**UNITED STATESSECURITIES AND EXCHANGE COMMISSION********WASHINGTON, D.C. 20549**

**FORM 10-Q**
| (Mark One)                                         |
|----------------------------------------------------|
|                                               |   |
| **x**                                              | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                         |
| **For the  quarterly period ended March 31, 2007** |
| ** **                                         |
| **OR**                                             |
| ** **                                         |
| **o**                                              | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

**For the transition period from                                     to                                     **

**Commissionfile number   000-50771**

**BG FINANCIAL GROUP, INC.****(Exact name of registrant as specified in its charter)

| **Tennessee**                                                                       |   | **20-0307691**                        |
|-------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of                                                    |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                                                     |   |                                  |
|                                                                                |   |                                  |
| **3095  East Andrew Johnson Highway Greeneville,  Tennessee**                       |   | **37745**                             |
| (Address of  principal executive offices)                                           |   | (Zip Code)                            |
|                                                                                |
| Registrant’s  telephone number, including area code:  **(423) 636-1555**  |
|                                                                                |
| **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 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  YES x  NO o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.
| Large accelerated  filer o | Accelerated  filer o | Non-accelerated filer x |
|---------------------------------|---------------------------|------------------------------|

 

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

As of May 1, 2007, there were 2,310,771 shares of common stock, $0.333par value, issued and outstanding.

 

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| **PART I - FINANCIAL INFORMATION** |
|------------------------------------|
| ** **                         | ** ** | ** ** |
| **Item 1.**                        | ** ** | **Financial  Statements.** |
| ** **                         | ** ** | ** ** |
|                               |   | The consolidated financial statements of the  Registrant and its wholly owned subsidiary are as follows: |
|                               |   |   |
|                               |   | Consolidated Balance Sheets – March 31, 2007  (unaudited) and December 31, 2006. |
|                               |   |   |
|                               |   | Consolidated Statements of Income - For the three  months ended March 31, 2007 and 2006 (unaudited). |
|                               |   |   |
|                               |   | Consolidated Statements of Cash Flows - For the three  months ended March 31, 2007 and 2006 (unaudited). |
|                               |   |   |
|                               |   | Notes to Consolidated Financial Statements. |
|                               |   |   |
| **Item 2.**                        | ** ** | **Management’s  Discussion and Analysis or Plan of Operation.** |
| ** **                         | ** ** | ** ** |
| **Item 3.**                        | ** ** | **Quantitative  and Qualitative Disclosures about Market Risk.** |
| ** **                         | ** ** | ** ** |
| **Item 4.**                        | ** ** | **Controls and  Procedures.** |
| ** **                         | ** ** | ** ** |
| **Item 4T.**                       | ** ** | **Controls and  Procedures** |
| ** **                         | ** ** | ** ** |
| **PART  II - OTHER INFORMATION**   |
| ** **                         |   | ** ** |
| **Item 1.**                        | ** ** | **Legal Proceedings.** |
| ** **                         | ** ** | ** ** |
| **Item 1A.**                       | ** ** | **Risk Factors.** |
| ** **                         | ** ** | ** ** |
| **Item 2.**                        | ** ** | **Unregistered  Sales of Equity Securities and Use of Proceeds.** |
| ** **                         | ** ** | ** ** |
| **Item 3.**                        | ** ** | **Defaults  Upon Senior Securities.** |
| ** **                         | ** ** | ** ** |
| **Item 4.**                        | ** ** | **Submission  of Matters to a Vote of Security Holders.** |
| ** **                         | ** ** | ** ** |
| **Item 5.**                        | ** ** | **Other Information.** |
| ** **                         | ** ** | ** ** |
| **Item 6.**                        | ** ** | **Exhibits.** |

 

2

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**BGFINANCIAL GROUP, INC. AND SUBSIDIARYGreeneville, TennesseeCONSOLIDATED STATEMENTS OFFINANCIAL CONDITION**

**PART I. FINANCIALINFORMATION**

**Item 1. Financial Statements**
| ** **                                                                                                                                     | ** ** | **As of**               | ** **  | **As of**                  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **March 31, 2007** | ** **  | **December 31, 2006** | ** ** |
| ** **                                                                                                                                     | ** ** | **(Unaudited)**              | ** **  | ** **                      | ** ** |
| **ASSETS**                                                                                                                                     | ** ** | ** **                   | ** **  | ** **                      | ** ** |
|                                                                                                                                           |       |                         |        |                            |       |
| Cash and due from banks                                                                                                                        |       | $                            | 2,919,225   |                            | $          | 3,263,969 |   |
| Federal funds sold                                                                                                                             |       | 11,690,791                   |        | 12,224,443                      |       |
| Cash and cash  equivalents                                                                                                                     |       | 14,610,016                   |        | 15,488,412                      |       |
| Federal Home Loan Bank  stock, at cost                                                                                                         |       | 262,600                      |        | 258,800                         |       |
| Loans, net of estimated  allowance for loan losses of $704,591 in 2007 and  $617,956 in 2006                                                   |       | 79,367,037                   |        | 77,059,828                      |       |
| Premises and equipment,  net                                                                                                                   |       | 5,317,635                    |        | 3,799,519                       |       |
| Accrued interest  receivable                                                                                                                   |       | 551,577                      |        | 506,906                         |       |
| Deferred tax assets,  net                                                                                                                      |       | 220,944                      |        | 166,545                         |       |
| Foreclosed assets                                                                                                                              |       | 407,900                      |        | 393,900                         |       |
| Other assets                                                                                                                                   |       | 83,906                       |        | 78,771                          |       |
| Total Assets                                                                                                                                   |       | $                            | 100,821,615 |                            | $          | 97,752,681 |   |
| ** **                                                                                                                                     | ** ** | ** **                   | ** **  | ** **                      | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                 |       |                         |        |                            |       |
|                                                                                                                                           |       |                         |        |                            |       |
| **LIABILITIES**                                                                                                                                | ** ** | ** **                   | ** **  | ** **                      | ** ** |
| Deposits:                                                                                                                                      |       |                         |        |                            |       |
| Noninterest-bearing                                                                                                                            |       |                         |        |                            |       |
| Demand                                                                                                                                         |       | $                            | 9,662,102   |                            | $          | 9,326,547 |   |
| Interest-bearing                                                                                                                               |       |                         |        |                            |       |
| Money market,  interest checking and savings                                                                                                   |       | 28,453,883                   |        | 28,496,934                      |       |
| Time deposits                                                                                                                                  |       | 49,237,791                   |        | 44,679,571                      |       |
| Total Deposits                                                                                                                                 |       | 87,353,776                   |        | 82,503,052                      |       |
| Accrued interest  payable                                                                                                                      |       | 639,813                      |        | 698,825                         |       |
| Securitized  borrowings                                                                                                                        |       | 1,488,825                    |        | 3,099,091                       |       |
| Other  liabilities                                                                                                                             |       | 311,163                      |        | 247,026                         |       |
| Federal Home  Loan Bank advances                                                                                                               |       | 2,090,419                    |        | 2,368,159                       |       |
| Total  Liabilities                                                                                                                             |       | 91,883,996                   |        | 88,916,153                      |       |
|                                                                                                                                           |       |                         |        |                            |       |
| **Commitments and contingencies**                                                                                                              | ** ** | ** **                   | ** **  | ** **                      | ** ** |
| ** **                                                                                                                                     | ** ** | ** **                   | ** **  | ** **                      | ** ** |
| **STOCKHOLDERS’ EQUITY**                                                                                                                  | ** ** | ** **                   | ** **  | ** **                      | ** ** |
| Stock:                                                                                                                                         |       |                         |        |                            |       |
| Preferred stock,  no par value; authorized 1,000,000 shares; none issued and outstanding                                                       |       | —                       |        | —                          |       |
| Common stock,  $0.333 par value; authorized 6,000,000 shares; issued and outstanding 2,310,771  shares at March 31, 2007 and December 31, 2006 |       | 770,256                      |        | 770,256                         |       |
| Additional  paid-in capital                                                                                                                    |       | 6,932,307                    |        | 6,932,307                       |       |
| Retained  earnings                                                                                                                             |       | 1,235,056                    |        | 1,133,965                       |       |
| Total  Stockholders’ Equity                                                                                                               |       | 8,937,619                    |        | 8,836,528                       |       |
| Total Liabilities and  Stockholders’ Equity                                                                                               |       | $                            | 100,821,615 |                            | $          | 97,752,681 |   |

 

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

3

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**BGFINANCIAL GROUP, INC. AND SUBSIDIARYGreeneville, TennesseeCONSOLIDATED STATEMENTS OFINCOME(Unaudited)**
| ** **                                                           | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006** | ** ** |
| **Interest  and dividend income:**                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Loans, including fees                                                |       | $                                | 1,719,123  |   | $ | 1,520,516 |   |
| Dividends on Federal Home Loan Bank stock                            |       | 3,800                            |       | 3,467 |   |
| Federal funds sold and other                                         |       | 112,633                          |       | 125,871 |   |
| Total interest and dividend income                                   |       | 1,835,556                        |       | 1,649,854 |   |
|                                                                 |       |                             |       |   |   |
| **Interest  expense:**                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Deposits                                                             |       | 825,588                          |       | 595,134 |   |
| Borrowed funds                                                       |       | 19,761                           |       | 33,863 |   |
| Total interest expense                                               |       | 845,349                          |       | 628,997 |   |
| Net interest income before provision for (benefit  from) loan losses | ** ** | 990,207                          | ** ** | 1,020,857 | ** ** |
| ** **                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Provision  for (benefit from) loan losses**                        |       | 104,364                          |       | (50,497 | ) |
| Net interest income after provision for (benefit  from) loan losses  | ** ** | 885,843                          | ** ** | 1,071,354 | ** ** |
|                                                                 |       |                             |       |   |   |
| **Noninterest  income:**                                             |       |                             |       |   |   |
| Service charges on deposit accounts                                  |       | 127,492                          |       | 62,684 |   |
| Fees from origination of mortgage loans sold                         |       | 34,324                           |       | 16,091 |   |
| Investment sales commissions                                         |       | 1,651                            |       | 43,472 |   |
| Other                                                                |       | 5,893                            |       | 3,642 |   |
| Total noninterest income                                             |       | 169,360                          |       | 125,889 |   |
|                                                                 |       |                             |       |   |   |
| **Noninterest  expense:**                                            |       |                             |       |   |   |
| Salaries and employee benefits                                       |       | 488,791                          |       | 461,095 |   |
| Occupancy                                                            |       | 127,497                          |       | 114,194 |   |
| Advertising                                                          |       | 18,995                           |       | 19,727 |   |
| Data processing                                                      |       | 55,705                           |       | 50,534 |   |
| Legal and professional                                               |       | 81,525                           |       | 115,811 |   |
| Other operating                                                      |       | 120,652                          |       | 164,053 |   |
| Total noninterest expense                                            |       | 893,165                          |       | 925,414 |   |
| **Income before income taxes**                                       |       | 162,038                          |       | 271,829 |   |
|                                                                 |       |                             |       |   |   |
| Income tax  expense                                                  |       | 60,947                           |       | 106,485 |   |
|                                                                 |       |                             |       |   |   |
| **Net income**                                                       |       | $                                | 101,091    |   | $ | 165,344 |   |
|                                                                 |       |                             |       |   |   |
| Basic earnings per  common share                                     |       | $                                | .04        |   | $ | .07 |   |

 

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

4

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**BGFINANCIAL GROUP, INC. AND SUBSIDIARYGreeneville, TennesseeCONSOLIDATED STATEMENTS OF CASHFLOWS(Unaudited)**
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006** | ** ** |
| ** **                                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                | 101,091    |   | $ | 165,344 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |                             |       |   |   |
| Provision for (benefit from) loan losses                                           |       | 104,364                          |       | (50,497 | ) |
| Depreciation                                                                       |       | 58,008                           |       | 63,712 |   |
| Write-down of foreclosed assets                                                    |       | 12,877                           |       | — |   |
| Realized loss (gain) on sales of foreclosed assets                                 |       | (200                             | )          | 5,309 |   |
| Deferred income tax expense                                                        |       | (54,399                          | )          | 101,706 |   |
| Federal Home Loan Bank stock dividends                                             |       | (3,800                           | )          | (3,400 | ) |
| Net change in:                                                                     |       |                             |       |   |   |
| Accrued interest receivable                                                        |       | (44,671                          | )          | (67,009 | ) |
| Other assets                                                                       |       | (5,135                           | )          | 41,412 |   |
| Other liabilities                                                                  |       | 64,137                           |       | (143,287 | ) |
| Accrued interest payable                                                           |       | (59,012                          | )          | 44,876 |   |
| Net cash provided by operating activities                                          |       | 173,260                          |       | 158,166 |   |
|                                                                               |       |                             |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Proceeds from sales of foreclosed assets                                           |       | 1,200                            |       | 68,775 |   |
| Loan originations and principal collections, net                                   |       | (2,439,450                       | )          | (1,749,158 | ) |
| Additions to premises and equipment                                                |       | (1,576,124                       | )          | (77,037 | ) |
| Net cash used in investing activities                                              |       | (4,014,374                       | )          | (1,757,420 | ) |
|                                                                               |       |                             |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net change in deposits (non-time deposits)                                         |       | 292,504                          |       | 4,587,584 |   |
| Net change in time deposits                                                        |       | 4,558,220                        |       | (6,627,260 | ) |
| Federal Home Loan Bank advances                                                    |       | —                           |       | 75,000 |   |
| Repayment of securitized borrowings                                                |       | (1,610,266                       | )          | — |   |
| Federal Home Loan Bank repayments                                                  |       | (277,740                         | )          | (45,941 | ) |
| Net cash provided by (used in) financing activities                                |       | 2,962,718                        |       | (2,010,617 | ) |
|                                                                               |       |                             |       |   |   |
| Net change in  cash and cash equivalents                                           |       | (878,396                         | )          | (3,609,871 | ) |
|                                                                               |       |                             |       |   |   |
| Cash and cash  equivalents at beginning of period                                  |       | 15,488,412                       |       | 18,273,842 |   |
|                                                                               |       |                             |       |   |   |
| Cash and cash  equivalents at end of period                                        |       | $                                | 14,610,016 |   | $ | 14,663,971 |   |
|                                                                               |       |                             |       |   |   |
| **SUPPLEMENTARY  CASH FLOW INFORMATION:**                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Interest paid on deposits and borrowed funds                                       |       | $                                | 904,361    |   | $ | 584,121 |   |
| Income taxes  paid                                                                 |       | $                                | —     |   | $ | — |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

5

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| ** **                                                           | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006** | ** ** |
| ** **                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:**                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Foreclosed assets sold during the period and  financed through loans |       | $                                | —     |   | $ | 128,450 |   |
| Loans moved to  foreclosed assets                                    |       | $                                | 27,877     |   | $ | 164,965 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

6

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**BG FINANCIAL GROUP, INC. ANDSUBSIDIARY****Greeneville, TennesseeNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**Note 1.****          Summary of SignificantAccounting Policies**

*Nature ofBusiness*:

BG Financial Group, Inc.(the “Company”) is a bank holding company whose business is conducted by itswholly-owned subsidiary, Bank of Greeneville (the “Bank”).  Bank of Greeneville is engaged in thebusiness of originating loans primarily within its lending area, Greenevilleand Greene County in Tennessee.  The Bankobtains deposits both inside and outside of its primary lending area.  The Company was organized in October2003.  The Company had minimal assets,liabilities or operations until January, 2004, when it acquired the Bank in aPlan of Share Exchange whereby the stockholders exchanged their shares ofownership in the Bank for shares of ownership in the Company on a one-for-onebasis.  As a part of the Plan of ShareExchange, the Bank became a wholly owned subsidiary of the Company.

The following is adescription of the significant policies used in the preparation of theaccompanying consolidated financial statements.

*Basisof Presentation:*

These consolidatedfinancial statements include the accounts of the BG Financial Group, Inc. andits wholly owned subsidiary Bank of Greeneville.  Significant intercompany transactions andaccounts are eliminated in consolidation.

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States for interimfinancial information and in accordance with the instructions to Form 10-Q andArticle 10 of Regulation S-X as promulgated by the Securities and ExchangeCommission (“SEC”).  Accordingly, they donot include all the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.  In the opinion of management, all adjustmentsconsidered necessary for a fair presentation of the financial position andresults of operations for the periods presented have been included.  Operating results for the three months endedMarch 31, 2007 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2007. For further information, refer to the consolidated financial statementsand notes thereto included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2006.  Certainamounts from prior period financial statements have been reclassified toconform to current period’s presentation.

*Use ofEstimates:*

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities as of the balance sheet dateand the reported amounts of revenues and expenses during the reportingperiod.  Actual results could differ fromthose estimates.  The most significant managementaccounting estimate is the appropriate level for the allowance for loanlosses.  The allowance for loan losses isevaluated on a regular basis by management and is based upon management’speriodic review of the collectibility of the loans in light of historicalexperience, the nature and volume of the loan portfolio, adverse situationsthat may affect the borrower’s ability to repay, estimated value of anyunderlying collateral and prevailing economic conditions.  This evaluation is inherently subjective asit requires estimates that are susceptible to significant revision as moreinformation becomes available.

7

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**Note2.****            StockOptions and Awards**

On July 1, 2005, theCompany adopted the provisions of Statement of Financial Accounting Standards (“SFAS”)No. 123 (revised 2004), *Share-Based Payment*(“SFASNo. 123R”).  This statement supercedesAPB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), whichthe Company had followed until the adoption of SFAS No. 123R.   The revised statement addresses theaccounting for share-based payment transactions with employees and other thirdparties, eliminates the ability to account for share-based compensationtransactions using APB 25 and requires that the compensation costs relating tosuch transactions be recognized in the consolidated statement of income.   In anticipation of adopting SFAS No. 123R,on May 17, 2005 the Board of Directors approved that all non-vested employeestock options granted to become fully vested and exercisable as of that date inorder to avoid recognition of compensation costs in the consolidated statementof income in future periods.  Any stockoptions granted after May 17, 2005 are fully exercisable on the date granted.  Accordingly, no compensation cost wasrecognized prior to the adoption of SFAS No. 123R on July 1, 2005.  No additional options were granted during theperiod ended March 31, 2007, therefore, no compensation cost is recognized inthe consolidated statement of income for the period ended March 31, 2007.  The following table illustrates the effect onnet income and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123R to stock-based employee compensationfor comparative periods ended March 31.
|                                                                                                                                                | ** ** | **Three-Month Period**  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **Ended March 31** | ** ** |
| ** **                                                                                                                                     | ** ** | **(Unaudited)**              | ** ** |
| ** **                                                                                                                                     | ** ** | **2007**                     | ** ** | **2006** | ** ** |
| Net income, as  reported                                                                                                                       |       | $                            | 101,091    |   | $ | 165,344 |   |
| ** **                                                                                                                                     | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Deduct: Total stock-based employee compensation expense  determined under fair value  based method for all awards,  net of related tax effects |       | —                       |       | — |   |
| ** **                                                                                                                                     | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Pro forma net  income                                                                                                                          |       | $                            | 101,091    |   | $ | 165,344 |   |
|                                                                                                                                           |       |                         |       |   |   |
| Earnings per  share                                                                                                                            |       |                         |       |   |   |
| Basic – as  reported                                                                                                                      |       | $                            | .04        |   | $ | .07 |   |
|                                                                                                                                           |       |                         |       |   |   |
| Basic – pro  forma                                                                                                                        |       | $                            | .04        |   | $ | .07 |   |
|                                                                                                                                           |       |                         |       |   |   |
| Diluted – as  reported                                                                                                                    |       | $                            | .04        |   | $ | .07 |   |
|                                                                                                                                           |       |                         |       |   |   |
| Diluted – pro forma                                                                                                                       |       | $                            | .04        |   | $ | .07 |   |

 

8

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**Note 3.****          Earnings Per Share ofCommon Stock**

Basicearnings per share (EPS) of common stock is computed by dividing net income bythe weighted average number of common shares outstanding during theperiod.  Diluted earnings per share of commonstock is computed by dividing net income by the weighted average number of common shares and potential dilutive commonshares outstanding during the period. Stock options are regarded as potential common shares.  Potential common shares are computed usingthe treasury stock method.  For the threemonths ended March 31, 2007, 19,000 options are excluded from the effect ofdilutive securities because they are anti-dilutive; 85,344 options aresimilarly excluded from the effect of dilutive securities for the three monthsended March 31, 2006.

Thefollowing is a reconciliation of the numerators and denominators used in thebasic and diluted earningsper share computations for the three months ended March 31, 2007 and 2006:

|                                                                   | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2007**                                                 | ** ** | **2006** | ** ** |
| ** **                                                        | ** ** | **Income**                                               | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| ** **                                                        | ** ** | **(Numerator)**                                          | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** |
|                                                              |       |                                                     |       |   |   |   |   |   |   |
| Basic EPS                                                         |       |                                                     |       |   |   |   |   |   |   |
| Income available to common stockholders                           |       | $                                                        | 101,091    |   | 2,310,771 |   | $ | 165,344 |   | 2,310,771 |   |
|                                                              |       |                                                     |       |   |   |   |   |   |   |
| Effect of  dilutive securities Stock options outstanding          |       | —                                                   |       | 119,621 |   | — |   | 157,285 |   |
|                                                              |       |                                                     |       |   |   |   |   |   |   |
| Diluted EPS                                                       |       |                                                     |       |   |   |   |   |   |   |
| Income available to common shareholders plus assumed  conversions |       | $                                                        | 101,091    |   | 2,430,392 |   | $ | 165,344 |   | 2,468,056 |   |

 

9

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

**Impact of Inflation**

The consolidatedfinancial statements and related financial data presented herein have beenprepared in accordance with accounting principles generally accepted in theUnited States and practices within the banking industry that require themeasurement of financial position and operating results in terms of historicaldollars without considering the changes in the relative purchasing power ofmoney over time due to inflation.  Unlikemost industrial companies, virtually all the assets and liabilities of afinancial institution are monetary in nature. As a result, interest rates have a more significant impact on afinancial institution’s performance than the effects of general levels ofinflation.

**CriticalAccounting Estimates**

TheCompany follows generally accepted accounting principles that are recognized inthe United States, along with general practices within the bankingindustry.  In connection with the applicationof those principles and practices, we have made judgments and estimates which,in the case of our allowance for loan and lease losses (ALLL), are material tothe determination of our financial position and results of operation.  Other estimates relate to the valuation ofassets acquired in connection with foreclosures or in satisfaction of loans,and realization of deferred tax assets.

**RecentAccounting Pronouncements**

In February 2007, theFASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities.* This statement permits entities to choose to measure manyfinancial instruments and certain other items at fair value. The objective ofthis standard is to improve financial reporting by providing entities with theopportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions. This statement is effective as of the beginning of fiscal yearsbeginning after November 15, 2007, with early adoption permitted under certaincircumstances. The Company did not choose to early adopt this standard.

In March 2006, the FASBissued Statement of Financial Accounting Standards (“SFAS”) No. 156, Accounting*forServicing of Financial Assets*, an Amendment of FASB Statement No.140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities*, (“SFAS 140”) whichrequires that all separately recognized servicing assets and liabilities beinitially measured at fair value, if practicable, and requires entities toelect either fair value measurement with changes in fair value reflected inearnings or the amortization and impairment requirements of Statement 140 forsubsequent measurement.  SFAS 156 iseffective as of the beginning of an entity’s first fiscal year that beginsafter September 15, 2006.  The Companyplans to adopt SFAS 156 on January 1, 2007. The adoption of SFAS 156 did not have any material impact on the Company’sconsolidated financial condition or results of operations.

In July 2006, FASBissued Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes*, (“FIN 48”). FIN 48 is effective for fiscal years beginning after December 15,2006.  FIN 48 applies to all income tax positions subject to FASB StatementNo. 109, *Accounting for Income Tax* (“SFAS 109”),including tax positions considered to be routine and those with a high degreeof uncertainty.  FIN 48 did not have amaterial impact on the Company’s consolidated financial statements.

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In September, 2006, theFASB issued SFAS No. 157, *Fair Value Measurements*(“SFAS 157”).  SFAS 157 defines fairvalue, establishes a framework for measuring fair value and expands disclosuresabout fair value measurements.  SFAS 157will be applied prospectively and is effective for fiscal years beginning afterNovember 15, 2007 and interim periods within those fiscal years.  SFAS157 is not expected to have a material impact on the Company’s consolidatedfinancial statements.

In December 2004, theFASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123(revised 2004), *Share-Based Payment* (“SFAS No.123R”), which revised SFAS No. 123, *Accounting for Stock-BasedCompensation*.  This statement supercedes APB Opinion No.25, “Accounting for Stock Issued to Employees.” The revised statement addresses the accounting for share-based paymenttransactions with employees and other third parties, eliminates the ability toaccount for share-based compensation transactions using APB 25 and requiresthat the compensation costs relating to such transactions be recognized in theconsolidated statement of income.  Therevised statement was effective as of the first interim or annual periodbeginning after September 15, 2005.  Inanticipation of adopting SFAS No. 123R, the Company elected to immediately vestall remaining stock options during 2005 to avoid the recognition ofcompensation costs in the consolidated statement of income in future periods.

**Forward-LookingStatements**

Management’s discussion of the Company andmanagement’s analysis of the Company’s operations and prospects, and othermatters, may include forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995 and other provisions offederal and state securities laws. Although the Company believes that the assumptions underlying suchforward-looking statements contained in this Report are reasonable, any of theassumptions could be inaccurate and, accordingly, there can be no assurancethat the forward-looking statements included herein will prove to beaccurate.  The use of such words as “expect,”“anticipate,” “forecast,” and comparable terms should be understood by thereader to indicate that the statement is “forward-looking” and thus subject tochange in a manner that can be unpredictable. Factors that could cause actual results to differ from the resultsanticipated, but not guaranteed, in this Report, include (without limitation)economic and social conditions, competition for loans, mortgages, and otherfinancial services and products, changes in interest rates, unforeseen changesin liquidity, results of operations, and financial conditions affecting theCompany’s customers, and other risks that cannot be accurately quantified orcompletely identified.  Many factorsaffecting the Company’s financial condition and profitability, includingchanges in economic conditions, the volatility of interest rates, politicalevents and competition from other providers of financial services simply cannotbe predicted. Because these factors are unpredictable and beyond the Company’scontrol, earnings may fluctuate from period to period.  The purpose of this type of information is toprovide readers with information relevant to understanding and assessing thefinancial condition and results of operations of the Company, and not topredict the future or to guarantee results. The Company is unable to predict the types of circumstances, conditionsand factors that can cause anticipated results to change.  The Company undertakes no obligation topublish revised forward-looking statements to reflect the occurrence of changedor unanticipated events, circumstances or results.

**General**

On January 23, 2004, BGFinancial Group, Inc. (“Company”), a bank holding company, acquired all of theoutstanding shares of Bank of Greeneville (“Bank”) in a one for one stockexchange.  The Bank is aTennessee-chartered, FDIC-insured, non-Member commercial bank offering a widerange of banking services, including checking, savings, and money marketdeposit accounts, certificates of deposit and loans for consumers, commercialand real estate purposes, and is the principal business of the Company. Themain office of the Corporation is located at 3095 East Andrew Johnson Highway,Greeneville, Greene County, Tennessee, which is also the main office of theBank.  This location is a 2.66 acre lot,on which there is a fully operational modular bank unit.  Other full service branch banking offices ofthe Bank are located at 506 Asheville Highway and 208 West Summer Street,Greeneville, Greene County, Tennessee. Recently the Bank purchased property in Maryville, Tennessee at 710South Foothills Plaza Drive.  This locationis a 1.17 acre lot, on which there is a 3,272 square foot fully operationalbrick bank building with drive through facilities. These locations arecentrally located and in high traffic/exposure areas.  Automatic teller machines and overnight “depositdrops” are positioned to serve the Bank’s clients.  Additional branches may be established asmarket opportunities surface.

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**Liquidity**

At March 31, 2007, the Company had liquid assets ofapproximately $14.6 million in the form of cash and federal funds sold comparedto approximately $15.5 million on December 31, 2006.  Management believes that the liquid assetsare adequate at March 31, 2007. Additional liquidity should be provided by thegrowth in deposit accounts and loan repayments. The Company also has the ability to purchase federal funds and is amember of the Federal Home Loan Bank of Cincinnati that will provide a creditline if necessary.  Management is notaware of any trends, events or uncertainties that are reasonably likely to havea material impact on the Company’s short term or long term liquidity.

**Resultsof Operations**

The Company had net income of $101,091 or $.04 pershare for the quarter ended March 31, 2007 compared to net income of $165,344or $.07 per share for the quarter ended March 31, 2006.  During the quarter ended March 31, 2007, theCompany made a provision for loan losses of $104,364, while recording a benefitfrom loan losses of $(50,497) for the same period in 2006 (See additionaldiscussion at *Provision for / Benefit from Loan Losses*).

*Net Interest Income/Margin*

Net interest income represents the amount by whichinterest earned on various assets exceeds interest paid on deposits and otherinterest-bearing liabilities and is the most significant component of theCompany’s earnings.  Interest income forthe quarter ended March 31, 2007 was $1,831,756 compared to $1,646,387 for thesame period in 2006. Total interest expense was $845,349 in 2007 compared to$628,997 in 2006 for the same period. The Company pursues local depositsaggressively with attractive interest rates, which has resulted in compressionof net interest margin.  The Companybenefited from a “catch up” interest payment of $136,267 received from a largeloan previously in non accrual status during the three months ended March 31,2006. Based on the Company’s mix of interest earning assets and interestbearing liabilities, management believes that net interest margin should remainstable or begin to increase slightly for the remainder of the year.  This assumption is based on a continuedrising interest rate environment.  Ifinterest rates remain stable or begin to decline, net interest margin coulddecline due to competitive pricing of both loans and interest bearing deposits.

*Provision for / Benefit from Loan Losses*

The provision for (benefit from) loan lossesrepresents a charge (or recovery) to operations necessary to establish anallowance for possible loan losses, which in management’s evaluation, isadequate to provide coverage for estimated losses on outstanding loans and toprovide for uncertainties in the economy. The provision for (benefit from) loanlosses during the three-month period ended March 31, 2007 was $104,364 ascompared to $(50,497) for the same three-month period ended March 31,2006.  During the three months endedMarch 31, 2007, loan charge-offs were $25,694. The recoveries for the three-month period ended March 31, 2007 were$7,965.  The allowance for loan losseswas $704,591 at March 31, 2007 as compared to $617,956 at December 31, 2006, anincrease of 14.0%.  The 14.0% increase isdue to an increase in the loan portfolio and a higher percentage of past dueloans at March 31, 2007.  The allowancewas .88% of loans at March 31, 2007. Management believes the allowance for loan losses at March 31, 2007 tobe adequate.

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*Provision for Income Taxes*

The Company’s provision for income tax expense forthe three months ended March 31, 2007 was $60,947, compared to $106,485, forthe same period in 2006.  The provisionsrepresent 37.6% and 37.8% of the Company’s pretax income respectively.  Management believes the provision for incometaxes for the period ended March 31, 2007 to be adequate.

*Noninterest Income*

The Company’s noninterestincome consists of service charges on deposit accounts and other fees andcommissions.  Total noninterest incomefor the three months ended March 31, 2007 was $169,360, compared to $125,889for the same period in 2006.  The mainreason for the increase was a sharp increase in service charges on depositaccounts due to a revenue generating program called “Bounce Protection” thatbegan late in the year 2006. Fees from origination of mortgage loans alsoincreased due to more aggressive marketing efforts by Company personnel.  These increases were offset by a decrease ininvestment sales commissions. Management projects that noninterest income willimprove during the remainder of 2007 due to more aggressive collection of fees and renewed marketing efforts.

*Noninterest Expense*

Noninterest expenses totaled $893,165 for the threemonths ended March 31, 2007 as compared to $925,414 for the three months endedMarch 31, 2006 and consisted of employee costs, occupancy expense and otheroperating expenses.  Salaries andemployee benefits increased from $461,095 for the three months ended March 31,2006 when compared to $462,991 for the three months ended March 31, 2007.  Legal and professional fees decreased $34,286to $81,525 for the three month ended March 31, 2006 from $115,811 for the sameperiod in 2006.  Management continues tostrengthen all departments of the Company to meet the new demands of regulatoryrequirements and strategic plan development.  Other operating expenses decreased $17,601 to $146,452 for the threemonths ended March 31, 2007 from $164,053 for the same period in 2006.  Most of the other noninterest expense can beaccounted for by an increase in occupancy expenses.

**Financial Condition**

Totalassets at March 31, 2007, were $100,821,615, an increase of $3,068,934 or 3.1%compared to 2006 year-end assets of $97,752,681.  Deposits increased to $87,353,776 at March31, 2007, an increase of $4,850,724 or 5.9% from $82,503,052 at December 31,2006.  The increase in deposits wasmainly due to management’s aggressive efforts to obtain local deposits.Premises and equipment increased to $5,317,635 at March 31, 2007 an increase of$1,518,116 or 40.0% from $3,799,519 at December 31, 2006.  The purchase of a new branch located at 710South Foothills Plaza Drive, Maryville, Tennessee, accounted for $1,483,258 ofthe increase in Premises and equipment. Federal Home Loan Bank Stock was $262,600 at March 31, 2007 compared to$258,800 at December 31, 2006.

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The Company places an emphasis on an integratedapproach to its balance sheet management. Significant balance sheet components of loans and sources of funds aremanaged in an integrated manner with the management of interest rate risk,liquidity, and capital.  These componentsare discussed below.

*Loans*

Net loans outstanding totaled $79,367,037 at March31, 2007 compared to $77,059,828 at December 31, 2006.  Commercial and real estate loan growthaccounted for almost all of the approximately $2.3 million increase for thefirst quarter of 2007.

Management feels theoverall quality of loans remains solid. In the event that a loan is 90 days or more past due the accrual ofincome is generally discontinued when the full collection of principal orinterest is in doubt unless the obligations are both well secured and in theprocess of collection.  At March 31,2007, there were no loans 90 days or more past due and still accruing interest,while total loans 90 days or more past due and in non-accrual status were$1,415,179.  At December 31, 2006, therewe no loans 90 days or more past due and still accruing interest, while totalloans 90 days or more past due and in non-accrual status were $1,531,621.

Restricted EquityInvestments

Federal Home Loan Bank (FHLB) stock at March 31,2007 had an amortized cost of $262,600 as compared to an amortized cost of$258,800 at December 31, 2006.   As amember of the FHLB, the Company is required to maintain stock in an amountequal to .15% of total assets and 4% of outstanding FHLB advances.    Federal Home Loan Bank stock is carried atcost under the available-for-sale category. Federal Home Loan Bank stock is maintained by the Company at par valueof one hundred dollars per share.

*Deposits*

Total deposits, which are the principal source offunds for the Company, were $87,353,776 at March 31, 2007, compared to$82,503,052 at December 31, 2006 representing an increase of 5.9%.  The Company has targeted local consumers,professional and commercial businesses as its central clientele, therefore,deposit instruments in the form of demand deposits, savings accounts, moneymarket demand accounts, NOW accounts, certificates of deposit and individualretirement accounts are offered to customers.  The Company established a line of credit with the Federal Home Loan Banksecured by a blanket-pledge of 1-4 family residential mortgage loans.   At March 31, 2007 the Company hadoutstanding advances of $2,090,419 at the Federal Home Loan Bank.

*Capital*

Equity capital at March31, 2007 was $8,937,619, an increase of $101,091 from $8,836,528 at December31, 2006, due to a net profit of $101,091 for the first three months of 2007.

AtMarch 31, 2007, both the Company’s and Bank’s capital ratios were in excess ofthe regulatory minimums.  Those ratiosare as follows:
| ** **                       | ** ** | **Required  Minimum Ratio** | ** ** | **To be Well  Capitalized** | ** ** | **Bank** | ** ** | **Company** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------------|------------|----------|------------|-------------|------------|
| Tier 1 Leverage  ratio           |       | 4.00                             | %          | 5.00                                  | %          | 9.31     | %          | 9.32        | %          |
| Tier 1  risk-based capital ratio |       | 4.00                             | %          | 6.00                                  | %          | 10.82    | %          | 10.83       | %          |
| Total risk-based  capital ratio  |       | 8.00                             | %          | 10.00                                 | %          | 11.68    | %          | 11.69       | %          |

 

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*Liability and Asset Management*

TheCompany’s Asset/Liability Committee (“ALCO”) actively measures and managesinterest rate risk using a process developed by the Company.  The ALCO is also responsible for implementingthe Company’s asset/liability management policies, overseeing the formulationand implementation of strategies to improve balance sheet positioning andearnings, and reviewing the Company’s interest rate sensitivity position.

Theprimary tool that management uses to measure short-term interest rate risk is anet interest income simulation model prepared by an independent correspondentinstitution.  These simulations estimatethe impact that various changes in the overall level of interest rates overone- and two-year time horizons would have on net interest income.  The results help the Company developstrategies for managing exposures to interest rate risk.

Likeany forecasting technique, interest rate simulation modeling is based on alarge number of assumptions.  In thiscase, the assumptions relate primarily to loan and deposit growth, asset andliability prepayments, interest rates and balance sheet management strategies.  Management believes that both individuallyand in the aggregate the assumptions are reasonable.  Nevertheless, the simulation modeling processproduces only a sophisticated estimate, not a precise calculation of exposure.

AtMarch 31, 2007, approximately 63% of the institution’s gross loans hadadjustable rates.  Based on theasset/liability modeling, management believes that these loans reprice at afaster pace than liabilities held at the institution.  Because the majority of the institution’sliabilities are 12 months and under and the gap in repricing is asset sensitive,management believes that a rising rate environment would have a positive impacton the Company’s net interest margin. Floors in the majority of the institution’s adjustable rate assets alsomitigate interest rate sensitivity in a decreasing rate environment.

*Off-BalanceSheet Arrangements*

The Company, at March 31, 2007, had outstandingunused lines of credit and standby letters of credit that totaled approximately$16,460,265.  These commitments havefixed maturity dates and many will mature without being drawn upon, meaningthat the total commitment does not necessarily represent the future cashrequirements.  The Company has theability to liquidate Federal funds sold or, on a short-term basis, to purchaseFederal funds from other banks and to borrow from the Federal Home LoanBank.  At March 31, 2007, the Company hadestablished with correspondent banks the ability to purchase Federal funds ifneeded.

**Item3.  Quantitative and QualitativeDisclosures about Market Risk**

The information set forthon pages 10 through 15 of Item 2, “MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS is incorporated herein byreference.

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**Item4.  Controls and Procedures**

a)                                     Evaluation of Disclosure Controls andProcedures

The Companymaintains disclosure controls and procedures, as defined in Rule 13a-15(e) and15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “ExchangeAct”), that are designed to ensure that information required to be disclosed byit in the reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported within the time period specified in the SEC’srules and forms and that such information is accumulated and communicated tothe Company’s management, including its Chief Executive Officer and ChiefFinancial Officer.  The Company carriedout an evaluation, under the supervision and with the participation of itsmanagement, including its Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of its disclosure controls andprocedures as of the end of the period covered by this report.  Based on the evaluation of these disclosurecontrols and procedures, the Chief Executive Officer and Chief FinancialOfficer concluded that the Company’s disclosure control and procedures wereeffective.

b)                                    Changes in Internal Controls andProcedures

There were nochanges in our internal controls over financial reporting during the quarterended March 31, 2007, that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.

**Item4T.  Controls and Procedures**

Not applicable.

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**PART II - OTHER INFORMATION**

**Item1.****           LEGAL PROCEEDINGS**

None.

**Item 1A.****                RISKFACTORS**

There have been nomaterial changes to our risk factors as previously disclosed in Part I, Item 1Aof the amendment to our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2006, as filed with the Securities and Exchange Commission onApril 30, 2007.

**Item2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

(a)        None.

(b)       Not applicable.

(c)        No repurchases of Company securities weremade during the quarter ended March 31, 2007.

The Company’s ability to pay dividends is derived from the income ofthe Bank.  The Bank’s ability to declareand pay dividends is limited by its obligations to maintain sufficient capitaland by other general restrictions on its dividends that are applicable to banksthat are regulated by the FDIC and the Department of FinancialInstitutions.  In addition, the FederalReserve Board may impose restrictions on the Company’s ability to pay dividendson its common stock.  As a result, theCompany cannot assure its shareholders that it will declare or pay dividends onshares of its common stock in the future.

**Item3.****           DEFAULTS UPON SENIORSECURITIES**

(a)    None.

(b)    None.

**Item4.****           SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

None.

**Item5.****        OTHER INFORMATION**

(a)    None.

(b)    None.

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**Item6.****           EXHIBITS.**

Index to Exhibits.
| Exhibit No. | ** ** | **Description**                                                                 |
|-------------|------------|---------------------------------------------------------------------------------|
| 2.1*        |       | Articles of Share Exchange of Bank of Greeneville  and BG Financial Group, Inc. |
| 2.2*        |       | Plan of Share Exchange of Bank of Greeneville and BG  Financial Group, Inc.     |
|        |       |                                                                            |
| 3.1*        |       | Charter of BG Financial Group, Inc.                                             |
| 3.2*        |       | Bylaws of BG Financial Group, Inc.                                              |
|        |       |                                                                            |
| 10.1**      |       | Stock Option Agreement between Bank of Greeneville  and J. Robert Grubbs        |
| 10.2**      |       | Stock Option Agreement between Bank of Greeneville  and T. Don Waddell          |
|        |       |                                                                            |
| 31.1        |       | Certification pursuant to Rule 13a-14a/15d-14(a)                                |
| 31.2        |       | Certification pursuant to Rule 13a-14a/15d-14(a)                                |
| 32.1        |       | Certification pursuant to Rule 18 USC Section  1350-Sarbanes-Oxley Act of 2002  |
| 32.2        |       | Certification pursuant to Rule 18 USC Section  1350-Sarbanes-Oxley Act of 2002  |

 

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*Previously filed as an exhibit to a Form 8-K filed by BG Financial Group, Inc.with the Securities and Exchange Commission on May 21, 2004, and incorporatedherein by reference.

**Previouslyfiled as an exhibit to Bank of Greeneville’s Registration Statement on Form10-SB, as filed with the Federal Deposit Insurance Corporation on April 27,2002, and incorporated herein by reference.

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***SIGNATURES***

In accordance with the requirements of the Exchange Act, the registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
| BG FINANCIAL GROUP,  INC. |
|---------------------------|
| (Registrant)              |
|                      |   |   |
|                      |   |   |
| DATE:                     | May 15, 2007 |   |   | /s/ J. Robert Grubbs |
|                      |   | J. Robert Grubbs |
|                      |   | President &  Chief Executive Officer |
|                      |   |   |
|                      |   |   |
| DATE:                     | May 15, 2007 |   |   | /s/ T. Don Waddell |
|                      |   | T. Don Waddell |
|                      |   | Chief Financial  Officer |

 

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