**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

***FORM 10-Q***

(Mark One)

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

 

**For thequarterly period ended June 30, 2006**

**OR**

**o**                                   TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**For thetransition period from _____________________ to ________________**

**Commissionfile number   000-50771**

**BGFINANCIAL GROUP, INC.**

(Exact name of registrantas 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**                                                    |                | **37745**                             |
| **Greeneville,  Tennessee**                                                              |                | ** **                            |
| (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 mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  YES o  NO x

As of August 1, 2006, there were 2,310,771 shares of common stock, $0.333 par 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 — June 30, 2006 and December 31, 2005. |
|                                     |   |   |
|                                     |   | Consolidated Statements of Income — For the six months  ended June 30, 2006 and 2005. |
|                                     |   |   |
|                                     |   | Consolidated Statements of Income — For the three  months ended June 30, 2006 and 2005. |
|                                     |   |   |
|                                     |   | Consolidated Statements of Cash Flows — For the six  months ended June 30, 2006 and 2005. |
|                                     |   |   |
|                                     |   | 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.** |
| ** **                               | ** ** | ** ** |
| **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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**BG FINANCIAL GROUP, INC. ANDSUBSIDIARY**

**Greeneville,Tennessee**

**CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION**

**Part I. FINANCIALINFORMATION**

**Item 1. Financial Statements**
|                                                                                                                                               | ** ** | **As of**              | ** ** | **As of**                  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
| ** **                                                                                                                                    | ** ** | **(Unaudited)**             | ** ** | ** **                      | ** ** |
| ** **                                                                                                                                    | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| **ASSETS**                                                                                                                                    |       |                        |       |                            |       |
| Cash and due from banks                                                                                                                       |       | $                           | 4,970,290  |                            | $          | 4,716,153 |   |
| Federal funds sold                                                                                                                            |       | 11,363,604                  |       | 13,557,689                      |       |
| Cash and cash  equivalents                                                                                                                    |       | 16,333,894                  |       | 18,273,842                      |       |
| Federal Home Loan Bank  stock, at cost                                                                                                        |       | 251,400                     |       | 244,500                         |       |
| Loans, net of allowance  for loan losses of $763,618 in 2006 and $697,013 in 2005                                                             |       | 68,442,253                  |       | 64,054,625                      |       |
| Premises and equipment,  net                                                                                                                  |       | 3,828,746                   |       | 3,777,981                       |       |
| Accrued income  receivable                                                                                                                    |       | 417,907                     |       | 418,329                         |       |
| Deferred tax benefit                                                                                                                          |       | 222,615                     |       | 236,743                         |       |
| Foreclosed assets                                                                                                                             |       | 565,633                     |       | 616,279                         |       |
| Other assets                                                                                                                                  |       | 130,137                     |       | 162,411                         |       |
| Total Assets                                                                                                                                  |       | $                           | 90,192,585 |                            | $          | 87,784,710 |   |
| ** **                                                                                                                                    |       |                        |       |                            |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                |       |                        |       |                            |       |
| **LIABILITIES**                                                                                                                               |       |                        |       |                            |       |
| Deposits:                                                                                                                                     |       |                        |       |                            |       |
| Noninterest-bearing  Demand                                                                                                                   |       | $                           | 9,201,686  |                            | $          | 8,624,411 |   |
| Interest-bearing                                                                                                                              |       |                        |       |                            |       |
| Money market,  interest checking and savings                                                                                                  |       | 28,113,535                  |       | 22,070,383                      |       |
| Time deposits                                                                                                                                 |       | 39,610,624                  |       | 44,007,894                      |       |
| Total Deposits                                                                                                                                |       | 76,925,845                  |       | 74,702,688                      |       |
| Accrued interest                                                                                                                              |       | 446,965                     |       | 353,534                         |       |
| Other  liabilities                                                                                                                            |       | 198,754                     |       | 208,613                         |       |
| Federal Home  Loan Bank advances                                                                                                              |       | 4,161,818                   |       | 4,179,052                       |       |
| Total  Liabilities                                                                                                                            |       | 81,733,382                  |       | 79,443,887                      |       |
|                                                                                                                                          |       |                        |       |                            |       |
| **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 June 30, 2006 and December 31, 2005 |       | 770,256                     |       | 770,256                         |       |
| Additional  paid-in capital                                                                                                                   |       | 6,932,307                   |       | 6,932,307                       |       |
| Retained  earnings                                                                                                                            |       | 756,640                     |       | 638,260                         |       |
| Total  Stockholders’ Equity                                                                                                              |       | 8,459,203                   |       | 8,340,823                       |       |
| Total Liabilities and  Stockholders’ Equity                                                                                              |       | $                           | 90,192,585 |                            | $          | 87,784,710 |   |

 

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

3

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** **

**BGFINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville, Tennessee**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**
|                                                                      | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                           | ** ** | **June 30, 2006**    | ** ** | **June 30, 2005** | ** ** |
| **Interest  and dividend income:**                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Loans, including fees                                                |       | $                              | 2,888,552  |   | $ | 2,534,041 |   |
| Dividends on Federal Home Loan Bank stock                            |       | 7,020                          |       | 5,359 |   |
| Federal funds sold and other                                         |       | 270,733                        |       | 134,543 |   |
| Total interest and dividend income                                   |       | 3,166,305                      |       | 2,673,943 |   |
| ** **                                                           | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Interest  expense:**                                               | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Deposits                                                             |       | 1,240,727                      |       | 919,519 |   |
| Borrowed funds                                                       |       | 68,363                         |       | 70,327 |   |
| Total interest expense                                               |       | 1,309,090                      |       | 989,846 |   |
| Net interest income before provision for (benefit  from) loan losses |       | 1,857,215                      | ** ** | 1,684,097 | ** ** |
| ** **                                                           | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Provision  for (benefit from) loan losses**                        |       | 99,871                         |       | (368,692 | ) |
| Net interest income after provision for (benefit  from) loan losses  | ** ** | 1,757,344                      | ** ** | 2,052,789 | ** ** |
|                                                                 |       |                           |       |   |   |
| **Noninterest  income:**                                             |       |                           |       |   |   |
| Service charges on deposit accounts                                  |       | 126,194                        |       | 132,169 |   |
| Fees from origination of mortgage loans                              |       | 43,050                         |       | 55,738 |   |
| Investment sales commissions                                         |       | 85,376                         |       | 49,057 |   |
| Other                                                                |       | 9,187                          |       | 12,710 |   |
| Total noninterest income                                             |       | 263,807                        |       | 249,674 |   |
|                                                                 |       |                           |       |   |   |
| **Noninterest  expenses:**                                           |       |                           |       |   |   |
| Compensation and benefits                                            |       | 907,620                        |       | 942,198 |   |
| Occupancy expenses                                                   |       | 240,900                        |       | 235,516 |   |
| Marketing                                                            |       | 42,826                         |       | 65,859 |   |
| Data processing                                                      |       | 107,075                        |       | 92,544 |   |
| Legal and professional fees                                          |       | 217,486                        |       | 216,138 |   |
| Other operating expenses                                             |       | 325,182                        |       | 297,838 |   |
| Total noninterest expense                                            |       | 1,841,089                      |       | 1,850,093 |   |
| **Income before income taxes**                                       |       | 180,062                        |       | 452,370 |   |
|                                                                 |       |                           |       |   |   |
| Income tax  expense                                                  |       | 61,682                         |       | 191,387 |   |
|                                                                 |       |                           |       |   |   |
| **Net income**                                                       |       | $                              | 118,380    |   | $ | 260,983 |   |
|                                                                 |       |                           |       |   |   |
| Earnings per share                                                   |       | $                              | .05        |   | $ | .11 |   |

 

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

4

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** **

**BGFINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville, Tennessee**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**
|                                                                      | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **June 30, 2006**      | ** ** | **June 30, 2005** | ** ** |
| **Interest  and dividend income:**                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Loans, including fees                                                |       | $                                | 1,368,036  |   | $ | 1,283,478 |   |
| Dividends on Federal Home Loan Bank stock                            |       | 3,553                            |       | 2,846 |   |
| Federal funds sold and other                                         |       | 144,862                          |       | 80,677 |   |
| Total interest and dividend income                                   |       | 1,516,451                        |       | 1,367,001 |   |
| ** **                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Interest  expense:**                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Deposits                                                             |       | 645,593                          |       | 487,162 |   |
| Borrowed funds                                                       |       | 34,500                           |       | 35,051 |   |
| Total interest expense                                               |       | 680,093                          |       | 522,213 |   |
| Net interest income before provision for (benefit  from) loan losses | ** ** | 836,358                          | ** ** | 844,788 | ** ** |
| ** **                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Provision  for (benefit from) loan losses**                        |       | 150,368                          |       | (237,045 | ) |
| Net interest income after provision for (benefit  from) loan losses  | ** ** | 685,990                          | ** ** | 1,081,833 | ** ** |
|                                                                 |       |                             |       |   |   |
| **Noninterest  income:**                                             |       |                             |       |   |   |
| Service charges on deposit accounts                                  |       | 63,510                           |       | 78,349 |   |
| Fees from origination of mortgage loans                              |       | 26,959                           |       | 33,902 |   |
| Investment sales commissions                                         |       | 41,904                           |       | 32,397 |   |
| Other                                                                |       | 5,545                            |       | 8,001 |   |
| Total noninterest income                                             |       | 137,918                          |       | 152,649 |   |
|                                                                 |       |                             |       |   |   |
| **Noninterest  expenses:**                                           |       |                             |       |   |   |
| Compensation and benefits                                            |       | 446,525                          |       | 443,123 |   |
| Occupancy expenses                                                   |       | 126,706                          |       | 116,292 |   |
| Marketing                                                            |       | 23,099                           |       | 38,881 |   |
| Data processing                                                      |       | 56,541                           |       | 47,388 |   |
| Legal and professional expense                                       |       | 101,675                          |       | 130,637 |   |
| Other operating expenses                                             |       | 161,129                          |       | 172,721 |   |
| Total noninterest expense                                            |       | 915,675                          |       | 949,042 |   |
| **Income (loss) before income taxes**                                |       | (91,767                          | )          | 285,440 |   |
|                                                                 |       |                             |       |   |   |
| Income tax  expense (benefit)                                        |       | (44,803                          | )          | 166,972 |   |
|                                                                 |       |                             |       |   |   |
| **Net income (loss)**                                                |       | $                                | (46,964    | ) | $ | 118,468 |   |
|                                                                 |       |                             |       |   |   |
| Earnings (loss) per  share                                           |       | $                                | (.02       | ) | $ | .05 |   |

 

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

5

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**BGFINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville, Tennessee**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited)**
|                                                                                              | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                   | ** ** | **June 30, 2006**    | ** ** | **June 30, 2005** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                                                   |       | $                              | 118,380    |   | $ | 260,983 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                           |       |   |   |
| Provision for (benefit from) loan losses                                                     |       | 99,871                         |       | (368,692 | ) |
| Depreciation                                                                                 |       | 131,447                        |       | 154,098 |   |
| Realized loss on sales of foreclosed assets                                                  |       | 11,418                         |       | 6,211 |   |
| Deferred income tax expense                                                                  |       | 14,128                         |       | 213,687 |   |
| Net change in:                                                                               |       |                           |       |   |   |
| Accrued income receivable                                                                    |       | 422                            |       | (15,131 | ) |
| Other assets                                                                                 |       | 32,174                         |       | (30,962 | ) |
| Other liabilities                                                                            |       | 83,672                         |       | (315,876 | ) |
| Net cash provided by (used in) operating activities                                          |       | 491,512                        |       | (95,682 | ) |
|                                                                                         |       |                           |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Federal Home Loan Bank stock purchases                                                       |       | (6,900                         | )          | (11,700 | ) |
| Proceeds from sales of foreclosed assets                                                     |       | 68,775                         |       | 172,328 |   |
| Loan originations and principal collections, net                                             |       | (4,517,046                     | )          | 5,795,558 |   |
| Additions to premises and equipment                                                          |       | (182,212                       | )          | (114,992 | ) |
| Net cash provided by (used in) by investing  activities                                      |       | (4,637,383                     | )          | 5,841,194 |   |
|                                                                                         |       |                           |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net change in deposits                                                                       |       | 6,620,427                      |       | 1,119,042 |   |
| Net change in certificates of deposit                                                        |       | (4,397,270                     | )          | (6,086,030 | ) |
| Federal Home Loan Bank advances                                                              |       | 75,000                         |       | (89,459 | ) |
| Federal Home Loan Bank repayments                                                            |       | (92,234                        | )          | - |   |
| Net cash provided by (used in) financing activities                                          |       | 2,205,923                      |       | (5,056,447 | ) |
|                                                                                         |       |                           |       |   |   |
| Net change in  cash and cash equivalents                                                     |       | (1,939,948                     | )          | 689,065 |   |
|                                                                                         |       |                           |       |   |   |
| Cash and cash  equivalents at beginning of year                                              |       | 18,273,842                     |       | 13,158,516 |   |
|                                                                                         |       |                           |       |   |   |
| Cash and cash  equivalents at end of year                                                    |       | $                              | 16,333,894 |   | $ | 13,847,581 |   |
|                                                                                         |       |                           |       |   |   |
| **SUPPLEMENTARY  CASH FLOW INFORMATION:**                                                    | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Interest paid on deposits and borrowed funds                                                 |       | $                              | 1,215,659  |   | $ | 922,401 |   |
| Income taxes  paid                                                                           |       | $                              | -          |   | $ | 126,000 |   |

 

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

** **

6

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** **

**BGFINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville, Tennessee**

**CONSOLIDATED STATEMENTS OF CASHFLOWS (Continued)**

**(Unaudited)**
|                                                                      | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                           | ** ** | **June 30, 2006**    | ** ** | **June 30, 2005** | ** ** |
| **SUPPLEMENTAL  SCHEDULE OF NON-CASH ACTIVITIES:**                   |       |                           |       |   |   |
| Foreclosed assets sold during the period and financed  through loans |       | $                              | 147,741    |   | $ | - |   |
| Loans moved to  foreclosed assets                                    |       | $                              | 177,288    |   | $ | 418,884 |   |

 

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

 

7

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**BGFINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville, Tennessee**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

**Note 1.   Summary of Significant Accounting Policies**

*Nature of Business*:

BGFinancial Group, Inc. (the “Company”) is a bank holding company whose businessis conducted by its wholly-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.

Thefollowing is a description of the significant policies used in the preparationof the accompanying consolidated financial statements.

*Basis of Presentation:*

Theseconsolidated financial statements include the accounts of the BG FinancialGroup, Inc. and its wholly owned subsidiary Bank of Greeneville.  Significant intercompany transactions andaccounts are eliminated in consolidation.

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and in accordance with the instructions toForm 10-Q and Article 10 of Regulation S-X as promulgated by the Securities andExchange Commission (“SEC”). Accordingly, they do not include all the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements.  In theopinion of management, all adjustments (none of which were other than normalrecurring accruals) considered necessary for a fair presentation of thefinancial position and results of operations for the periods presented havebeen included.  Operating results for thethree and six months ended June 30, 2006 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2006.  For further information, refer to theconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2005.  Certain amounts from prior period financialstatements have been reclassified to conform to current period’s presentation.

8

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*Use of Estimates:*

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities as of thebalance sheet date and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.  The mostsignificant management accounting estimate is the appropriate level for theallowance for loan losses.  The allowancefor loan losses is evaluated on a regular basis by management and is based uponmanagement’s periodic review of the collectibility of the loans in light ofhistorical experience, the nature and volume of the loan portfolio, adversesituations that may affect the borrower’s ability to repay, estimated value ofany underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective asit requires estimates that are susceptible to significant revision as moreinformation becomes available.

**Note 2.   StockOptions and Awards**

 

OnJuly 1, 2005, the Company adopted the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 123 (revised 2004), *Share-BasedPayment* (“SFAS No. 123R”). This statement supercedes APB Opinion No. 25, “Accounting for StockIssued to Employees” (APB 25), which the Company had followed until theadoption of SFAS No. 123R.   The revisedstatement addresses the accounting for share-based payment transactions withemployees and other third parties, eliminates the ability to account forshare-based compensation transactions using APB 25 and requires that thecompensation costs relating to such transactions be recognized in theconsolidated statement of income.   Inanticipation of adopting SFAS No. 123R, on May 17, 2005 the Board of Directorsapproved that all non-vested employee stock options granted to become fullyvested and exercisable as of that date in order to avoid recognition ofcompensation costs in the consolidated statement of income in futureperiods.  Any stock options granted afterMay 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 June 30, 2006, therefore, no compensation cost is recognized inthe consolidated statement of income for the period ended June 30, 2006.  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 June 30.
|                                                                                                                                                                  | ** ** | **Three-Month Period** | ** ** | **Six-Month Period**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                       | ** ** | **Ended June 30** | ** ** | **Ended June 30** | ** ** |
| ** **                                                                                                                                                       | ** ** | **(Unaudited)**             | ** ** | **(Unaudited)**             | ** ** |
| ** **                                                                                                                                                       | ** ** | **2006**                    | ** ** | **2005**                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                                                                             |       |                        |       |                        |       |   |   |   |   |
| Net income  (loss), as reported                                                                                                                                  |       | $                           | (46,964    | )                           | $          | 118,468 |   | $ | 118,380 |   | $ | 260,983 |   |
| ** **                                                                                                                                                       | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deduct: Total  stock-based employee  compensation expense determined  under  fair value based method for  all awards, net of related tax  effects |       | -                           |       | 83,774                      |       | - |   | 125,675 |   |
| ** **                                                                                                                                                       | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pro forma net income(loss)                                                                                                                                       |       | $                           | (46,964    | )                           | $          | 34,694 |   | $ | 118,380 |   | $ | 135,308 |   |
|                                                                                                                                                             |       |                        |       |                        |       |   |   |   |   |
| Earnings per  share                                                                                                                                              |       |                        |       |                        |       |   |   |   |   |
| Basic — as  reported                                                                                                                                        |       | $                           | (.02       | )                           | $          | .05 |   | $ | .05 |   | $ | .11 |   |
|                                                                                                                                                             |       |                        |       |                        |       |   |   |   |   |
| Basic — pro  forma                                                                                                                                          |       | $                           | (.02       | )                           | $          | .02 |   | $ | .05 |   | $ | .06 |   |
|                                                                                                                                                             |       |                        |       |                        |       |   |   |   |   |
| Diluted — as  reported                                                                                                                                      |       | $                           | (.02       | )                           | $          | .05 |   | $ | .05 |   | $ | .11 |   |
|                                                                                                                                                             |       |                        |       |                        |       |   |   |   |   |
| Diluted — pro forma                                                                                                                                         |       | $                           | (.02       | )                           | $          | .01 |   | $ | .05 |   | $ | .05 |   |

** **

9

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**Note 3.   Earnings Per Share of Common 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 ofcommon stock is computed by dividing net income by the weighted average numberof common shares and potential dilutive common shares outstanding during theperiod.  Stock options are regarded aspotential common shares.  Potentialcommon shares are computed using the treasury stock method.  For the three and six months ended June 30,2006, 85,344 options are excluded from the effect of dilutive securitiesbecause they are anti-dilutive; 73,902 options are similarly excluded from theeffect of dilutive securities for the three and six months ended June 30, 2005.

Thefollowing is a reconciliation of the numerators and denominators used in thebasic and diluted earnings per share computations for the three and six monthsended June 30, 2006 and 2005:
|                                                                          | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                               | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                               | ** ** | **Income**                                          | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| ** **                                                               | ** ** | **(Numerator)**                                     | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** |
| Basic EPS                                                                |       |                                                |       |   |   |   |   |   |   |
| Income (loss) available to common stockholders                           |       | $                                                   | (46,964    | ) | 2,310,771 |   | $ | 118,468 |   | 2,306,775 |   |
|                                                                     |       |                                                |       |   |   |   |   |   |   |
| Effect of  dilutive securities                                           |       |                                                |       |   |   |   |   |   |   |
| Stock options outstanding                                                |       | -                                                   |       | 132,031 |   | - |   | 171,923 |   |
|                                                                     |       |                                                |       |   |   |   |   |   |   |
| Diluted EPS                                                              |       |                                                |       |   |   |   |   |   |   |
| Income (loss)  available to common shareholders plus assumed conversions |       | $                                                   | (46,964    | ) | 2,442,802 |   | $ | 118,468 |   | 2,479,698 |   |
|                                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **Income**                                        | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| ** **                                                        | ** ** | **(Numerator)**                                   | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** |
| Basic EPS                                                         |       |                                              |       |   |   |   |   |   |   |
| Income available  to common stockholders                          |       | $                                                 | 118,380    |   | 2,310,771 |   | $ | 260,983 |   | 2,306,775 |   |
|                                                              |       |                                              |       |   |   |   |   |   |   |
| Effect of dilutive  securities                                    |       |                                              |       |   |   |   |   |   |   |
| Stock options  outstanding                                        |       | -                                                 |       | 139,685 |   | - |   | 172,923 |   |
|                                                              |       |                                              |       |   |   |   |   |   |   |
| Diluted EPS                                                       |       |                                              |       |   |   |   |   |   |   |
| Income available  to common shareholders plus assumed conversions |       | $                                                 | 118,380    |   | 2,450,456 |   | $ | 260,983 |   | 2,479,698 |   |

 

10

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** **

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

**Impactof Inflation**

Theconsolidated financial statements and related financial data presented hereinhave been prepared in accordance with accounting principles generally acceptedin the United 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**

The Company follows generally accepted accountingprinciples that are recognized in the United States, along with generalpractices within the banking industry. In connection with the application of those principles and practices, wehave made judgments and estimates which, in the case of our allowance for loanand lease losses (ALLL), are material to the determination of our financialposition and results of operation.  Otherestimates relate to the valuation of assets acquired in connection withforeclosures or in satisfaction of loans, and realization of deferred taxassets.

**RecentAccounting Pronouncements**

InMarch 2006, the Financial Account Standards Board (“FASB”) issued Statement ofFinancial Accounting Standards (“SFAS”) No. 156, Accounting For Servicing ofFinancial Assets, an Amendment of FASB Statement No. 140, Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities,(“SFAS 156”) which requires that all separately recognized servicing assets andliabilities be initially measured at fair value, if practicable, and requiresentities to elect either fair value measurement with changes in fair valuereflected in earnings or the amortization and impairment requirements ofStatement 140 for subsequent measurement. SFAS 156 is effective as of the beginning of an entity’s first fiscalyear that begins after September 15, 2006. The Company plans to adopt SFAS 156 on January 1, 2007.  The adoption of SFAS 156 is not expected tohave any material impact on the Company’s consolidated financial condition orresults of operations.

FASBStaff Position on FAS No. 115-1 and FAS No. 124-1 (“the FSP”), “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments,”was issued in November 2005 and addresses the determination of when aninvestment is considered impaired; whether the impairment isother-than-temporary; and how to measure an impairment loss.  The FSP also addresses accountingconsiderations subsequent to the recognition of an other-than-temporaryimpairment on a debt security, and requires certain disclosures aboutunrealized losses that have not been recognized as other-than-temporaryimpairments.  The FSP replaces theimpairment guidance on Emerging Issues Task Force (EITF) Issue No. 03-1 withreferences to existing authoritative literature concerning other-than-temporarydeterminations.  Under the FSP, lossesarising from impairment deemed to be other-than-temporary, must be recognizedin earnings at an amount equal to the entire difference between the securitiescost and its fair value at the financial statement date, without consideringpartial recoveries subsequent to that date. The FSP also required that an investor recognize an other-than-temporaryimpairment loss when a decision to sell a security has been made and theinvestor does not expect the fair value of the security to fully recover priorto the expected time of sale.  The FSP iseffective for reporting periods beginning after December 15, 2005.  The adoption of this statement did not have amaterial impact on the Company’s consolidated financial statements.

11

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InDecember 2004, the FASB 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 supercedesAPB Opinion No. 25, “Accounting for Stock Issued to Employees.”  The revised statement addresses theaccounting for share-based payment transactions with employees and other thirdparties, eliminates the ability to account for share-based compensation transactionsusing APB 25 and requires that the compensation costs relating to suchtransactions be recognized in the consolidated statement of income.  The revised statement was effective as of thefirst interim or annual period beginning after June 15, 2005.  In anticipation of adopting SFAS No. 123R,the Company elected to immediately vest all remaining stock options during 2005to avoid the recognition of compensation costs in the consolidated statement ofincome in future periods.

TheFASB issued an FSP on December 15, 2005, “SOP 94-6-1 - Terms of Loan ProductsThat May Give Rise to a Concentration of Credit Risk” which addresses thedisclosure requirements for certain nontraditional mortgage and other loanproducts the aggregation of which may constitute a concentration of credit riskunder existing accounting literature. Pursuant to this FSP, the FASB’s intentions were to reemphasize theadequacy of such disclosures and noted that the recent popularity of certainloan products such as negative amortization loans, high loan-to-value loans,interest only loans, teaser rate loans, option adjusted rate mortgage loans andother loan product types may aggregate to the point of being a concentration ofcredit risk to an issuer and thus may require enhanced disclosures underexisting guidance.  This FSP waseffective immediately.  The adoption ofthis FSP did not have a material impact on the consolidated financialstatements.

**Forward-LookingStatements**

Management’sdiscussion of the Company and management’s analysis of the Company’s operationsand prospects, and other matters, may include forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995 and otherprovisions of federal and state securities laws.  Although the Company believes that theassumptions underlying such forward-looking statements contained in this Reportare reasonable, any of the assumptions could be inaccurate and, accordingly,there can be no assurance that the forward-looking statements included hereinwill prove to be accurate.  The use ofsuch words as “expect,” “anticipate,” “forecast,” and comparable terms shouldbe understood by the reader to indicate that the statement is “forward-looking”and thus subject to change in a manner that can be unpredictable.  Factors that could cause actual results todiffer from the results anticipated, but not guaranteed, in this Report,include (without limitation) economic and social conditions, competition forloans, mortgages, and other financial services and products, changes ininterest rates, unforeseen changes in liquidity, results of operations, andfinancial conditions affecting the Company’s customers, and other risks thatcannot be accurately quantified or completely identified.  Many factors affecting the Company’sfinancial condition and profitability, including changes in economicconditions, the volatility of interest rates, political events and competitionfrom other providers of financial services simply cannot be predicted. Becausethese factors are unpredictable and beyond the Company’s control, earnings mayfluctuate from period to period.  Thepurpose of this type of information is to provide readers with informationrelevant to understanding and assessing the financial condition and results of operationsof the Company, and not to predict the future or to guarantee results.  The Company is unable to predict the types ofcircumstances, conditions and factors that can cause anticipated results tochange.  The Company undertakes noobligation to publish revised forward-looking statements to reflect theoccurrence of changed or unanticipated events, circumstances or results.

12

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** **

**General**

OnJanuary 23, 2004, BG Financial Group, Inc. (“Company”), a bank holding company,acquired all of the outstanding shares of Bank of Greeneville (“Bank”) in a onefor one stock exchange.  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.  The Company and the Bank are located at 3095East Andrew Johnson Highway, Greeneville, Tennessee  37745.

**Liquidity**

At June 30, 2006, the Company had liquid assets ofapproximately $16.3 million in the form of cash and federal funds sold comparedto approximately $18.3 million on December 31, 2005.  Management believes that the liquid assetsare adequate at June 30, 2006. 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 a net loss of $(46,965) or $(.02)per share for the quarter ended June 30, 2006 compared to net income of$118,468 or $.05 per share for the quarter ended June 30, 2005.  Net income for the six months ended June 30,2006 was $118,379 as compared to a net income of $260,983 for the same periodin 2005. Most of the net loss during the quarter is attributable to additionalprovision for loan losses made during the period for potential consumer loanlosses, and additional specific reserves for commercial loans. During thequarter ended June 20, 2006, the Company made a provision of $150,368, whilerecording a benefit of $(237,045) for the same period in 2005.

*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 June 30, 2006 was $1,516,451 compared to $1,367,001 for thesame period in 2005, and total interest expense was $680,093 in 2006 comparedto $522,213 in 2005 for the same period. Interest income for the six months ended June 30, 2006 was $3,166,305,compared to $2,673,943 for the same period in 2005, and total interest expensewas $1,309,090 in 2006 compared to $989,846 in 2005 for the same period.  The Company pursues local depositsaggressively with attractive interest rates, which has resulted in compressionof net interest margin.  The Company benefitedfrom a “catch up” interest payment of $136,267 received from a large loanpreviously in non accrual status during the six months ended June 30, 2006.Based on the Company’s mix of interest earning assets and interest bearingliabilities, management believes that net interest margin should remain stableor 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.

13

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* *

*Benefit from / Provision for Loan Losses*

Theprovision for (benefit from) loan losses represents a charge (or recovery) tooperations necessary to establish an allowance for possible loan losses, whichin management’s evaluation, is adequate to provide coverage for estimatedlosses on outstanding loans and to provide for uncertainties in the economy.The provision for loan losses during the three and six month periods ended June30, 2006 was $150,368 and $99,871, respectively, as compared to the benefitfrom loan losses of $(237,045) and $(368,692) for the same periods in2005.  There were several reasons for thebenefit recognized during the same periods in 2005. One factor was that several loans, which were classified as specialmention, substandard or doubtful as of December 31, 2004, were paid out duringthe first six months of 2005 with minimal losses. In addition, the Bank’s loanportfolio as a whole had decreased significantly during the same periods in2005. During the same periods in 2005, the Bank was under competitivepressure from local credit unions and other local banks offering lower rates onfixed rate loans.  Management made thedecision to let certain outstanding loans refinance at credit unions and otherlocal banks, versus subjecting the bank to the interest rate and credit risksthat would be created to retain the loan.  During the quarter ended June 30,2006, the Bank recorded additional provision for loan losses for potentialconsumer loan losses, and additional specific reserves for commercial loans. Duringthe three and six months ended June 30, 2006, loan charge-offs were $3,231 and$34,135 respectively.  The recoveries forthe three and six month periods ended June 30, 2006 were $0 and $869,respectively.  The allowance for loanlosses was $763,618 at June 30, 2006 as compared to $697,013 at December 31,2005, an increase of 9.6%.  The allowancewas 1.1% of loans at June 30, 2006. Management believes the allowance for loan losses at June 30, 2006 to beadequate and will increase during the year to match normal loan growth.

*Provision (Benefit) for/from Income Taxes*

Due to the Company’s bank subsidiary’s loss in 2001,there was no income tax expense incurred, and a deferred tax asset was recordedwith a valuation allowance.  In 2002,2003, 2004 and 2005, the Company posted pre-tax income of $130,109, $343,206,$731,700 and $927,391, respectively; causing management to believe that it ismore likely than not that it will generate future taxable income to utilize itsnet deferred tax asset. The Company’s provision/(benefit) for/from income taxexpense for the three and six months ended June 30, 2006 was $(44,803) and$61,682, respectively when compared to $166,972 and $191,387 for the sameperiods in 2005.  Management believes theprovision for income taxes for the period ended June 30, 2006 to be adequate.

*Noninterest Income*

The Company’s noninterest income consists of servicecharges on deposit accounts and other fees and commissions.  Total noninterest income for three and sixmonths ended June 30, 2006 was $137,918 and $263,807, respectively whencompared to $152,649 and $249,674 for the same periods in 2005.  The main reason for the increase for the sixmonth period ended June 30, 2006, was an increase in investment salescommissions, as management continues to emphasize growth in non-traditionalproducts and services. Management projects that other fees and commissions andservice charges will increase in 2006.

14

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* *

*Noninterest Expense*

Noninterest expenses totaled $915,675 and $1,841,089for the three and six months ended June 30, 2006, as compared to $949,042 and$1,850,093 for the same periods in 2005.  Salaries and benefits increased $3,402 for the three months ended June30, 2006, while the six months ended June 30, 2006 decreased $34,578, ascompared to the same periods in 2005.  The decrease was mainly due to the non-replacement of personnel inpositions that were not critical to the Company’s operations. Legal andprofessional fees decreased $28,962 for the three months ended June 30, 2006,while increasing $1,348 for the six months ended June 30, 2006, as compared tothe same periods in 2005.  Managementcontinues to incur additional expenses to meet the demands of regulatoryrequirements and strategic plan development.  Other operating expenses decreased $11,592 for the three months endedJune 30, 2006, while increasing $27,344 for the six months ended June 30, 2006,when compared to the same periods in 2005. Most of the other operating expense increase can be attributed toincreases in collection expenses for repossessions and other real estate owned.

**Financial Condition**

Total assets at June 30, 2006, were $90,192,585, anincrease of $2,407,875 or 2.7% compared to 2005 year-end assets of$87,784,710.  Deposits increased to$76,925,845 at June 30, 2006, an increase of $2,223,157 or 3.0% from$74,702,688 at December 31, 2005.  Theincrease in deposits was mainly due to management’s more aggressive efforts toobtain local deposits. Federal Home Loan Bank Stock was $251,400 at June 30,2006 compared to $244,500 at December 31, 2005.

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*

Netloans outstanding totaled $68,442,253 at June 30, 2006 compared to $64,054,625at December 31, 2005.  Commercial andreal estate loan growth accounted for almost all of the approximately $4.4million increase for the first two quarters of 2006. 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 June 30, 2006,total loans 90 days or more past due and still accruing interest were $0, whiletotal loans in non-accrual status were $1,206,561.  At December 31, 2005, total loans 90 days ormore past due and still accruing interest were $78,509, while total loans innon-accrual status were $2,094,311.

*Securities*

Federal Home Loan Bank (FHLB) stock at June 30, 2006had an amortized cost and market value of $251,400 as compared to an amortizedcost and a market value of $244,500 at December 31, 2005.   As a member of the FHLB, the Company isrequired to maintain stock in an amount equal to .15% of total assets.  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.

15

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* *

*Deposits*

Total deposits, which are the principal source offunds for the Company, were $76,925,845 at June 30, 2006, compared to$74,702,688 at December 31, 2005 representing an increase of 3.0%.  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 June 30, 2006 the Company had outstandingadvances of $4,161,818 at the Federal Home Loan Bank.

*Capital*

Equity capital at June 30,2006 was $8,459,203, an increase of $118,380 from $8,340,823 at December 31,2005, due to a net profit of $118,380 for the first six months of 2006.

AtJune 30, 2006, both the Company’s and Bank’s capital ratios were in excess ofthe regulatory minimums.  Those ratiosare as follows:

 
| ** **                       | ** ** | **Required  MinimumRatio** | ** ** | **To be  WellCapitalized** | ** ** | **Bank** | ** ** | **Company** | ** ** |
|----------------------------------|------------|----------------------------|------------|---------------------------------|------------|----------|------------|-------------|------------|
| Tier 1 Leverage  ratio           |       | 4.00%                      |       | 5.00%                           |       | 9.68%    |       | 9.68%       |       |
| Tier 1  risk-based capital ratio |       | 4.00%                      |       | 6.00%                           |       | 11.84%   |       | 11.84%      |       |
| Total risk-based  capital ratio  |       | 8.00%                      |       | 10.00%                          |       | 12.91%   |       | 12.91%      |       |

 

*Liability and Asset Management*

The Company’s Asset/Liability Committee (“ALCO”)actively measures and manages interest rate risk using a process developed bythe Company.  The ALCO is alsoresponsible for implementing the Company’s asset/liability management policies,overseeing the formulation and implementation of strategies to improve balancesheet positioning and earnings, and reviewing the Company’s interest ratesensitivity position.

The primary tool that management uses to measureshort-term interest rate risk is a net interest income simulation modelprepared by an independent correspondent institution.  These simulations estimate the impact thatvarious changes in the overall level of interest rates over one- and two-yeartime horizons would have on net interest income.  The results help the Company developstrategies for managing exposures to interest rate risk.

Like any forecasting technique, interest ratesimulation modeling is based on a large number of assumptions.  In this case, the assumptions relateprimarily to loan and deposit growth, asset and liability prepayments, interestrates and balance sheet management strategies. Management believes that both individually and in the aggregate theassumptions are reasonable. Nevertheless, the simulation modeling process produces only asophisticated estimate, not a precise calculation of exposure.

At June 30, 2006, approximately 59% of theinstitution’s gross loans had adjustable rates. Based on the asset/liability modeling, management believes that theseloans reprice at a faster 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 assetsensitive, management believes that a rising rate environment would have apositive impact on the Company’s net interest margin.  Floors in the majority of the institution’sadjustable rate assets also mitigate interest rate sensitivity in a decreasingrate environment.

16

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* *

*Off-BalanceSheet Arrangements*

The Company, at June 30, 2006, had outstandingunused lines of credit and standby letters of credit that totaled approximately$10,939,000.  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 June 30, 2006, the Company hadestablished with correspondent banks the ability to purchase Federal funds ifneeded.

** **

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

Theinformation set forth on pages 11 through 17 of Item 2, “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” isincorporated herein by reference.

** **

**Item4.  Controls and Procedures**

a)    Evaluation of Disclosure Controls andProcedures

TheCompany maintains disclosure controls and procedures, as defined in Rule13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934(the “Exchange Act”), that are designed to ensure that information required tobe disclosed by it in the reports that it files or submits under the ExchangeAct is recorded, processed, summarized and reported within the time periodspecified in the SEC’s rules and forms and that such information is accumulatedand communicated to the Company’s management, including its Chief ExecutiveOfficer and Chief Financial Officer.  TheCompany carried out an evaluation, under the supervision and with theparticipation of its management, including its Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofits disclosure controls and procedures as of the end of the period covered bythis report.  Based on the evaluation ofthese disclosure controls and procedures, the Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure control andprocedures were effective.

b)   Changes in Internal Controls andProcedures

Therewere no changes in our internal controls over financial reporting during thequarter ended June 30, 2006, that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

17

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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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2005,as filed with the Securities and Exchange Commission on April 17, 2006.

**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 June 30, 2006.

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 SENIOR SECURITIES**

(a)             None.

(b)    None.

**Item4.    SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

(a)             The annual meeting of the Company’s shareholders washeld May 25, 2006.

(b)            The following members of the board ofdirectors were each re-elected as Class II directors to serve for an additionalthree-year term or until their respective successors are duly elected andqualified:

Don E. Claiborne

WendyC. Warner

The term of office for the following members of theboard of directors continued after the meeting: J. Robert Grubbs and Leonard B. Lawson (Class I); William J. Smead andRoger A. Woolsey (Class III).

18

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(c)             (1)  The followingdirectors were elected by the following tabulation:

|                  | ** ** | **Number of** | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **    |
|------------------|------------|---------------|------------|------------|------------|-------------|------------|-------------|------------|---------------|
| ** **       | ** ** | **Shares**    | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | **Broker**    |
| **Name**         | ** ** | **Voting**    | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** |
| ** **       | ** ** | ** **    | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **    |
| Don E. Claiborne |       | 1,234,009     |       | 1,206,799  |       | 27,210      |       | 0           |       | 0             |
| Wendy C. Warner  |       | 1,234,009     |       | 1,206,799  |       | 27,210      |       | 0           |       | 0             |

 

(2)          The ratification of the appointment of PershingYoakley & Associates, P.C. as independent auditors for the Company forfiscal year 2006 was as follows:

|                              | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | **Broker**    |
|------------------------------|------------|------------|------------|-------------|------------|-------------|------------|---------------|
| **Number  of Shares Voting** | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Non-Votes** |
| ** **                   | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **    |
| 1,234,009                    |       | 1,220,199  |       | 1,755       |       | 12,055      |       | 0             |

 

(d)   None.

**Item5.    OTHER INFORMATION**

(a)    None.

(b)    None.

 

19

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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  |       |

 

* Previously filedas an exhibit to a Form 8-K filed by BG Financial Group, Inc. with theSecurities and Exchange Commission on May 21, 2004, and incorporated herein byreference.

** Previously filedas an exhibit to Bank of Greeneville’s Registration Statement on Form 10-SB, asfiled with the Federal Deposit Insurance Corporation on April 27, 2002, andincorporated herein by reference.

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*** ***

***SIGNATURES***

In accordance with therequirements of the Exchange Act, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.
| BG FINANCIAL GROUP,  INC. |
|---------------------------|
| (Registrant)              |
|                      |   |   |
| DATE:                     | August 18, 2006 |   | /s/ J. Robert Grubbs |
|                      |   | J. Robert Grubbs |
|                      |   | President & Chief Executive Officer |
|                      |   |   |
| DATE:                     | August 18, 2006 |   | /s/T. Don Waddell |
|                      |   | T. Don Waddell |
|                      |   | Chief Financial Officer |

 

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