.08% during the three months ended June 30, 2008, while the average prime interest rate
during the three-month period ended June 30, 2009 was 3.25%. With a 183 basis point
decrease in the average prime rate during the comparable periods, and with approximately
56% of our loan portfolio tied to the prime rate, we experienced an immediate decrease in
loan yields as the prime rate decreases occurred as evidenced by the 115 basis point
decline in loan yield over the comparable periods. The cost of interest-bearing
liabilities decreased 103 basis points, as we reduced our rates on transaction deposit
accounts, and as higher priced certificates of deposits matured and were replaced at lower
interest rates. Fixed maturity certificates of deposit are priced higher than core
deposits and have stated maturity dates, so there is not an immediate decrease in the
interest rates paid on these time deposits to offset the immediate decrease in loan
yields. The net interest margin is calculated by dividing annualized net interest income
by year-to-date average earning assets. Our net interest spread was 2.16% and 2.09% for
the quarters ended June 30, 2009 and 2008, respectively. The net interest spread is the
difference between the yield we earn on our interest-earning assets and the rate we pay on
our interest-bearing liabilities. In pricing deposits, we consider our liquidity needs,
the direction and levels of interest rates and local market conditions.

Provision for Loan Losses

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

14

---

Our
provision for loan losses for the quarter ended June 30, 2009 was $281,085 compared to
$79,000 for the quarter ended June 30, 2008. The increase was primarily due to charges
necessary to replenish the allowance for loan losses after charging-off loans in the
second quarter of 2009. During the second quarter our charge-offs totaled $248,749.

Refer
to the discussion below under Allowance for Loan Losses for a description of
the factors we consider in determining the amount of the provision we expense each period
in order to maintain an appropriate allowance for loan losses.

Non-interest Income

Non-interest
income totaled $121,703 for the three-month period ended June, 30, 2009 compared to
$20,560 for the same period in 2008 for an improvement of $101,143, or 492%. During the
three months ended June 30, 2009 we recorded gains of $87,002 on investment securities
sold during the period compared to none for the quarter ended June 30, 2008. Two agency
bonds were called and four mortgage-backed securities were sold during the quarter. These
proceeds were reinvested in agency bonds and taxable municipal bonds. Mortgage brokerage
fees increased 882% to $16,687 for the three-month period ended June, 30, 2009 from $1,700
in the comparable period in 2008 due to increased mortgage volume associated with the
lower mortgage rate environment.

Non-interest Expenses

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

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

Non-interest
expenses totaled $520,782 for the quarter ended June 30, 2009 compared to $465,997 for the
quarter ended June 30, 2008, for an increase of $54,785, or 12%. Regulatory and FDIC
insurance expense increased from $12,341 for the quarter ended June 30, 2008 to $69,256,
or 461% for the quarter ended June 30, 2009. This substantial increase was due to an FDIC
special assessment of $42,000 as well as general increases in FDIC assessment rates
associated with economic recovery programs and continued growth in the Banks
deposits. This special assessment is being charged to all financial institutions to aid in
replenishing the FDICs insurance fund, and is based on a percentage of total assets
minus Tier 1 capital at June 30, 2009. Pursuant to the FDICs final ruling on the
special assessment, the percentage used in calculating our Banks special assessment
was .05%. The FDICs final ruling indicated the possibility of additional special
assessments to financial institutions as the FDIC replenishes the insurance fund. Credit
and related expenses increased from $5,725 for the quarter ended June 30, 2008 to $10,457,
or 83%, due to attorney fees incurred on loan-related foreclosures.

Six
months ended June 30, 2009 and 2008

General

Our
net loss for the six months ended June 30, 2009 was $148,081, or $0.15 per common share,
compared to a net loss of $85,434 or $0.07 per share, for the six months ended June 30,
2008, for an increase in net loss of $62,647, or 73%. As described previously, the
increase in net loss is attributable primarily to net interest margin deterioration
between the comparable periods, an increase in our provision for loan losses, and the FDIC
special assessment as well as general increases in FDIC insurance costs. This loss was
partially offset by improvements in gains on investment securities sales, mortgage loan
fees and other non-interest income.

15

---

Net Interest Income

Net
interest income was $1,012,603 for the six months ended June 30, 2009 an increase of
$150,672, or 17%, over net interest income of $861,931 for the six months ended June 30,
2008. Interest income increased $163,266, or 8%, to $2,089,594 for the six months ended
June 30, 2009. Average earning assets increased to $81 million for the six months ended
June 30, 2009 from $62 million for the six months ended June 30, 2008, an increase of $19
million, or 31%. Although the volume of average interest-earning assets increased $19
million from June 30, 2008 to June 30, 2009, as shown in the table below, we did not
experience as significant an increase in corresponding interest income due to the 240
basis point drop in the average prime rate from period to period. Loan interest and
related fees improved $109,437, or 8%, over the same period ended 2008 due to continued
growth in the loan portfolio. Interest expense for the six months ended June 30, 2009
increased only $12,594, or 1.2%, over the same period in 2008 as higher-priced certificates of
deposit matured and were replaced with lower rates and rates were lowered on all deposit
transaction accounts due to the market decrease in rates.

The
following table sets forth information related to our average balance sheet, average
yields on assets, and average costs of liabilities for the six months ended June 30, 2009
and 2008. We derived these yields and rates by dividing annualized income or expense by
the average balance of the corresponding assets or liabilities. We derived average
balances from the daily balances throughout the periods indicated.

|Average Balances, Income and Expenses, Yields and Rates for the Six Months Ended June 30,
|-----------------------------------------------------------------------------------------
|
|
|
|Interest-earning assets:                                                                 
|Federal funds sold                                                                       
|Investment securities and FHLB stock                                                     
|Loans (1)                                                                                
|                                                                                         
|Total interest-earning assets                                                            
|Non-earning assets                                                                       
|                                                                                         
|Total assets                                                                             
|                                                                                         
|Interest-bearing liabilities:                                                            
|Interest checking                                                                        
|Savings and money market                                                                 
|Time deposits                                                                            
|Federal funds purchased                                                                  
|FHLB borrowings                                                                          
|                                                                                         
|Total interest-bearing liabilities                                                       
|                                                                                         
|Non-interest bearing liabilities                                                         
|Shareholders equity                                                                     
|                                                                                         
|Total liabilities and shareholders equity                                               
|                                                                                         
|Net interest spread                                                                      
|                                                                                         
|Net interest income/margin                                                               
|                                                                                         

(1)  
          Loan fees, which are immaterial, are included in interest income. There were
          $1,168,000 in nonaccrual loans at June 30, 2009 and no nonaccrual loans at June
          30, 2008. Nonaccrual loans are included in the average balances above and income
          on nonaccrual loans is included on the cash basis for yield computation
          purposes.

Our
consolidated net interest margin for the quarter ended June 30, 2009 was 2.51%, a decrease
of 29 basis points from the net interest margin of 2.80% for the same period in 2008. The
average prime interest rate was 5.65% during the six months ended June 30, 2008, while the
average prime interest rate during the six-month period ended June 30, 2009 was 3.25%.
With a 240 basis point decrease in the average prime rate during the comparable periods,
and with approximately 56% of our loan portfolio tied to the prime rate, we experienced an
immediate decrease in loan yields as the prime rate decreases occurred as evidenced by the
147 basis point decline in loan yield over the comparable periods. The cost of
interest-bearing liabilities decreased 119 basis points as rates on transaction deposit
accounts were reduced and as higher priced certificates of deposits matured and were
replaced at lower interest rates. Fixed maturity certificates of deposit are priced higher
than core deposits and have stated maturity dates, so there is not an immediate decrease
in the interest rates paid on these time deposits to offset the immediate decrease in loan
yields. The net interest margin is calculated by dividing annualized net interest income
by year-to-date average earning assets. Our net interest spread was 2.29% and 2.17% for
the six months ended June 30, 2009 and 2008, respectively. The net interest spread is the
difference between the yield we earn on our interest-earning assets and the rate we pay on
our interest-bearing liabilities. In pricing deposits, we consider our liquidity needs,
the direction and levels of interest rates and local market conditions.

16

---

Provision for Loan Losses

Our
provision for loan losses for the six months ended June 30, 2009 was $353,185 compared to
$112,608 for the six months ended June 30, 2008. The increase was primarily due to charges
necessary to replenish the allowance for loan losses after charging-off loans in the
second quarter of 2009. Continued growth in the loan portfolio as well as a general
increase in the allowance for loan losses as a percentage of loans also contributed to the
increase in the loan loss provision. Management evaluates the adequacy of the reserve for
probable loan losses given the size, mix, and quality of the current loan portfolio.
Management also relies on our limited history of past-dues and charge-offs, as well as
peer data to determine our loan loss allowance. Refer to the discussion below under
Allowance for Loan Losses for a description of the factors we consider in
determining the amount of provision we expense each period in order to maintain an
appropriate allowance for loan losses.

We
maintained an allowance as a percentage of outstanding loans of 1.30% at June 30, 2009
compared to 1.20% at June 30, 2008.

Non-interest Income

Non-interest
income totaled $208,035 for the six months ended June 30, 2009, an increase of $137,121,
or 193%, over the six months ended June 30, 2008. During the six months ended June 30,
2009, we recognized $143,098 in gains on investment securities called or sold during the
period, compared to $38,924 in gains for the six months ended June 30, 2008. Two
mortgage-backed securities and one corporate bond were sold in the first quarter of 2009.
Two agency bonds were called and four mortgage-backed securities were sold during the
second quarter of 2009. These proceeds were reinvested in agency bonds and taxable
municipal bonds. Total customer service fees, which include mortgage fees and service
charges on accounts, increased 233% in the six-month period. Mortgage loan fees increased
474% to $30,121 for the six-month period ended June, 30, 2009 from $5,245 in the
comparable period in 2008 due to increased mortgage volume associated with the lower
mortgage rate environment. Service charges on deposit accounts increased $2,610, or 40%,
from $6,568 for the period ended June 30, 2008 to $9,178 for the comparable period in 2009
due to continued growth in deposits.

Non-interest Expenses

The
following table sets forth our non-interest expenses for the six month periods of 2009 and
2008.

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

Non-interest
expenses were $1,015,534 for the six months ended June 30, 2009 compared to $905,670 for
the same period ended June 30, 2008, for an increase of 12%. As stated previously, the
most significant increase was in regulatory fees and FDIC insurance, which increased from
$23,954 for the six months ended June 30, 2008 to $93,586 for the same period ended June
30, 2009. The FDIC special assessment fee of $42,000 as well as a general increase in FDIC
insurance assessments impacted this increase. Data processing costs increased from
$100,599 for the six months ended June 30, 2008 to $121,151 for the same period ended June
30, 2009. This increase represents our core processor charges, which are, in part, based
on growth of the Banks deposit accounts. Legal and audit fees increased from $34,139
for the six months ended June 30, 2008 to $49,772 for the same period ended June 30, 2009
due to increases in the costs for both auditor and legal reviews of SEC filings for 2009.
Credit related expenses increased from $7,435 for the six months ended June 30, 2008 to
$13,634 for the same period ended June 30, 2009 due to attorney fees associated with
loan-related collection and foreclosures efforts.

# Balance Sheet Review

17

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General

At
June 30, 2009, total assets were $94.1 million compared to $82.6 million at December 31,
2008, for an increase of $11.5 million, or 14%. The increase in assets included volume
increases in our loan and investment portfolios as well as our federal funds sold
balances, all of which were increased primarily from growth in local deposits.
Interest-earning assets comprised approximately 95% of total assets at June 30, 2009 and
December 31, 2008. Gross loans totaled $59.4 million, an increase of $4.7 million, or
8.8%, from $54.7 million at December 31, 2008. Investment securities and Federal Home Loan
Bank stock amounted to $23.8 million at June 30, 2009. At June 30, 2009, we had federal
funds sold balances of $6.0 million.

Deposits
totaled $68.9 million at June 30, 2009, an $11.2 million, or 20%, increase from $57.7
million at December 31, 2008. Federal Home Loan Bank borrowings remained unchanged at
$14.5 million. Shareholders equity totaled $10.1 million at June 30, 2009, a
$468,000, or 5%, increase from $9.6 million at December 31, 2008. The increase in
shareholders equity was primarily attributable to our sale of preferred stock
pursuant to our participation in the U.S. Treasurys CPP.

Investments

On
June 30, 2009 and December 31, 2008, the fair values of our investment securities
portfolio amounted to $23.0 million and $21.1 million and represented 26% and 27%,
respectively, of interest-earning assets. Unrealized losses, net of tax benefit, on
available for sale investment securities amounted to $424,643 and $27,761 at June 30, 2009
and December 31, 2008, respectively. Our portfolio consisted of U.S. government sponsored
agencies, mortgage-backed agencies, taxable municipal securities 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 shown in the following
table.

|                                   | June 30, 2009 | December 31, 2008
|---------------------------------- | ------------- | -----------------
|
|
|
|
|U.S. Government sponsored agencies |               |                  
|Mortgage-backed agencies           |               |                  
|Taxable municipal securities       |               |                  
|Corporate bonds                    |               |                  
|                                   |               |                  
|Total                              |               |                  
|                                   |               |                  

During
the six-month period ended June 30, 2009, two agency bonds were called and one corporate
bond and six agency-mortgage-backed bonds were sold. The proceeds from the sales were
reinvested in agency bonds and taxable municipal bonds. Although the corporate (bank) bond
was considered investment grade at the time of sale, we had the opportunity to sell the
bond at a gain and believed disposal was prudent in light of the current market
conditions. The overall yield and/or average lives improved on the sales and replacement
bonds. All sales resulted in gains totaling $143,098 for the six months ended June 30,
2009.

Our
corporate (bank) bonds continue to be designated investment grade by Moodys and
Standard & Poors. Seven of our corporate bonds had been in unrealized loss positions
for more than 12 months at June 30, 2009. We believe, based on industry analyst reports
and credit ratings, that deterioration in fair values of these bonds as well as other
individual investment securities available for sale is attributed to changes in market
interest rates and not in the credit quality of the issuer and therefore, these losses are
not considered other-than-temporary. We have the ability and intent to hold these
securities until such time as the value recovers or the securities mature.

Investment
securities with market values of approximately $6.6 million and $10.1 million at June 30,
2009 and December 31, 2008, respectively, were pledged to secure public deposits and
Federal Home Loan Bank borrowings.

At
June 30, 2009 and December 31, 2008, we held non-marketable equity securities, which
consisted of Federal Home Loan Bank stock of $799,300 and $755,900, respectively. Federal
Home Loan Bank stock purchases are required as the level of Federal Home Loan Bank
advances increase. No ready market exists for this stock and it has no quoted market
value. Redemptions of this stock have historically been at par value. Accordingly, this
investment is carried at cost, which approximates fair market value. This stock has
historically paid a quarterly dividend, but is currently not paying a dividend due to the
current economic environment and we are no longer accruing a dividend on this stock.

Loans

Since
loans typically provide higher interest yields than other interest-earning assets, it is
our goal to ensure that the highest percentage of our earning assets is invested in our
loan portfolio. Gross loans outstanding at June 30, 2009 and December

18

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31, 2008 were $59.5 million and $54.7
million, respectively and represented 68% and 69% of interest-earning assets for each of
the periods. The loan portfolio increased $4.8 million during the first six months of
2009. This measured growth level is indicative of the slowdown in the economy as well as
of our desire to manage our credit risk in the current economic environment.

The
percentage of loans in each category remained relatively stable from December 31, 2008 to
June 30, 2009, as shown in the table below. Loans secured by real estate mortgages
comprised approximately 83% of loans outstanding at June 30, 2009 and 82% at December 31,
2008. Most of our real estate loans are secured by residential and commercial properties.
We do not generally originate traditional long-term residential mortgages, but we do issue
traditional second mortgage residential real estate loans and home equity lines of credit.
We obtain a security interest in real estate whenever possible, in addition to any other
available collateral. This collateral is taken to increase the likelihood of the ultimate
repayment of the loan. Generally, we limit the loan-to-value ratio on loans we make to
80%.

Due
to the short time our portfolio has existed, the loan mix shown below may not be
indicative of the ongoing portfolio mix. Management believes that the loan portfolio is
adequately diversified, although loans secured by real estate comprise the majority of our
portfolio.

The
following table summarizes the composition of our loan portfolio at June 30, 2009 and
December 31, 2008.

|                                      | June 30, | December 31,
|------------------------------------- | -------- | ------------
|
|
|
|Real Estate:                          |          |             
|Construction and development and land |          |             
|Commercial                            |          |             
|Residential mortgages                 |          |             
|Home equity lines                     |          |             
|                                      |          |             
|Total real estate                     |          |             
|Commercial                            |          |             
|Consumer                              |          |             
|                                      |          |             
|Gross loans                           |          |             
|                                      |          |             
|Less allowance for loan losses        |          |             
|                                      |          |             
|Total loans, net                      |          |             
|                                      |          |             

Construction
and development and land loans represented approximately 31% of total loans at June 30,
2009 and December 31, 2008. Loans secured by land represented approximately 70% of the
construction and development and land category at June 30, 2009. We have concentrations of
credit, generally defined as more than 25% of Tier 1 capital and the allowance for loan
losses, in the residential construction and land loan categories. We believe that we have
appropriate controls in place to monitor risks associated with these concentrations.

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

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

Impairment and Potential
Problem Loans

We
discontinue accrual of interest on a loan when we conclude that it is doubtful that we
will be able to collect interest from the borrower. Generally, a loan will be placed on
nonaccrual status when it becomes 90 days past due as to principal or interest, or when
management believes, after considering the borrowers financial condition, economic
and the borrowers

19

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industry conditions, if applicable,
and collection efforts, that the borrowers financial condition is such that
collection of the loan is doubtful. A payment of interest on a loan that is classified as
nonaccrual will be recognized as income when received. When a loan is placed on nonaccrual
status, all previously accrued but unpaid interest is reversed and is deducted from
reported interest income and earnings. Once a loan is placed on nonaccrual status, no
additional interest is accrued on the loan balance.

We
had no loans 90 days or more past due at June 30, 2009. Impaired loans are generally
nonperforming loans or loans which are 90 days or more delinquent as to principal and
interest payments. During the second quarter, we identified one impaired loan totaling
$1,168,000 and placed this loan on nonaccrual status. While this loan was less than 90
days past due, management received information indicating that the borrower is unable to
repay the loan. Interest reversed on this loan totaled $28,000. Based on our evaluation of
the deteriorating financial condition of the borrower and its inability to repay the loan,
we considered this loan impaired under the criteria defined in FAS 114, Accounting
by Creditors for Impairment of a Loan, at June 30, 2009. This loan is collateralized
by residential real estate, and we have a recent appraisal, which indicates that the fair
value of the property less estimated selling costs is more than sufficient to cover our
outstanding loan balance. Accordingly at June 30, 2009, there was no impairment charge
associated with the loan. Management will continue to assess the collateral value
associated with this loan. In the second quarter of 2009, foreclosure proceedings and a
judgment against three borrowers were finalized and a total of $248,749 was charged-off.
There were no accruing loans which were contractually past due 90 days or more as to
principal or interest payments.

We
maintain a list of potential problem loans that are not in nonaccrual status but that
exhibit signs of credit issues. We add loans to this list when we become aware of
potential deterioration in the borrowers ability to perform. These loans are
identified in order to closely monitor the status. At June 30, 2009, we had identified
potential problem loans totaling $1,126,000.

Allowance for Loan Losses

We
have established an allowance for loan losses through a provision for loan losses charged
to expense on our consolidated statements of income. The allowance for loan losses was
$769,878 and $665,442 as of June 30, 2009 and December 31, 2008, respectively, and
represented 1.30% of outstanding loans at June 30, 2009 and 1.22% as of December 31, 2008.
The allowance for loan losses represents an amount which we believe will be adequate to
absorb probable losses on existing loans that may become uncollectible. Our allowance for
loan losses covers estimated credit losses on individually evaluated loans that are
determined to be impaired, as well as estimated credit losses inherent in the remainder of
the loan portfolio. Our judgment as to the adequacy of the allowance for loan losses is
based on a number of assumptions about future events, which we believe to be reasonable,
but which may or may not prove to be accurate. We believe we have an effective loan review
system and loan grading system that is designed to identify, monitor and address asset
quality problems in an accurate and timely manner. Our determination of the allowance for
loan losses is based on evaluations of the collectibility of loans, including
consideration of factors such as the balance of impaired loans, the quality, mix, and size
of our overall loan portfolio, economic conditions that may affect the borrowers
ability to repay, the amount and quality of collateral securing the loans, our historical
loan loss experience, and a review of specific problem loans. We also consider subjective
issues such as changes in the lending policies and procedures, changes in the
local/national economy, changes in volume or type of credits, changes in volume/severity
of problem loans, quality of loan review and board of director oversight, concentrations
of credit, and peer group comparisons.

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

In
calculating the allowance for loan losses, we utilize a credit grading system, which we
apply to each loan. We calculate our general reserve based on historical and peer loss
percentage allocations of each of the categories of unclassified loan types, including
commercial, commercial real estate, construction and development, residential mortgages,
home equity lines of credit and consumer loans. The loss factors are adjusted for
qualitative factors, including those described above. We also analyze individual
significant credits not considered impaired and maintain a general unallocated reserve in
accordance with December 2006 regulatory guidance in our assessment of the allowance for
loan losses. Significant individual credits criticized as special mention or classified as
substandard or doubtful require individual analysis. Loans in the substandard category are
characterized by deterioration in quality exhibited by any number of well-defined
weaknesses requiring corrective action such as declining or negative earnings trends and
declining or inadequate liquidity or collateral. Loans in the doubtful category exhibit
the same

20

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weaknesses found in the substandard
category, but the weaknesses are more pronounced. These loans are not yet rated as loss
because certain events may occur which could repay the debt. Loans classified as
substandard, but not impaired, totaled $1,126,000 at June 30, 2009. These loans were
performing and were not past due 30 days or more at June 30, 2009, but these borrowers
have exhibited past performance issues. In situations where a loan is considered impaired,
the loans are excluded from the general reserve calculations and are assigned a specific
reserve. The specific reserve is based on our analysis of the most probable source of
repayment which is usually the liquidation of the underlying collateral, but may also
include discounted future cash flows.

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

We
had no loans classified as doubtful at June 30, 2009 and December 31, 2008. Charge-offs
for the six month period ended June 30, 2009 were $248,749 compared to none for the same
period in 2008. Management pursues recoveries on loans charged-off; however, it is not
possible at this time to determine the amount, if any, which may be recovered. Activity in
the allowance for loan losses account is shown below.

|                                                            | 
|----------------------------------------------------------- | 
|Beginning allowance for loan losses at December 31, 2008    | 
|Additions to allowance for loan losses charged to provision | 
|Loans charged-off:                                          | 
|Commercial real estate                                      | 
|Commercial                                                  | 
|                                                            | 
|Total loans charged-off                                     | 
|                                                            | 
|Recoveries on loans previously charged-off                  | 
|                                                            | 
|Ending allowance for loan losses at June 30, 2009           | 
|                                                            | 

Other real estate

Loans
transferred to other real estate totaled $1,060,000 at June 30, 2009. Other real estate is
recorded at the lower of net principal loan balance outstanding or estimated fair market
value less estimated selling costs. Estimated fair market values are based on appraisals
obtained at the time of acquisition of the properties by the Bank. Other real estate
consists of residential as well as commercial properties.

Deposits

Our
primary source of funds for our loans and investments is our deposits. Deposits increased
$11.2 million, from $57.7 million at December 31, 2008 to $64.9 million at June 30, 2009.
The following table shows the composition of deposits at June 30, 2009 and December 31,
2008.

|                                           | June 30, 2009 | December 31, 2008
|------------------------------------------ | ------------- | -----------------
|
|
|
|Non-interest bearing demand deposits       |               |                  
|Interest bearing checking                  |               |                  
|Money market and savings                   |               |                  
|Time deposits less than $100,000           |               |                  
|Time deposits $100,000 and over            |               |                  
|Brokered time deposits, less than $100,000 |               |                  
|                                           |               |                  
|Total                                      |               |                  
|                                           |               |                  

Core
deposits, which exclude time deposits of $100,000 or more and brokered certificates of
deposit, provide a relatively stable funding source for our loan portfolio and other
earning assets. Our core deposits were $34.8 million and $28.7 million at June 30, 2009
and December 31, 2008, respectively. Our loan-to-deposit ratio was 86% and 95% at June 30,
2009 and December 31, 2008, respectively. Local deposits increased $10.0 million, or 90%
of the total deposit growth during the first six-months of

21

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2009, and we were able to decrease
our reliance on brokered deposits in the first six months of 2009 compared to the same
period of 2008. All of our time deposits are certificates of deposits.

As
a participant in the FDICs TLGP, our Bank will incur additional FDIC premium costs
in 2009 associated with our participation.

Borrowings and lines of
credit

At
June 30, 2009, the Bank had short-term lines of credit with correspondent banks to
purchase a maximum of $4.0 million in unsecured federal funds on a one to fourteen day
basis for general corporate purposes. The interest rate on borrowings under these lines is
the prevailing market rate for federal funds purchased. These accommodation lines of
credit are renewable annually and may be terminated at any time at the correspondent
banks sole discretion. The Bank utilized these lines of credit during the six months
ended June 30, 2009, but did not utilize these lines of credit during the second quarter
of 2009. The average amount outstanding during the six months ended June 30, 2009 was
$259,000. No amounts were outstanding at any month-end during the six months ended June
30, 2009 and the average interest rate paid on these borrowings was .90%. The average
amount outstanding during the year ended December 31, 2008 was $554,000 and the highest
month-end amount outstanding during 2008 was $2.2 million. The average interest rate paid
on these borrowings during the year was 2.94%. There were no outstanding amounts on these
lines of credit at June 30, 2009 and December 31, 2008.

We
are also a member of the Federal Home Loan Bank. At June 30, 2009 and December 31, 2008,
we had $14.5 million outstanding in Federal Home Loan Bank borrowings. At June 30, 2009,
we had borrowing capacity with the Federal Home Loan Bank of approximately $4.4 million
based on a percentage of our total assets. Average and maximum amounts outstanding were
$14.5 million during the six-month period ended June 30, 2009 at an average interest rate
of 3.16%. 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

Total
shareholders equity increased $468,102 from $9.6 million at December 31, 2008 to
$10.1 million at June 30, 2009 primarily due to our issuance of preferred stock to the
U.S. Treasury. Common stock increased $26,994 due to stock options
compensation expense accrued during the six months ended June 30, 2009. We incurred an
unrealized loss, net of tax benefit, of $396,882 on investment securities available for
sale, which decreased shareholders equity during the six-month period. In addition, our net loss
of $148,081 for the six months ended June 30, 2009 decreased shareholders equity.

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

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

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

22

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considered
well-capitalized, we must maintain total risk-based capital of at least 10%,
Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.

The
following tables set forth the Banks capital ratios at June 30, 2009 and December
31, 2008.

|June 30, 2009             |  |  | Well capitalized | Adequately capitalized
|------------------------- |  |  | ---------------- | ----------------------
|
|
|
|Total risk-based capital  |  |  | $                | 11,008                
|Tier 1 risk-based capital |  |  |                  | 10,373                
|Tier 1 leverage capital   |  |  |                  | 10,373                

|December 31, 2008         |  |  | Well capitalized | Adequately capitalized
|------------------------- |  |  | ---------------- | ----------------------
|
|
|
|Total risk-based capital  |  |  | $                | 10,245                
|Tier 1 risk-based capital |  |  |                  | 9,580                 
|Tier 1 leverage capital   |  |  |                  | 9,580                 

As
stated previously, in the first quarter of 2009, we elected to participate in the U.S.
Treasurys CPP under EESA. Because we were required to raise substantially more
capital in our initial offering than we could immediately utilize and are still a
relatively new enterprise, our capital ratios are significantly above the well-capitalized
designation as shown in the table above. While we do not need capital, we believe that
given the current economic and capital markets conditions and the impact on credit risk as
well as any future capital needs, it was prudent for us to participate. The maximum amount
of capital, for which we were preliminarily approved, was $1,891,000 and we elected to
participate in the CPP by selling to the Treasury preferred stock for the sum of $1
million. We retained $100,000 in the holding company to cover dividend payments to the
Treasury for approximately two years. We injected $900,000 into the Bank and this
additional bank capital is reflected in the capital ratios at June 30, 2009 shown above.

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

# Effect of Inflation and
Changing Prices

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

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

# Off-Balance Sheet Risk

Through
the Bank, we have made contractual commitments to extend credit in the ordinary course of
its business activities. These commitments are legally binding agreements to lend money to
our clients at predetermined interest rates for a specified period of time. We evaluate
each clients creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by us upon extension of credit, is based on our credit
evaluation of the borrower. Collateral varies but may include accounts receivable,
inventory, property, plant and equipment, commercial and residential real estate. We
manage the credit risk on these commitments by subjecting them to normal underwriting and
risk management processes. At June 30, 2009, the Bank had unfunded commitments to extend
credit of $5.2 million through various types of lending arrangements.

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

23

---

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

# Liquidity

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

At
June 30, 2009, our liquid assets, consisting of cash and due from banks and federal funds
sold amounted to $6.9 million, or approximately 7% of total assets. Our investment
securities available for sale amounted to $23.0 million or approximately 24% of total
assets. Unpledged investment securities of $16.4 million at June 30, 2009 traditionally
provide a secondary source of liquidity since they can be converted into cash in a timely
manner. At June 30, 2009, $6.6 million of our investment securities were pledged to secure
public entity deposits and as collateral for Federal Home Loan Bank borrowings.

Our
ability to maintain and expand our deposit base and borrowing capabilities serves as our
primary source of liquidity. We plan to meet our future cash needs primarily through the
liquidation of temporary investments and the generation of deposits. In addition, we will
receive cash upon the maturities of loans and maturities, calls, sales and prepayments on
investment securities. At June 30, 2009 we had federal funds purchased lines of credit
with two correspondent banks totaling $4.0 million. Availability on these lines of credit
was $4.0 million at June 30, 2009. In July 2009, we were granted a federal funds purchased
line of credit of $2.0 million from a third correspondent bank. We are also a member of
the Federal Home Loan Bank, from which applications for borrowings can be made. The
Federal Home Loan Bank requires that investment securities or qualifying mortgage loans be
pledged to secure advances from them. We are also required to purchase Federal Home Loan
Bank stock in a percentage of each advance. There was approximately $4.4 million in
borrowing capacity available from the Federal Home Loan Bank based on total assets at June
30, 2009. Federal Home Loan Bank borrowing capacity increases as our quarterly total
assets increase and as long as we have sufficient collateral to pledge toward these
advances. We believe that our existing stable base of core deposits along with continued
growth in our deposit base will enable us to successfully meet our long term liquidity
needs.

# Market Risk

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

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

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

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

# Recently Issued
Accounting Standards

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

24

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In
June 2009, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 168, The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles
 a replacement of 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. The Codification does not change GAAP. Instead, it takes the
thousands of individual pronouncements that currently comprise GAAP and reorganizes them
into approximately 90 accounting Topics, and displays all Topics using a consistent
structure. Contents in each Topic are further organized first by Subtopic, then Section
and finally Paragraph. The Paragraph level is the only level that contains substantive
content. Citing particular content in the Codification involves specifying the unique
numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.
FASB suggests that all citations begin with FASB ASC, where ASC stands for
Accounting Standards Codification. SFAS 168, (FASB ASC 105-10-05, 10, 15, 65, 70) is
effective for interim and annual periods ending after September 15, 2009 and will not have
an impact on the Companys financial position but will change the referencing system
for accounting standards. The following pronouncements provide citations to the applicable
Codification by Topic, Subtopic and Section in addition to the original standard type and
number.

FSP
EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20,
(FASB ASC 325-40-65) (FSP EITF 99-20-1) was issued in January 2009. Prior to
the FSP, other-than-temporary impairment was determined by using either Emerging Issues
Task Force (EITF) Issue No. 99-20, Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be
Held by a Transferor in Securitized Financial Assets, (EITF 99-20) or
SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, (SFAS 115) depending on the type of security. EITF 99-20
required the use of market participant assumptions regarding future cash flows regarding
the probability of collecting all cash flows previously projected. SFAS 115 determined
impairment to be other than temporary if it was probable that the holder would be unable
to collect all amounts due according to the contractual terms. To achieve a more
consistent determination of other-than-temporary impairment, the FSP amends EITF 99-20 to
determine any other-than-temporary impairment based on the guidance in SFAS 115, allowing
management to use more judgment in determining any other-than-temporary impairment. The
FSP was effective for reporting periods ending after December 15, 2008. Management has
reviewed the Companys security portfolio and evaluated the portfolio for any
other-than-temporary impairments.

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

FSP
SFAS 115-2 and SFAS 124-2 (FASB ASC 320-10-65), Recognition and Presentation of
Other-Than-Temporary Impairments, (FSP SFAS 115-2 and SFAS 124-2)
categorizes losses on debt securities available-for-sale or held-to-maturity determined by
management to be other-than-temporarily impaired into losses due to credit issues and
losses related to all other factors. Other-than-temporary impairment (OTTI) exists when it
is more likely than not that the security will mature or be sold before its amortized cost
basis can be recovered. An OTTI related to credit losses should be recognized through
earnings. An OTTI related to other factors should be recognized in other comprehensive
income. The FSP does not amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities. Annual disclosures required in SFAS
115 and FSP SFAS 115-1 and SFAS 124-1 are also required for interim periods (including the
aging of securities with unrealized losses).

FSP
SFAS 157-4 (FASB ASC 820-10-65), Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That are Not Orderly recognizes that quoted prices may not be
determinative of fair value when the volume and level of trading activity has
significantly decreased. The evaluation of certain factors may necessitate that fair value
be determined using a different valuation technique. Fair value should be the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction, not a forced liquidation or distressed sale. If a transaction is considered
to not be orderly, little, if any, weight should be placed on the transaction price. If
there is not sufficient information to conclude as to whether or not the transaction is
orderly, the transaction price should be considered when estimating fair value. An
entitys intention to hold an asset or liability is not relevant in determining fair
value. Quoted prices provided by pricing services may still be used when estimating fair
value in accordance with SFAS 157; however, the entity should evaluate whether the quoted
prices are based on current information and orderly transactions. Inputs and valuation
techniques are required to be disclosed in addition to any changes in valuation
techniques.

FSP
SFAS 107-1 and APB 28-1 (FASB ASC 825-10-65), Interim Disclosures about Fair Value
of Financial Instruments requires disclosures about the fair value of financial
instruments for interim reporting periods of publicly traded companies as well as in
annual financial statements and also requires those disclosures in summarized financial
information at interim reporting periods A publicly traded company includes any company
whose securities trade in a public market on either a stock exchange or in the
over-the-counter market, or any company that is a conduit bond obligor. Additionally, when
a company makes a filing with a regulatory agency in preparation for sale of its
securities in a public market it is considered a publicly traded company for this purpose.

25

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The
three staff positions are effective for periods ending after June 15, 2009, with early
adoption of all three permitted for periods ending after March 15, 2009. The Company
adopted the staff positions for its second quarter 10-Q. The staff positions had no
material impact on the financial statements. Additional disclosures have been provided
where applicable.

The
SEC issued Staff Accounting Bulletin (SAB) No. 111 (FASB ASC 320-10-S99-1) on
April 9, 2009 to amend Topic 5.M., Other Than Temporary Impairment of Certain
Investments in Debt and Equity Securities and to supplement FSP SFAS 115-2 and SFAS
124-2. SAB 111 maintains the staffs previous views related to equity securities;
however debt securities are excluded from its scope. The SAB provides that
other-than-temporary impairment is not necessarily the same as
permanent impairment and unless evidence exists to support a value equal to or
greater than the carrying value of the equity security investment, a write-down to fair
value should be recorded and accounted for as a realized loss. The SAB was effective upon
issuance and had no impact on the Companys financial position.

SFAS
165 (FASB ASC 855-10-05, 15, 25, 45, 50, 55), Subsequent Events, (SFAS
165) was issued in May 2009 and provides guidance on when a subsequent event should
be recognized in the financial statements. Subsequent events that provide additional
evidence about conditions that existed at the date of the balance sheet should be
recognized at the balance sheet date. Subsequent events that provide evidence about
conditions that arose after the balance sheet date but before financial statements are
issued, or are available to be issued, are not required to be recognized. The date through
which subsequent events have been evaluated must be disclosed as well as whether it is the
date the financial statements were issued or the date the financial statements were
available to be issued. For nonrecognized subsequent events which should be disclosed to
keep the financial statements from being misleading, the nature of the event and an
estimate of its financial effect, or a statement that such an estimate cannot be made,
should be disclosed. The standard is effective for interim or annual periods ending after
June 15, 2009. See Note 1 to the consolidated financial statements for managements
evaluation of subsequent events.

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

26

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

Not applicable.

# Item 4.   Controls and
Procedures.

As
of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our current
disclosure controls and procedures are effective as of June 30, 2009. There have been no
significant changes in our internal controls over financial reporting during the fiscal
quarter ended June 30, 2009 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.

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

27

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# PART II  OTHER
INFORMATION

# Item 1.   Legal Proceedings.

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

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

Not applicable.

# Item 3.   Default
Upon Senior Securities.

Not applicable.

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

Our board of directors submitted
three matters to a vote of our security holders during the three months ended June 30,
2009 at our annual meeting of shareholders held on April 30, 2009. These proposals were as
follows:

1)    
          Election of Directors: Our board of directors is divided into three classes with
          each class to be as nearly equal in number as possible. The three classes of
          directors have staggered terms, so that the terms of approximately one-third of
          the board members expire at each annual shareholders meeting. The current Class
          I directors are Jeffrey L. Dezen, Roger H. Gower and Frank B. Halter, Jr. The
          current Class II directors are R. Bruce Harman, Arthur L. Howson, Jr., Paula S.
          King and J. Matthew Shouse. The current Class III directors are Jonathan T.
          McClure, David A. Merline, Jr., William H. Pelham and Russel T. Williams.

The previous terms of the Class I
directors expired at the 2009 annual shareholders meeting. Each of the three current Class
I directors was nominated for election and stood for re-election to a three-year term
expiring at the 2012 annual shareholder meeting. Each of the three Class I directors was
re-elected with voting results as follows: Mr. Dezen had 1,011,798 votes in favor of his
re-election and 21,920 votes withheld. Mr. Gower had 1,012,298 votes in favor of his
re-election and 21,420 votes withheld. Mr. Halter had 1,019,817 votes in favor of his
re-election and 13,901 votes withheld.

The terms of the Class II directors
will expire at the 2010 annual shareholders meeting, and the terms of the Class III
directors will expire at the 2011 annual shareholders meeting.

2)    
          Ratification of Appointment of Independent Registered Public Accounting Firm:
          The ratification of the appointment of Elliott Davis, LLC as our independent
          registered public accounting firm for the year ending December 31, 2009 was
          submitted to a vote of our security holders at our 2009 annual shareholders
          meeting with voting results as follows: 1,027,618 votes in favor, 5,600 votes
          against, and 500 votes abstained.

3)    
          Non-binding Resolution to Approve the Compensation of our Named Executive
          Officers: Due to our participation in the U.S. Treasurys Capital Purchase
          Program, we were required to submit for shareholder approval an advisory
          (non-binding) proposal requesting approval of the compensation of our named
          executive officers as disclosed in the Description of the Compensation
          Arrangements and in the tables and related discussion included in the proxy
          statement. Voting results were as follows: 988,300 votes in favor, 34,768 votes
          against, and 10,650 votes abstained.

There were no other matters voted on
by the Companys shareholders at our 2009 annual shareholder meeting.

# Item 5.   Other Information.

Not applicable.

# Item 6.   Exhibits.

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

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

32           Section 1350
Certifications.

28

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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 undersigned thereunto duly authorized.

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

|                       |  |                                                     
|---------------------- |  | ----------------------------------------------------
|                       |  |                                                     
|Date:  August 12, 2009 |  | By:   /s/  Russel T. Williams                       
|                       |  | Russel T. Williams                                  
|                       |  | Chief Executive Officer(Principal Executive Officer)

|                       |  |                                                     
|---------------------- |  | ----------------------------------------------------
|                       |  |                                                     
|Date:  August 12, 2009 |  | By:   /s/  Paula S. King                            
|                       |  | Paula S. King                                       
|                       |  | Chief Financial Officer(Principal Financial Officer)

29

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# BANKGREENVILLE FINANCIAL
CORPORATION

# EXHIBIT INDEX

Exhibit Number
                            Description

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

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

32           Section 1350
Certifications.

30