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

# FORM 10-Q

(Mark One)

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

| | For the Quarterly Period Ended September 30, 2008
| | -------------------------------------------------

| | 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 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 November 12, 2008.

---

# 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 ProceedsItem 3.     Default Upon Senior SecuritiesItem 4.     Submission of Matters to a Vote of Security HoldersItem 5.     Other InformationItem 6.     Exhibits

SIGNATURES

EXHIBIT INDEX

Exhibit 10.1    
Amendment No. 1 to the BankGreenville Financial Corporation 2006 Stock Incentive Plan
adopted October 14, 2008.

Exhibit 10.2    
Employment Agreement between BankGreenville Financial Corporation and Russel T. Williams
dated November 10, 2008.

Exhibit 10.3     Employment Agreement between BankGreenville Financial Corporation and Paula S. King dated November
10, 2008.

Exhibit 31.1     Rule
13a-14(a) Certification of the Principal Executive Officer

Exhibit 31.2     Rule 13a-14(a)
Certification of the Principal Financial Officer

Exhibit 32        Section
1350 Certifications

2

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# BANKGREENVILLE
FINANCIAL CORPORATION

# PART I  FINANCIAL
INFORMATION

# Item 1.   Financial
Statements

# Consolidated Balance
Sheets

|                                                       | September 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                                             |               |             
|Property and equipment, net                            |               |             
|Accrued interest receivable                            |               |             
|Other assets                                           |               |             
|                                                       |               |             
|Total assets                                           |               |             
|                                                       |               |             
|Liabilities and Shareholders Equity                   |               |             
|Liabilities                                            |               |             
|Deposits                                               |               |             
|Non-interest bearing                                   |               |             
|Interest bearing                                       |               |             
|                                                       |               |             
|Total deposits                                         |               |             
|Federal funds purchased                                |               |             
|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; none issued and outstanding                |               |             
|Common stock, no par value; 10,000,000 shares          |               |             
|authorized; 1,180,000 shares issued and outstanding at |               |             
|September 30, 2008 and December 31, 2007               |               |             
|Accumulated other comprehensive income (loss)          |               |             
|Retained 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 | Nine Months Ended
|------------------------------------------------------------ | ------------------ | -----------------
|
|
|Interest income                                              |                    |                  
|Loans and fees                                               |                    |                  
|Investment securities and Federal Home Loan Bank stock       |                    |                  
|Federal funds sold                                           |                    |                  
|                                                             |                    |                  
|Total interest income                                        |                    |                  
|                                                             |                    |                  
|Interest expense                                             |                    |                  
|Deposits                                                     |                    |                  
|Borrowings                                                   |                    |                  
|                                                             |                    |                  
|Total interest expense                                       |                    |                  
|                                                             |                    |                  
|Net interest income                                          |                    |                  
|                                                             |                    |                  
|Provision for loan losses                                    |                    |                  
|                                                             |                    |                  
|Net interest income after provision for loan losses          |                    |                  
|                                                             |                    |                  
|Non-interest income                                          |                    |                  
|Gains on investment securities sales and calls               |                    |                  
|Mortgage brokerage fees                                      |                    |                  
|Service charges on deposit accounts                          |                    |                  
|                                                             |                    |                  
|Total non-interest income                                    |                    |                  
|                                                             |                    |                  
|Non-interest expense                                         |                    |                  
|Compensation and employee benefits                           |                    |                  
|Occupancy and equipment                                      |                    |                  
|Data processing and related costs                            |                    |                  
|Marketing, advertising and shareholder communications        |                    |                  
|Legal and audit                                              |                    |                  
|Other professional fees                                      |                    |                  
|Supplies, postage and telephone                              |                    |                  
|Insurance                                                    |                    |                  
|Credit related expenses                                      |                    |                  
|Courier and armored carrier service                          |                    |                  
|Regulatory fees and FDIC insurance                           |                    |                  
|Other                                                        |                    |                  
|                                                             |                    |                  
|Total non-interest expense                                   |                    |                  
|                                                             |                    |                  
|Income (loss) before income taxes                            |                    |                  
|Income taxes                                                 |                    |                  
|                                                             |                    |                  
|Net income/(loss)                                            |                    |                  
|                                                             |                    |                  
|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 Loss (Unaudited)

|                                |  |  | Accumulated |           | 
|------------------------------- |  |  | ----------- | --------- | 
|
|
|
|
|Balance, December 31, 2006      |  |  |             | 1,180,000 | 
|                                |  |  |             |           | 
|Stock compensation expense      |  |  |             | -         | 
|                                |  |  |             |           | 
|Comprehensive loss:             |  |  |             |           | 
|                                |  |  |             |           | 
|Net loss                        |  |  |             | -         | 
|                                |  |  |             |           | 
|Unrealized losses on investment |  |  |             |           | 
|securities available for sale,  |  |  |             |           | 
|no tax effect                   |  |  |             | -         | 
|                                |  |  |             |           | 
|Total comprehensive loss        |  |  |             | -         | 
|                                |  |  |             |           | 
|Balance, September 30, 2007     |  |  |             | 1,180,000 | 
|                                |  |  |             |           | 
|Balance, December 31, 2007      |  |  |             | 1,180,000 | 
|                                |  |  |             |           | 
|Stock compensation expense      |  |  |             | -         | 
|                                |  |  |             |           | 
|Comprehensive loss:             |  |  |             |           | 
|                                |  |  |             |           | 
|Net loss                        |  |  |             | -         | 
|                                |  |  |             |           | 
|Unrealized losses on investment |  |  |             |           | 
|securities available for sale,  |  |  |             |           | 
|net of  tax benefit             |  |  |             | -         | 
|                                |  |  |             |           | 
|Total comprehensive loss        |  |  |             | -         | 
|                                |  |  |             |           | 
|Balance, September  30, 2008    |  |  |             | 1,180,000 | 
|                                |  |  |             |           | 

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 Nine Months Ended (Unaudited)

|                                                                             | September 30, | September 30,
|---------------------------------------------------------------------------- | ------------- | -------------
|
|
|Operating activities                                                         |               |              
|Net loss                                                                     |               |              
|Provision for loan losses                                                    |               |              
|Stock compensation expense                                                   |               |              
|Depreciation                                                                 |               |              
|Net amortization (accretion) of premium (discounts) on investment securities |               |              
|Gains on sales and calls of investment securities                            |               |              
|Increase in interest receivable                                              |               |              
|(Increase) decrease in other assets                                          |               |              
|(Decrease) increase in accrued interest payable                              |               |              
|Increase (decrease) in accounts payable and accrued liabilities              |               |              
|                                                                             |               |              
|Net cash provided by (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                                                         |               |              
|Increase in deposits, net                                                    |               |              
|Proceeds from Federal Home Loan Bank advances                                |               |              
|Decrease in federal funds purchased                                          |               |              
|                                                                             |               |              
|Net cash provided by financing activities                                    |               |              
|                                                                             |               |              
|Net increase (decrease) in cash and cash equivalents                         |               |              
|                                                                             |               |              
|Cash and cash equivalents, beginning of period                               |               |              
|                                                                             |               |              
|Cash and cash equivalents, end of period                                     |               |              
|                                                                             |               |              
|Supplemental information                                                     |               |              
|Cash paid for:                                                               |               |              
|Interest                                                                     |               |              
|                                                                             |               |              
|Schedule of non-cash transactions:                                           |               |              
|Unrealized losses on investment securities                                   |               |              
|                                                                             |               |              

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

6

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# BANKGREENVILLE
FINANCIAL CORPORATION

# Notes to Consolidated
Financial Statements

# NOTE 1  NATURE OF
BUSINESS AND BASIS OF PRESENTATION

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

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 nine months ended September 30, 2008 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2008. For further
information, refer to the audited consolidated financial statements and footnotes thereto
included in the Companys 10-KSB for the year ended December 31, 2007 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-KSB filed with the Securities and Exchange Commission for the year ended
December 31, 2007. For further information, refer to the financial statements and
footnotes thereto included in that filing. Accounting standards that have been issued or
proposed by the Financial Accounting Standards Board (FASB) that do not
require adoption until a future date are not expected to have a material impact on the
consolidated financial statements upon adoption.

# Net Income or Loss per
Share

Basic
income or loss per share represents net income or loss to 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 nine months ended
September 30, 2008 and 2007, the stock options and warrants were not
in-the-money. 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 income or loss per
common share, respectively, were the same.

# Stock Compensation Plans

Upon
completion of the offering, the Company issued stock warrants to the organizing directors
for the purchase of three shares of common stock at $10.00 per share for every four shares
purchased in the stock offering, up to a maximum of 10,000

7

---

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

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 10,000 options forfeited and no options granted during the nine months ended
September 30, 2008. At September 30, 2008 and December 31, 2007, the Company had 95,900
and 105,900 options outstanding, respectively, at $10.00 per share. Vested options
amounted to 38,060 and 18,880 at September 30, 2008 and December 31, 2007, respectively.
Options outstanding at September 30, 2008 have a weighted average remaining contractual
term of approximately 7 1/2 years. Total unrecognized compensation cost related to
non-vested options granted as of September 30, 2008 was $121,048, and is expected to be
expensed ratably over the remaining vesting periods of the stock options. Net income, as
reported, included stock-based employee compensation expense of $13,497 for the three
months ended September 30, 2008 and net loss included stock based employee compensation
expense of $41,526 for the nine month period. Net loss, as reported, included stock-based
employee compensation expense of $14,661 and $43,704 for the three months and nine months
ended September 30, 2007, 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 $1,936,000 as of September 30, 2008 compared to $  at September 30, 2007.

# 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 September 30, 2008, 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, 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

8

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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 ($20,505,832 at September 30, 2008) 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
September 30, 2008 was $1.3 million.

FASB
Staff Position No. 157-2 delays the implementation of SFAS 157 until the first quarter of
2009 with respect to goodwill, other intangible assets, real estate and other assets
acquired through foreclosure and other non-financial assets measured at fair value on a
nonrecurring basis.

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

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

9

---

# 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 2007 Form 10-KSB.

# 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 2007 Form
10-KSB under the Risk Factors heading as filed with the Securities and
Exchange Commission and that include, without limitation, the following:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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, the capital and credit markets have
experienced extended volatility and disruption. In the last 90 days, the volatility and
disruption have reached unprecedented levels. There can be no assurance that these
unprecedented recent developments will not materially and adversely affect our business,
financial condition and results of operations.

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

# General

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

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

10

---

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.

This
discussion and analysis also identifies significant factors that have affected our
financial position and operating results during the periods included in the accompanying
financial statements. We encourage you to read this discussion and analysis in conjunction
with our financial statements and the other statistical information included in this
report.

In
response to financial conditions affecting the banking system and financial markets and
the potential threats to the solvency of investment banks and other financial
institutions, the United States government has taken unprecedented actions. On October 3,
2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the
EESA). Pursuant to the EESA, the U.S. Treasury will have the authority to,
among other things, purchase mortgages, mortgage-backed securities, and other financial
instruments from financial institutions for the purpose of stabilizing and providing
liquidity to the U.S. financial markets. On October 14, 2008, the U.S. Department of
Treasury announced the Capital Purchase Program under the EESA, pursuant to which the
Treasury intends to make senior preferred stock investments in participating financial
institutions. We are evaluating whether to participate in the Capital Purchase Program.
Regardless of our participation, governmental intervention and new regulations under these
programs could materially and adversely affect our business, financial condition and
results of operations.

# 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, 2007, as filed on our annual report on Form 10-KSB.

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.

11

---

# Results of Operations Three months ended
September 30, 2008 and 2007

General

Our
net income for the quarter ended September 30, 2008 was $4,708, or $.004 per share,
compared to a net loss of $144,099, or $0.12 per share, for the quarter ended September
30, 2007, for an improvement of $148,807, or 103%. As described below, the transition from
net loss to net income is attributable to an increase in our net interest income, which
reflects the continued growth of our bank and the volume increases in our interest-earning
assets for the three months ended September 30, 2008 compared to the same period in 2007.

Net Interest Income

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

Net
interest income was $513,323 for the quarter ended September 30, 2008, an increase of
$141,035, or 38%, over net interest income of $372,288 for the quarter ended September 30,
2007. Interest income increased $298,897, or 39%, to $1,075,126 for the quarter ended
September 30, 2008, due to volume increases in loans as well as a reallocation from
federal funds sold to investments. Loan interest and related fees improved $223,388, or
41%, over the quarter ended September 30, 2007, due to continued growth in the loan
portfolio. Average loans as a percentage of average assets were 66% and 55% at September
30, 2008 and 2007, respectively. Third quarter 2008 investment interest income of $309,159
represented an increase of $122,803, or 66%, over the same period in 2007. Interest
expense for the quarter ended September 30, 2008 increased $157,862, or 39%, over the same
period in 2007, due to volume increases in deposits and participation in the Federal Home
Loan Bank advance program.

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 September 30,
2008 and 2007. 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 |  |  
|------------------------------------------ | ------------------------------------------------------- |  | -
|
|
|
|
|
|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 no
          nonaccrual loans for either period.

12

---

Our
consolidated net interest margin for the quarter ended September 30, 2008 was 2.83%, a
decrease of 73 basis points from the net interest margin of 3.56% for the same period in
2007. The average prime interest rate was 8.18% during the three months ended September
30, 2007, while the average prime interest rate during the three-month period ended
September 30, 2008 was 5.00%. With a 275 basis point decrease in prime rate during the
comparable periods, and with approximately 60% of our loan portfolio tied to the prime
rate, we experienced an immediate decrease in loan yields as the prime rate decreases
occurred. Loan yield declined 149 basis points over the comparable periods. Cost of
interest-bearing liabilities decreased 128 basis points, as higher priced certificates of
deposits matured and were replaced at lower interest rates. These fixed maturity deposits
take longer to re-price than variable rate loans, which adjust immediately, and the
significant decline in net interest margin resulted. The net interest margin is calculated
by dividing annualized net interest income by year-to-date average earning assets. Our net
interest spread was 2.38% and 2.59% for the quarters ended September 30, 2008 and 2007,
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. 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.

Our
provision for loan losses for the quarter ended September 30, 2008 was $70,382 compared to
$82,000 for the quarter ended September 30, 2007. This decrease of 14% was due to smaller
loan growth for quarter ended September 30, 2008 compared to September 30, 2007. Loans
increased in the third quarter of 2008 by $5.9 million compared to $10.5 million for the
same quarter in 2007. The significant growth in the third quarter of 2007 resulted from
typical faster growth in the early stages of a de novo bank. Despite the two potential
problem borrowing relationships that we were aware of as of September 30, 2008, and
discussed under Loans below, we believe that our provision for loan losses for
the quarter ended September 30, 2008 is adequate. We maintained an allowance as a
percentage of outstanding loans of 1.20% at September 30, 2008.

Non-interest Income

Non-interest
income totaled $14,787 for the quarter ended September 30, 2008 compared to $10,599 for
the quarter ended September 30, 2007. Mortgage brokerage fees decreased $2,530 while
service charges on deposit accounts increased $10,031 due to deposit growth.

Non-interest Expenses

The
following table sets forth our non-interest expenses for the third quarter of 2008 and
2007.

|                                                      | 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 $453,020 for the quarter ended September 30, 2008 compared to $444,986
for the quarter ended September 30, 2007, for an increase of $8,034, or 2%. Data
processing costs increased from $47,565 for the quarter ended September 30, 2007 to
$57,861 for the quarter ended September 30, 2008. This increase was due to growth of the
banks deposit accounts as well as upgrades to the banks computer systems.
Marketing, advertising and shareholder communications expenses decreased from $12,055
during the three months ended September 30, 2007 to $5,992 for the same period of 2008. This
decrease

13

---

was primarily due to expenses
incurred in 2007 relating to advertising associated with the grand opening and move into
the permanent headquarters building. Other professional fees increased from $7,521 for the
quarter ended September 30, 2007 to $11,601 for the quarter ended September 30, 2008, due
to increased external compliance and outsourced internal audit exams.

# Nine
months ended September 30, 2008 and 2007

General

Our
net loss for the nine months ended September 30, 2008 was $80,726, or $0.07 per share,
compared to a net loss of $454,668, or $0.39 per share, for the nine months ended
September 30, 2007, for an improvement of $373,942, or 82%. As described below, most of
this improvement in net loss is attributable to increases in our net interest income,
which reflects the continued growth of our bank and the volume increases in our loans and
investment securities. Also, we recorded $38,924 in gains on investment securities called
and sold during the first quarter of 2008. Refer to Non-interest Income for a
discussion of these gains.

Net Interest Income

Net
interest income was $1,375,254 for the nine months ended September 30, 2008, and
represented an increase of $410,188, or 43%, over net interest income of $965,066 for the
same period ended September 30, 2007. Interest income increased $1,090,306, or 57%, to
$3,001,454 for the nine months ended September 30, 2008, due to volume increases in
interest earning assets.

Average
earning assets increased to $65 million for the nine months ended September 30, 2008 from
$35 million for the nine months ended September 30, 2007, an increase of $30 million, or
86%. Loan interest and related fees improved $924,465, or 76%, over the same period ended
2007 due to continued growth in the loan portfolio. Interest expense for the nine months
ended September 30, 2008 increased $680,118, or 72%, to $1,626,200 due to volume increases
in deposits and participation in the Federal Home Loan Bank advance program beginning in
December 2007.

The
following table sets forth information related to our average balance sheet, average
yields on assets, and average costs of liabilities for the nine months ended September 30,
2008 and 2007. 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 |  |  
|------------------------------------------ | ------------------------------------------------------- |  | -
|
|
|
|
|
|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 no
          nonaccrual loans for either period.

14

---

Our
consolidated net interest margin for the nine months ended September 30, 2008 was 2.81%, a
decrease of 83 basis points from the net interest margin of 3.64% for the same period in
2007. The prime interest rate averaged 8.23% for the nine months ended September 30, 2007.
From September 30, 2007 to September 30, 2008, the prime rate dropped 275 basis points.
From January 1 to September 30, 2008, the prime rate dropped 225 basis points and the
average prime interest rate during the nine months ended September 30, 2008 was 5.41%.
With approximately 60% of our loan portfolio tied to the prime rate, we experienced an
immediate decrease in loan yields as the prime rate decreases occurred. Conversely, we
relied on a higher volume of certificates of deposit, both local and brokered, to fund the
growth of our loan portfolio. These deposits 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. Additionally, during the nine months ended September 30, 2008, we
utilized alternative funding sources of federal funds purchased and FHLB borrowings. The
net interest margin is calculated by dividing annualized net interest income by
year-to-date average earning assets. Our net interest spread was 2.26% and 2.48% for the
nine months ended September 30, 2008 and 2007, 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

Our
provision for loan losses for the nine months ended September 30, 2008 was $182,990,
compared to $163,621 for the same period in 2007. 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. Despite the two potential problem borrowing
relationships that we were aware of as of September 30, 2008, and discussed under
Loans below, we believe that our provision for loan losses is adequate. The
allowance as a percentage of gross loans was 1.20% at September 30, 2008.

Non-interest Income

Non-interest
income totaled $85,700 for the nine months ended September 30, 2008, an improvement of
$37,859, or 79%, over the nine months ended September 30, 2007. During the nine months
ended September 30, 2008, we recognized $38,924 in gains on investment securities called
or sold during the period, compared to gains of $3,313 for the nine months ended September
30, 2007. Three agency bonds were called during the first quarter of 2008. In addition
three other agency bonds were sold during the first quarter of 2008 prior to April call
dates. Management correctly estimated that interest rates would drop prior to the call
dates, and sold these agency bonds in order to reinvest the proceeds in investment
securities prior to the additional interest rate decreases. One mortgage-backed security
was sold as its prepayment speed had increased and the proceeds were reinvested in a
higher yielding investment grade corporate bond.

Mortgage
brokerage fees decreased $25,947, or 83%, from $31,192 for the first nine months of 2007
to $5,245 for the same period in 2008. Service charges or deposit accounts increased
$28,195, or 211% from $13,336 for the nine months ended September 30, 2007 to $41,531 for
the comparable period in 2008. This increase is due to deposit growth, and in particular,
growth in corporate transaction accounts.

Non-interest Expenses

The
following table sets forth our non-interest expenses for the nine month periods of 2008
and 2007.

|                                                      | Nine 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                            |                  
|                                                      |                  

15

---

Non-interest
expenses were $1,358,690 for the nine months ended September 30, 2008 compared to
$1,303,954 for the same period ended September 30, 2007, for an increase of 4%. The most
significant component of non-interest expense is compensation and benefits, which totaled
$800,803 for the nine months ended September 30, 2008, compared to $714,389 for the same
period ended September 30, 2007. This 12% increase primarily related to staff additions
associated with the banks growth, performance raises and increases in bank-paid
employee health care and other insurance costs. Data processing costs increased from
$135,041 for the nine months ended September 30, 2007 to $158,460 for the same period
ended September 30, 2008. This 17% increase was due to continued growth of the banks
deposit accounts as well as upgrades to the banks computer systems. Other
professional fees decreased from $49,193 for the nine months ended September 30, 2007 to
$31,075 for the same period ended September 30, 2008 primarily due to a search firm fee
paid in conjunction with the hiring of a senior lender during the first quarter of 2007.
Regulatory fees and FDIC insurance increased from $26,954 for the nine months ended
September 30, 2007 to $39,162 for the same period ended September 30, 2008. Our FDIC
insurance assessments continue to increase as deposits grow. Decreases in marketing,
advertising and shareholder communications as well as in occupancy and equipment expenses
relate to the move from our modular facility to our headquarters building in April 2007.

# Balance Sheet Review

General

At
September 30, 2008, total assets were $79.6 million compared to $58.6 million at December
31, 2007, for an increase of $21.0 million, or 36%. The increase in assets resulted from
volume increases in our loan and investment portfolios and related increases in our
funding sources of deposits and other borrowings. Interest-earning assets comprised
approximately 95% and 93% of total assets at September 30, 2008 and December 31, 2007,
respectively. Gross loans totaled $52.6 million, an increase of $16.4 million, or 45%,
from $36.2 million at December 31, 2007. Investment securities and Federal Home Loan Bank
stock amounted to $21.3 million at September 30, 2008. At September 30, 2008, we were in a
federal funds sold position of $1,936,000.

Deposits
totaled $54.8 million at September 30, 2008, a $10.7 million, or 24% increase from $44.1
million at December 31, 2007. There were no federal funds purchased at September 30, 2008
compared to $1.6 million at December 31, 2007. Federal Home Loan Bank borrowings were
$14.5 million at September 30, 2008 compared to $2.4 million at December 31, 2007, for an
increase of $12.1 million, or 492%. Shareholders equity totaled $9.0 million at
September 30, 2008, a $0.7 million, or 7% decrease from $9.7 million at December 31, 2007.

Investments

On
September 30, 2008 and December 31, 2007, our investment securities portfolio amounted to
$20.5 million and $18.5 million and represented 27% and 34%, respectively, of
interest-earning assets. Unrealized losses, net of tax benefit, on available for sale
investment securities amounted to $561,489 at September 30, 2008 compared to unrealized
gains of $57,834 at December 31, 2007, due to changes in market interest rates as
discussed below. Our portfolio consisted of U.S. government sponsored agencies of $4.1
million, mortgage-backed agencies of $11.8 million, taxable municipal securities of $0.9
million and corporate bonds of $3.7 million. All of our investment securities are
classified as available for sale.

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

|                                   | September 30, 2008 | December 31, 2007
|---------------------------------- | ------------------ | -----------------
|
|
|
|
|U.S. Government sponsored agencies |                    |                  
|Mortgage-backed agencies           |                    |                  
|Taxable municipal securities       |                    |                  
|Corporate bonds                    |                    |                  
|                                   |                    |                  
|Total                              |                    |                  
|                                   |                    |                  

During
the nine month period of 2008, four agency bonds were called and four bonds were sold
prior to call dates in anticipation of additional interest rate decreases. The proceeds
from these calls and sales were reinvested in agency mortgage-backed securities,
investment grade corporate bonds and used to fund loans.

All
of our corporate bonds continue to be designated as investment grade by Moodys and
Standard & Poors. We believe, based on industry analyst reports and credit ratings,
the deterioration in fair values of individual investment securities available for sale is
attributed to changes in market interest rates and not in the credit quality of the issuer
and therefore, these

16

---

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 $11.1 million and $5.9 million at September
30, 2008 and December 31, 2007, respectively, were pledged to secure public deposits and
Federal Home Loan Bank borrowings.

At
September 30, 2008 and December 31, 2007, we held non-marketable equity securities, which
consisted of Federal Home Loan Bank stock of $755,900 and $183,000, respectively. Federal
Home Loan Bank stock purchases are required as the level of Federal Home Loan Bank
advances increase. Federal Home Loan Bank stock increased $572,900 during the nine-month
period ended September 30, 2008, to reflect the net increase of $12.0 million in Federal
Home Loan Bank advances during the same period. 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 pays a quarterly dividend, which decreased from 5.75% to 2.89% for the
third quarter of 2008. We did not hold any Fannie Mae or Freddie Mac preferred stock at
September 30, 2008.

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 September 30, 2008 and December 31, 2007 were
$52.6 million and $36.2 million, respectively. Gross loans represented 69% and 66% of
interest-earning assets for September 30, 2008 and December 31, 2007, respectively.

Although
the loan portfolio grew $16.4 million during the nine month period of 2008, the percentage of
loans in each category remained relatively stable from December 31, 2007 to September 31,
2008, as shown in the table below. Loans secured by real estate mortgages comprised
approximately 81% of loans outstanding at September 30, 2008 and 78% at December 31, 2007.
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. We attempt to maintain a relatively diversified
loan portfolio to help reduce the risk inherent in concentration of certain types of
collateral.

The
following table summarizes the composition of our loan portfolio at September 30, 2008 and
December 31, 2007.

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

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

17

---

in the market, and, as such, may be
subject to a greater extent to adverse conditions in the economy. 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. Refer to the additional information regarding risks
associated with commercial real estate and construction and development lending under the
heading Risk Factors in our annual report on Form 10-KSB for the year ended
December 31, 2007.

We
have determined that our loan portfolio did not include any loans considered subprime at
September 30, 2008.

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

There
were no nonaccrual or nonperforming loans at September 30, 2008 and December 31, 2007, and
no accruing loans which were contractually past due 90 days or more as to principal or
interest payments. At September 30, 2008, we were aware of two potential problem borrowing
relationships with an aggregate principal balance of $1,264,000, which were classified
substandard at September 30, 2008. Both borrowing relationships had been current until
their last payments due in late July and August 2008, respectively. Neither borrower was
90 days or more past due and they were not on nonaccrual status at September 30, 2008.
Both borrowing relationships were placed on nonaccrual status in October 2008, due to
additional information obtained by management in October as well as continued past-due
status. In October, we began foreclosure proceedings against one of the borrowers. Our
loans are collateralized by commercial and residential real estate. We believe that we
have sufficient collateral value to cover the outstanding balances on these loans based on
our knowledge of the market and recent appraisal information. However, based on our
evaluation of the deteriorating financial condition of the borrowers and their inability
to repay the loans, we considered these loans impaired under the criteria defined in FAS
114, Accounting by Creditors for Impairment of a Loan, at September 30, 2008. Based on our
assessment of the collateral value and estimate of an adequate fair value less selling
costs for the properties, we did not identify an impairment charge or specific reserve
amount for these loans. We were not aware of any other potential problem loans at
September 30, 2008. Refer to our discussion below in the Allowance for Loan
Losses section.

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 operations. The allowance for loan losses was
$629,174 and $446,184 as of September 30, 2008 and December 31, 2007, respectively, and
represented 1.20% of outstanding loans at September 30, 2008 and 1.23% as of December 31,
2007. 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 have begun to see an overall decline in credit quality and
have increased their allowance for loan losses accordingly. Though we have not experienced
significant changes in credit quality during this volatile time, 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.

18

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In
calculating the allowance for loan losses, we utilize a credit grading system, which we
apply to each loan. We calculate our general reserve based on historical and peer loss
percentage allocations of each of the categories of unclassified loan types, including
commercial, commercial real estate, construction and development, residential mortgages,
home equity lines of credit and consumer loans. The loss factors are adjusted for
qualitative factors, including those described above. We also analyze individual
significant credits not considered impaired and maintain a general unallocated reserve in
accordance with December 2006 regulatory guidance in our assessment of the allowance for
loan losses. Significant individual credits criticized as special mention or classified as
substandard or doubtful require individual analysis. Loans in the substandard category are
characterized by deterioration in quality exhibited by any number of well-defined
weaknesses requiring corrective action such as declining or negative earnings trends and
declining or inadequate liquidity or collateral. Loans in the doubtful category exhibit
the same weaknesses found in the substandard category, but the weaknesses are more
pronounced. These loans are not yet rated as loss because certain events may occur which
could repay the debt. As discussed in the previous section, loans classified as
substandard totaled $1,264,000 at September 30, 2008. We considered these loans impaired
under the criteria of FAS 114 at September 30, 2008 due to the deteriorating financial
condition and inability of the borrowers to repay the loans. In situations where a loan in
considered impaired, the loans are excluded from the general reserve calculations and are
assigned a specific reserve. The specific reserve is based on our analysis of the most
probable source of repayment which is usually the liquidation of the underlying
collateral, but may also include discounted future cash flows. These loans are
collateralized by real estate, and we believe, based on our knowledge of the properties
and the market as well as recent appraisals and our loan to value percentage, that the
fair value less estimated costs to sell the property is sufficient to cover the principal
balances on these loans. Therefore, no impairment charge, or specific reserve, was
identified for these loans.

We had no loans classified as
doubtful at September 30, 2008 and no classified loans at December 31, 2007.

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.

There
were no charge-offs during the three month and nine month periods ended September 30, 2008
and 2007. The only addition to the allowance for loan losses for both periods was the
accrual of the loan loss provision.

Deposits

Our
primary source of funds for our loans and investments is our deposits. Deposits increased
$10.7 million, from $44.1 million at December 31, 2007 to $54.8 million at September 30,
2008. The following table shows the composition of deposits at September 30, 2008 and
December 31, 2007.

|                                           | September 30, 2008 | December 31, 2007
|------------------------------------------ | ------------------ | -----------------
|
|
|
|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 $26.9 million and $20.4 million at September 30,
2008 and December 31, 2007, respectively. Core deposit growth of $6.5 million during the
period included growth of $6.0 million in our money market accounts. Our loan-to-deposit
ratio was 96% and 82% at September 30, 2008 and December 31, 2007, respectively. Due to
the competitive interest rate environment in our market, we utilized brokered certificates
of deposit as a funding source in the nine months ended September 30, 2008 when we were
able to procure these certificates at interest rates less than those in the local market.
Brokered certificates of deposit purchased outside our primary market totaled $15.9
million and $12.2 million at September 30, 2008 and December 31, 2007, respectively. All
of our time deposits are certificates of deposits.

19

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The
maturity distribution of our time deposits of $100,000 or more and our brokered time
deposits as of September 30, 2008 was as follows:

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

Another
aspect of the EESA (in addition to the Capital Purchase Plan described above) which became
effective on October 3, 2008 is a temporary increase of the basic limit on federal deposit
insurance coverage from $100,000 to $250,000 per depositor. The basic deposit insurance
limit will return to $100,000 after December 31, 2009.

In
addition, the bank is included in the initial period of the FDICs Temporary
Liquidity Guarantee Program which was announced October 14, 2008 as part of the EESA. This
guarantee applies to the following transactions:

| |  | All newly issued senior unsecured debt (up to $1.5 trillion) issued on or before June 30,
2009, including promissory notes, commercial paper, inter-bank funding, and any unsecured
portion of secured debt. For eligible debt issued on or before June 30, 2009, coverage
would only be provided for three years beyond that date, even if the liability has not
matured; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Funds in non-interest-bearing transaction deposit accounts (up to $500 billion) held by
FDIC-insured banks until December 31, 2009.
| | - | -----------------------------------------------------------------------------------------------------------------------------------

All
FDIC institutions are covered for the first 30 days at no cost. After the initial 30 day
period expires, the institution must opt out if it no longer wishes to participate in the
program; otherwise, it will be assessed for future participation. There will be a 75-basis
point fee to protect new debt issues and an additional 10-basis point fee to fully cover
non-interest bearing deposit transaction accounts. The bank is evaluating whether or not
to continue to participate in this Program after the initial period ends.

Borrowings and lines of
credit

At
September 30, 2008, the bank had short-term lines of credit with correspondent banks to
purchase a maximum of $5.8 million in unsecured federal funds on a one to fourteen day
basis for general corporate purposes. The interest rate on borrowings under these lines is
the prevailing market rate for federal funds purchased. These accommodation lines of
credit are renewable annually and may be terminated at any time at the correspondent
banks sole discretion. The Bank utilized these lines of credit during the nine
months ended September 30, 2008. The average amount outstanding during the nine months
ended September 30, 2008 was $534,000. The highest month-end amount outstanding during the
nine months was $2.2 million and the average interest rate paid on these borrowings was
3.27%. The average amount outstanding during the year ended December 31, 2007 was $1.6
million and the highest month-end amount outstanding during 2007 was $2.7 million. The
average interest rate paid on these borrowings during the year was 4.50%. There were no
outstanding amounts on these lines of credit as of September 30, 2008 and $1,648,000 was
outstanding at December 31, 2007.

We
are also a member of the Federal Home Loan Bank. At September 30, 2008 and December 31,
2007, we had $14.5 million and $2.4 million outstanding, respectively, in Federal Home
Loan Bank borrowings. At September 30, 2008, we had borrowing capacity with the Federal
Home Loan Bank of $1.5 million based on our total assets. These borrowings were used to
fund loans and purchase investment securities, and were utilized as the interest rates
charged on these advances were less than those we paid for brokered certificates of
deposit during the timeframe. The average amount outstanding during the nine months ended
September 30, 2008 was $7.1 million and the maximum balance outstanding during the period
was $14.5 million at an average interest rate of 3.14 %. The maximum balance outstanding
during the year ended December 31, 2007 was $2.4 million at an interest rate of 3.64%.

# Capital Resources

Total
shareholders equity decreased $658,523 from $9.68 million at December 31, 2007 to
$9.02 million at September 30, 2008. Common stock increased $41,526 due to stock options
compensation expense accrued during the nine months ended September 30, 2008. We incurred
an unrealized loss, net of tax benefit, of $619,323 on investment securities available for
sale, which decreased shareholders equity during the nine month period. Our net loss
of $80,726 for the nine months ended September 30, 2008 contributed to the net decrease in
shareholders equity during the nine month period.

20

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

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

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

The
following tables set forth the Banks capital ratios at September 30, 2008 and
December 31, 2007.

|                          |  |  | Well capitalized | Adequately capitalized
|------------------------- |  |  | ---------------- | ----------------------
|
|
|
|Total risk-based capital  |  |  | $                | 10,175                
|Tier 1 risk-based capital |  |  |                  | 9,546                 
|Leverage capital          |  |  |                  | 9,546                 

|                          |  |  | Well capitalized | Adequately capitalized
|------------------------- |  |  | ---------------- | ----------------------
|
|
|
|Total risk-based capital  |  |  | $                | 10,031                
|Tier 1 risk-based capital |  |  |                  | 9,585                 
|Leverage capital          |  |  |                  | 9,585                 

We
believe that our capital is sufficient to fund the activities of the bank in its initial
stages of operation 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
2008.

As
stated previously, we are evaluating whether or not to participate in Treasurys
Capital Purchase Program 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 are evaluating
the program in light of future capital needs. The maximum amount of capital we believe
that we could obtain through this program is approximately $1.9 million based on our
risk-weighted assets at September 30, 2008.

21

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# 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 September 30, 2008, the bank had issued commitments to
extend credit of $7.2 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.

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
September 30, 2008, our liquid assets, consisting of cash and due from banks and federal
funds sold, amounted to $2,725,497, or approximately 3.42% of total assets. Our investment
securities available for sale amounted to $20.5 million or approximately 26% of total
assets. Unpledged investment securities of $9.4 million at September 30, 2008
traditionally provide a secondary source of liquidity since they can be converted into
cash in a timely manner. At September 30, 2008, $11.1 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 and prepayments on
investment securities. We maintain federal funds purchased lines of credit with
correspondent banks totaling $5.8 million. Availability on these lines of credit was
approximately $5.8 million at September 30, 2008. We are 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 $1.5 million in borrowing capacity
available from the Federal Home Loan Bank based on total assets at September 30, 2008.
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.

22

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# 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
September 30, 2008 and December 31, 2007, we were asset-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.

In
May, 2008, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 162, The Hierarchy of Generally
Accepted Accounting Principles, (SFAS No. 162). SFAS No. 162 identifies
the sources of accounting principles and the framework for selecting the principles used
in the preparation of financial statements of nongovernmental entities that are presented
in conformity with generally accepted accounting principles (GAAP) in the United States
(the GAAP hierarchy). SFAS No. 162 is effective November 15, 2008. The FASB has stated
that it does not expect SFAS No. 162 will result in a change in current practice. The
application of SFAS No. 162 will have no effect on the Companys financial position,
results of operations or cash flows.

The
FASB issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), (FSP APB 14-1). The Staff Position specifies that issuers
of convertible debt instruments that may be settled in cash upon conversion should
separately account for the liability and equity components in a manner that will reflect
the entitys nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 provides guidance for initial and subsequent measurement
as well as derecognition provisions. The Staff Position is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Early adoption is not permitted. The adoption of this Staff
Position will have no material effect on the Companys financial position, results of
operations or cash flows.

In
June, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating
Securities, (FSP EITF 03-6-1). The Staff Position provides that unvested
share-based payment awards that contain nonforfeitable rights to dividends or dividend
equivalents are participating securities and must be included in the earnings per share
computation. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those years. All
prior-period earnings per share data presented must be adjusted retrospectively. Early
application is not permitted. The adoption of this Staff Position will have no material
effect on the Companys financial position, results of operations or cash flows.

The
SECs Office of the Chief Accountant and the staff of the FASB issued press release
2008-234 on September 30, 2008 (Press Release) to provide clarifications on
fair value accounting. The press release includes guidance on the use of managements
internal assumptions and the use of market quotes. It also reiterates the
factors in SEC Staff Accounting Bulletin (SAB) Topic 5M which should be
considered when determining other-than-temporary impairment: the length of time and extent
to which the market value has been less than cost; financial condition and near-term
prospects of the issuer; and the intent and ability of the holder to retain its investment
for a period of time sufficient to allow for any anticipated recovery in market value.

On
October 10, 2008, the FASB issued FSP SFAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active (FSP SFAS
157-3). This FSP clarifies the application of SFAS No. 157, Fair Value
Measurements (see Note 3) in a market that is not active and provides an example to
illustrate key considerations in determining

23

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the fair value of a financial asset
when the market for that asset is not active. The FSP is effective upon issuance,
including prior periods for which financial statements have not been issued. For the
Company, this FSP is effective for the quarter ended September 30, 2008.

The
Company considered the guidance in the Press Release and in FSP SFAS 157-3 when conducting
its review for other-than-temporary impairment as of September 30, 2008 and determined
that it did not result in a change to its impairment estimation techniques.

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

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

Not applicable.

# Item 4.   Controls and
Procedures.

As
of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our current
disclosure controls and procedures are effective as of September 30, 2008. There have been
no significant changes in our internal controls over financial reporting during the fiscal
quarter ended September 30, 2008 that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting.

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

24

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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.

Not applicable.

# Item 5.   Other
Information.

Not applicable.

# Item 6.   Exhibits

10.1      Amendment No. 1 to the BankGreenville Financial Corporation 2006 Stock Incentive Plan adopted October 14, 2008.

10.2      Employment Agreement between BankGreenville Financial Corporation and Russel T. Williams dated November 10,   2008.

10.3      Employment Agreement between BankGreenville Financial Corporation and Paula S. King dated November 10, 2008.

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.

25

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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:  November 12, 2008 |  | By:   /s/  Russel T. Williams                                 
|                         |  | Russel T. Williams                                            
|                         |  | Chief Executive Officer
         (Principal Executive Officer)

|                         |  |                                                               
|------------------------ |  | --------------------------------------------------------------
|                         |  |                                                               
|Date:  November 12, 2008 |  | By:   /s/  Paula S. King                                      
|                         |  | Paula S. King                                                 
|                         |  | Chief Financial Officer
         (Principal Financial Officer)

26

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# BANKGREENVILLE
FINANCIAL CORPORATION

# EXHIBIT INDEX

ExhibitNumber
              Description

10.1      Amendment No. 1 to the BankGreenville Financial Corporation 2006 Stock Incentive Plan adopted October 14, 2008.

10.2      Employment Agreement between BankGreenville Financial Corporation and Russel T. Williams dated November 10,   2008.

10.3      Employment Agreement between BankGreenville Financial Corporation and Paula S. King dated November 10, 2008.

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.

27