**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION********WASHINGTON, D.C. 20549**

 

***FORM 10-Q***

 

(Mark One)

 

ý       **QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended March 31, 2006**

 

**OR**

 

o        **TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from _____________________ to ________________**

 

**Commissionfile number   000-50771**

 

**BG FINANCIAL 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 Greeneville,  Tennessee** | ** ** | **37745**                             |
| (Address of principal  executive offices)                     |       | (Zip Code)                            |

 

Registrant’stelephone number, including area code:  **(423)636-1555**

 

**NotApplicable**

(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 ý  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 acceleratedfiler o        Acceleratedfiler o          Non-acceleratedfiler ý

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act.) YES o  NOý

 

As of May 17, 2006, there were 2,310,771 sharesof common stock, $0.333 par value, issued and outstanding.

 

 
| **PART  I - FINANCIAL INFORMATION** |
|-------------------------------------|
| ** **                          | ** ** | ** ** |
| **Item 1.**                         | ** ** | **Financial Statements.** |
|                                |   |   |
|                                |   | The unaudited consolidated financial statements of  the Registrant and its wholly owned subsidiary are as follows: |
|                                |   |   |
|                                |   | Consolidated Balance Sheets  - March 31, 2006 and December 31, 2005. |
|                                |   |   |
|                                |   | Consolidated Statements of  Income - For the three months ended March 31, 2006 and 2005. |
|                                |   |   |
|                                |   | Consolidated Statements of  Cash Flows - For the three months ended March 31, 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.** |

 

 

**BGFINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF FINANCIALCONDITION**

 

**Part I. FINANCIALINFORMATION**

 

**Item 1. Financial Statements**

 
|                                                                                                                                                               |   | As of          |       | As of             |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|------------|-------------------|--------|
|                                                                                                                                                               |   | March 31, 2006 |       | December 31, 2005 |   |
|                                                                                                                                                               |   | (Unaudited)    |       |              |   |
| **ASSETS**                                                                                                                                                         |   |           |       |              |   |   |
|                                                                                                                                                               |   |           |       |              |   |   |
| Cash and due  from banks                                                                                                                                           |   | $              | 6,038,209  |              |   | $ | 4,716,153 |   |   |
| Federal funds  sold                                                                                                                                                |   |           | 8,625,762  |              |   |   | 13,557,689 |   |   |
| Cash and cash  equivalents                                                                                                                                         |   |           | 14,663,971 |              |   |   | 18,273,842 |   |   |
| Federal Home  Loan Bank stock, at cost                                                                                                                             |   |           | 247,900    |              |   |   | 244,500 |   |   |
| Loans, net of  allowance for loan losses of $616,481 in 2006 and $697,013 in 2005                                                                                  |   |           | 65,817,765 |              |   |   | 64,054,625 |   |   |
| Premises and  equipment, net                                                                                                                                       |   |           | 3,791,306  |              |   |   | 3,777,981 |   |   |
| Accrued income  receivable                                                                                                                                         |   |           | 485,338    |              |   |   | 418,329 |   |   |
| Deferred tax  benefit                                                                                                                                              |   |           | 135,037    |              |   |   | 236,743 |   |   |
| Foreclosed  assets                                                                                                                                                 |   |           | 578,710    |              |   |   | 616,279 |   |   |
| Other assets                                                                                                                                                       |   |           | 184,201    |              |   |   | 162,411 |   |   |
| Total Assets                                                                                                                                                       |   | $              | 85,904,228 |              |   | $ | 87,784,710 |   |   |
|                                                                                                                                                               |   |           |       |              |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                      |   |           |       |              |   |   |   |   |   |
|                                                                                                                                                               |   |           |       |              |   |   |   |   |   |
| **LIABILITIES**                                                                                                                                                    |   |           |       |              |   |   |   |   |   |
| Deposits:                                                                                                                                                          |   |           |       |              |   |   |   |   |   |
| Noninterest-bearing                                                                                                                                                |   |           |       |              |   |   |   |   |   |
| Demand                                                                                                                                                             |   | $              | 8,865,944  |              |   | $ | 8,624,411 |   |   |
| Interest-bearing                                                                                                                                                   |   |           |       |              |   |   |   |   |   |
| Money market,  interest checking and savings                                                                                                                       |   |           | 26,416,435 |              |   |   | 22,070,383 |   |   |
| Time deposits                                                                                                                                                      |   |           | 37,380,634 |              |   |   | 44,007,894 |   |   |
| Total Deposits                                                                                                                                                     |   |           | 72,663,013 |              |   |   | 74,702,688 |   |   |
| Accrued interest                                                                                                                                                   |   |           | 398,410    |              |   |   | 353,534 |   |   |
| Other  liabilities                                                                                                                                                 |   |           | 128,527    |              |   |   | 208,613 |   |   |
| Federal Home  Loan Bank advances                                                                                                                                   |   |           | 4,208,111  |              |   |   | 4,179,052 |   |   |
| Total  Liabilities                                                                                                                                                 |   |           | 77,398,061 |              |   |   | 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 March 31, 2006 and 2,310,771 shares at December 31, 2005 |   |           | 770,256    |              |   |   | 770,256 |   |   |
| Additional  paid-in capital                                                                                                                                        |   |           | 6,932,307  |              |   |   | 6,932,307 |   |   |
| Retained  earnings                                                                                                                                                 |   |           | 803,604    |              |   |   | 638,260 |   |   |
| Total  Stockholders’ Equity                                                                                                                                   |   |           | 8,506,167  |              |   |   | 8,340,823 |   |   |
| Total  Liabilities and Stockholders’ Equity                                                                                                                   |   | $              | 85,904,228 |              |   | $ | 87,784,710 |   |   |

 

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

 

1

 

**BG FINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

 
| ** **                                            | ** ** | Three Months Ended | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|
| ** **                                            | ** ** | March 31, 2006     | ** ** | March 31, 2005 | ** ** |
| **Interest  and dividend income:**                    | ** ** | ** **         | ** ** | ** ** | ** ** |
| Loans, including  fees                                |       | $                  | 1,520,516  |   | $ | 1,250,563 |   |
| Dividends on  Federal Home Loan Bank stock            |       |               | 3,467      |   |   | 2,513 |   |
| Federal funds  sold and other                         |       |               | 125,871    |   |   | 53,866 |   |
| Total interest  and dividend income                   |       |               | 1,649,854  |   |   | 1,306,942 |   |
|                                                  |       |               |       |   |   |   |   |
| **Interest  expense:**                                | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                                              |       |               | 595,134    |   |   | 432,357 |   |
| Borrowed funds                                        |       |               | 33,863     |   |   | 35,275 |   |
| Total interest  expense                               |       |               | 628,997    |   |   | 467,632 |   |
| Net interest  income before provision for loan losses |       |               | 1,020,857  |   |   | 839,310 |   |
| ** **                                            | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Provision  for (benefit from) loan losses**         |       |               | (50,497    | ) |   | (131,647 | ) |
| Net interest  income after provision                  | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| for (benefit  from) loan losses                       |       |               | 1,071,354  |   |   | 970,957 |   |
|                                                  |       |               |       |   |   |   |   |
| **Noninterest  income:**                              |       |               |       |   |   |   |   |
| Service charges  on deposit accounts                  |       |               | 62,684     |   |   | 53,820 |   |
| Fees from  origination of mortgage loans              |       |               | 16,091     |   |   | 21,836 |   |
| Investment sales  commissions                         |       |               | 43,472     |   |   | 16,660 |   |
| Other                                                 |       |               | 3,642      |   |   | 4,709 |   |
| Total  noninterest income                             |       |               | 125,889    |   |   | 97,025 |   |
|                                                  |       |               |       |   |   |   |   |
| **Noninterest  expenses:**                            |       |               |       |   |   |   |   |
| Compensation and  benefits                            |       |               | 461,095    |   |   | 499,075 |   |
| Occupancy  expenses                                   |       |               | 114,194    |   |   | 119,225 |   |
| Marketing                                             |       |               | 19,727     |   |   | 26,978 |   |
| Data processing                                       |       |               | 50,534     |   |   | 45,156 |   |
| Legal and  professional expenses                      |       |               | 115,811    |   |   | 85,501 |   |
| Other operating  expenses                             |       |               | 164,053    |   |   | 125,117 |   |
| Total  noninterest expense                            |       |               | 925,414    |   |   | 901,052 |   |
| **Income  before income taxes**                       |       |               | 271,829    |   |   | 166,930 |   |
|                                                  |       |               |       |   |   |   |   |
| Income tax  expense                                   |       |               | 106,485    |   |   | 24,415 |   |
|                                                  |       |               |       |   |   |   |   |
| **Net  income**                                       |       | $                  | 165,344    |   | $ | 142,515 |   |
|                                                  |       |               |       |   |   |   |   |
| Earnings per  share                                   |       | $                  | .07        |   | $ | .06 |   |
|                                                       |            |                    |            |  |  |  |  |  |  |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

2

 

** BG FINANCIALGROUP, INC. AND SUBSIDIARY**

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                                         |   | Three Months Ended |       |
|----------------------------------------------------------------------------------------------|--------|--------------------|------------|
|                                                                                         |   | March 31, 2006     |       | March 31, 2005 |   |
|                                                                                         |   |               |       |   |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                   |   |               |       |   |   |
| Net income                                                                                   |   | $                  | 165,344    |   |   | $ | 142,515  |   |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |   |               |       |   |   |   |   |   |   |
| Provision for  (benefit from) loan losses                                                    |   |               | (50,497    | ) |   |   | (131,647 | ) |   |
| Depreciation                                                                                 |   |               | 63,712     |   |   |   | 76,418  |   |   |
| Realized (gain)  loss on sales of foreclosed assets                                          |   |               | 5,309      |   |   |   | (3,913 | ) |   |
| Deferred income  tax expense                                                                 |   |               | 101,706    |   |   |   | 25,535 |   |   |
| Net change in:                                                                               |   |               |       |   |   |   |   |   |   |
| Accrued income  receivable                                                                   |   |               | (67,009    | ) |   |   | (4,654 | ) |   |
| Other assets                                                                                 |   |               | 41,412     |   |   |   | (110,055 | ) |   |
| Other  liabilities                                                                           |   |               | (98,411    | ) |   |   | (365,269 | ) |   |
| Net cash  provided by (used in) operating activities                                         |   |               | 161,566    |   |   |   | (371,070 | ) |   |
|                                                                                         |   |               |       |   |   |   |   |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                   |   |               |       |   |   |   |   |   |   |
| Federal Home  Loan Bank stock purchases                                                      |   |               | (3,400     | ) |   |   | (2,500 | ) |   |
| Proceeds from  sales of foreclosed assets                                                    |   |               | 68,775     |   |   |   | 125,888 |   |   |
| Loan  originations and principal collections, net                                            |   |               | (1,749,158 | ) |   |   | 3,297,183 |   |   |
| Additions to  premises and equipment                                                         |   |               | (77,037    | ) |   |   | (77,432 | ) |   |
| Net cash provided  (used) by investing activities                                            |   |               | (1,760,820 | ) |   |   | 3,343,139 |   |   |
|                                                                                         |   |               |       |   |   |   |   |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                   |   |               |       |   |   |   |   |   |   |
| Net change in  deposits                                                                      |   |               | 4,587,584  |   |   |   | 575,388  |   |   |
| Net change in  certificates of deposit                                                       |   |               | (6,627,260 | ) |   |   | (2,874,794 | ) |   |
| Federal Home  Loan Bank advances                                                             |   |               | 75,000     |   |   |   | - |   |   |
| Federal Home  Loan Bank repayments                                                           |   |               | (45,941    | ) |   |   | (44,559 | ) |   |
| Net cash  provided (used) by financing activities                                            |   |               | (2,010,617 | ) |   |   | (2,343,965 | ) |   |
|                                                                                         |   |               |       |   |   |   |   |   |   |
| Net change in  cash and cash equivalents                                                     |   |               | (3,609,871 | ) |   |   | 628,104 |   |   |
|                                                                                         |   |               |       |   |   |   |   |   |   |
| Cash and cash  equivalents at beginning of year                                              |   |               | 18,273,842 |   |   |   | 13,158,516 |   |   |
|                                                                                         |   |               |       |   |   |   |   |   |   |
| Cash and cash  equivalents at end of year                                                    |   | $                  | 14,663,971 |   |   | $ | 13,786,620 |   |   |
|                                                                                         |   |               |       |   |   |   |   |   |   |
| **SUPPLEMENTARY  CASH FLOW INFORMATION:**                                                    |   |               |       |   |   |   |   |   |   |
| Interest paid on  deposits and borrowed funds                                                |   | $                  | 584,121    |   |   | $ | 476,605 |   |   |
| Income taxes  paid                                                                           |   | $                  | -          |   |   | $ | 126,000 |   |   |

 

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

 

3

 

**BG FINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)**

**(Unaudited)**

 
|                                                               |   | Three Months Ended |    |
|--------------------------------------------------------------------|--------|--------------------|---------|
|                                                               |   | March 31, 2006     |    | March 31, 2005 |   |
|                                                               |   |               |    |   |   |
| **SUPPLEMENTAL  SCHEDULE OF NON-CASH ACTIVITIES:**                 |   |               |    |   |   |
| Foreclosed assets  sold during the year and financed through loans |   | $                  | 128,450 |   |   | $ | - |   |   |
| Loans moved to  foreclosed assets                                  |   | $                  | 164,965 |   |   | $ | 108,988 |   |   |

 

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

 

4

 

**BGFINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville,Tennessee**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

*Nature of Business*:

 

BG Financial Group, Inc. (the “Company”)is a bank holding company whose business is conducted by its wholly-ownedsubsidiary, Bank of Greeneville (the “Bank”). Bank of Greeneville is engaged inthe business of originating loans primarily within its lending area,Greeneville and Greene County in Tennessee. The Bank obtains deposits bothinside and outside of its primary lending area. The Company was organized inOctober 2003. The Company had minimal assets, liabilities or operations untilJanuary, 2004, when it acquired the Bank in a Plan of Share Exchange wherebythe stockholders exchanged their shares of ownership in the Bank for shares ofownership in the Company on a one-for-one basis. As a part of the Plan of ShareExchange, the Bank became a wholly owned subsidiary of the Company.

 

The following is a description of thesignificant policies used in the preparation of the accompanying consolidatedfinancial statements.

 

*Basis of Presentation:*

 

These consolidated financial statementsinclude the accounts of the BG Financial Group, Inc. Significant intercompanytransactions and accounts are eliminated in consolidation.

 

The accompanying unaudited consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financial informationand in accordance with the instructions to Form 10-Q and Article 10 ofRegulation S-X as promulgated by the Securities and Exchange Commission (“SEC”).Accordingly, they do not include all the information and footnotes required byaccounting principles generally accepted in the United States for completefinancial statements. In the opinion of management, all adjustments (none ofwhich were other than normal recurring accruals) considered necessary for afair presentation of the financial position and results of operations for theperiods presented have been included. Operating results for the three monthsended March 31, 2006 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2006. For further information, referto the consolidated financial statements and note thereto included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2005. Certainamounts from prior period financial statements have been reclassified toconform to current year’s presentation.

 

*Use of Estimates:*

 

The preparation of consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosures of contingentassets and liabilities as of the balance sheet date and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates. The most significant management accounting estimate isthe appropriate level for the allowance for loan losses. The allowance for loanlosses 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 evaluationis inherently subjective as it requires estimates that are susceptible tosignificant revision as more information becomes available.

 

5

 

**Note 2.****           ****Stock Options and Awards**

 

On July 1, 2005, the Company adopted the provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), *Share-Based Payment*(“SFAS No. 123R”). Thisstatement supercedes APB Opinion No. 25, “Accounting for Stock Issued toEmployees” (APB 25), which the Company had followed until the adoption of SFASNo. 123R. The revised statement addresses the accounting for share-basedpayment transactions with employees and other third parties, eliminates theability to account for share-based compensation transactions using APB 25 andrequires that the compensation costs relating to such transactions berecognized in the consolidated statement of income. In anticipation of adoptingSFAS No. 123R, on May 17, 2005 the Board of Directors approved that allnon-vested employee stock options granted to become fully vested andexercisable as of that date in order to avoid recognition of compensation costsin the consolidated statement of income in future periods. Any stock optionsgranted after May 17, 2005 are fully exercisable on the date granted. Accordingly,no compensation cost was recognized prior to the adoption of SFAS No. 123R onJuly 1, 2005. No additional options were granted during the period ended March31, 2006, therefore no compensation cost is recognized in the consolidated statementof income for the period ended March 31, 2006. The following table illustratesthe effect on net income and earnings per share if the Company had applied thefair value recognition provisions of SFAS No. 123R to stock-based employeecompensation for comparative periods ended March 31.

 
|                                                                                                                                          |       | Three-Month Period |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
|                                                                                                                                          |       | Ended March 31     |       |
|                                                                                                                                          |       | (Unaudited)        |       |
|                                                                                                                                          |       | 2006               |       | 2005 |   |
| ** **                                                                                                                                    | ** ** | ** **         | ** ** | ** ** | ** ** |
| Net income, as reported                                                                                                                       |       | $                  | 165,344    |   |   | $ | 142,515 |   |   |
| ** **                                                                                                                                    | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       |               | -          |   |   |   | 41,901 |   |   |
| ** **                                                                                                                                    | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pro forma net income                                                                                                                          |       | $                  | 165,344    |   |   | $ | 100,614 |   |   |
| ** **                                                                                                                                    | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Earnings per share                                                                                                                            |       |               |       |   |   |   |   |   |   |
| Basic – as reported                                                                                                                      |       | $                  | .07        |   |   | $ | .06 |   |   |
| ** **                                                                                                                                    | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic – pro forma                                                                                                                        |       | $                  | .07        |   |   | $ | .04 |   |   |
| ** **                                                                                                                                    | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Diluted – as reported                                                                                                                    |       | $                  | .07        |   |   | $ | .04 |   |   |
| ** **                                                                                                                                    | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Diluted – pro forma                                                                                                                      |       | $                  | .07        |   |   | $ | .04 |   |   |

 

6

 

**Note 3.   Earnings Per Share of Common Stock**

 

Basic earnings per share(EPS) of common stock is computed by dividing net income by the weightedaverage number of common shares outstanding during the period. Diluted earningsper share of common stock is computed by dividing net income by the weightedaverage number of common shares and potential dilutive common sharesoutstanding during the period. Stock options are regarded as potential commonshares. Potential common shares are computed using the treasury stock method.For the three months ended March 31, 2006, 85,344 options are excluded from theeffect of dilutive securities because they are anti-dilutive; 22,924 optionsare similarly excluded from the effect of dilutive securities for the threemonths ended March 31, 2005.

 

The following is areconciliation of the numerators and denominators used in the basic and dilutedearnings per share computations for the three months ended March 31, 2006 and2005:

 
|                                                             |   | Three Months Ended  March 31, |    |
|------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                             |   | 2006                          |    | 2005 |   |
|                                                             |   | Income                        |    | Shares |   | Income |   | Shares |   |
|                                                             |   | (Numerator)                   |    | (Denominator) |   | (Numerator) |   | (Denominator) |   |
|                                                             |   |                          |    |   |   |   |   |   |   |
| Basic EPS                                                        |   |                          |    |   |   |   |   |   |   |
| Income available  to common stockholders                         |   | $                             | 165,344 |   |   |   | 2,310,771 |   |   | $ | 142,515 |   |   |   | 2,306,775 |   |   |
|                                                             |   |                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Effect of  dilutive securities Stock options outstanding         |   |                          | -       |   |   |   | 157,285 |   |   |   | - |   |   |   | 87,621 |   |   |
|                                                             |   |                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted EPS                                                      |   |                          |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income available  to commonshareholders plus assumed conversions |   | $                             | 165,344 |   |   |   | 2,468,056 |   |   | $ | 142,515 |   |   |   | 2,394,396 |   |   |

 

7

 

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

 

**Impactof Inflation**

 

The financial statements and related financial datapresented herein have been prepared in accordance with accounting principlesgenerally accepted in the United States and practices within the bankingindustry that require the measurement of financial position and operatingresults in terms of historical dollars without considering the changes in therelative purchasing power of money over time due to inflation. Unlike mostindustrial companies, virtually all the assets and liabilities of a financialinstitution are monetary in nature. As a result, interest rates have a moresignificant impact on a financial institution’s performance than the effects ofgeneral levels of inflation.

 

**Critical Accounting Estimates**

 

The Company follows generally accepted accounting principles that arerecognized in the United States, along with general practices within thebanking industry. In connection with the application of those principles andpractices, we have made judgments and estimates which, in the case of ourallowance for loan and lease losses (ALLL), are material to the determinationof our financial position and results of operation. Other estimates relate tothe valuation of assets acquired in connection with foreclosures or insatisfaction of loans, and realization of deferred tax assets.

 

** ****Recent Accounting Pronouncements**

 

FASB Staff Position on FAS No. 115-1 and FAS No. 124-1(“the FSP”), “The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments,” was issued in November 2005 and addressesthe determination of when an investment is considered impaired; whether theimpairment is other-than-temporary; and how to measure an impairment loss. TheFSP also addresses accounting considerations subsequent to the recognition ofan other-than-temporary impairment on a debt security, and requires certaindisclosures about unrealized losses that have not been recognized asother-than-temporary impairments. The FSP replaces the impairment guidance onEmerging Issues Task Force (EITF) Issue No. 03-1 with references to existingauthoritative literature concerning other-than-temporary determinations. Underthe FSP, losses arising from impairment deemed to be other-than-temporary, mustbe recognized in earnings at an amount equal to the entire difference betweenthe securities cost and its fair value at the financial statement date, withoutconsidering partial recoveries subsequent to that date. The FSP also requiredthat an investor recognize an other-than-temporary impairment loss when adecision to sell a security has been made and the investor does not expect thefair value of the security to fully recover prior to the expected time of sale.The FSP is effective for reporting periods beginning after December 15, 2005. Theadoption of this statement did not have a material impact on the Company’sconsolidated financial statements.

 

In December 2004, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 123 (revised 2004), *Share-Based Payment* (“SFAS No. 123R”),which revised SFAS No. 123, “Accounting for Stock-Based Compensation.”  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. The revised statement was effective as of thefirst interim or annual period beginning after June 15, 2005. In anticipationof adopting SFAS No. 123R, the Company elected to immediately vest allremaining stock options during 2005 to avoid the recognition of compensationcosts in the consolidated statement of income in future periods.

 

8

 

The FASB issued an FSP on December 15, 2005, “SOP94-6-1 - Terms of Loan Products That May Give Rise to a Concentration of CreditRisk” which addresses the disclosure requirements for certain nontraditionalmortgage and other loan products the aggregation of which may constitute aconcentration of credit risk under existing accounting literature. Pursuant tothis FSP, the FASB’s intentions were to reemphasize the adequacy of suchdisclosures and noted that the recent popularity of certain loan products suchas negative amortization loans, high loan-to-value loans, interest only loans,teaser rate loans, option adjusted rate mortgage loans and other loan producttypes may aggregate to the point of being a concentration of credit risk to anissuer and thus may require enhanced disclosures under existing guidance. ThisFSP was effective immediately. The adoption of this FSP did not have a materialimpact on the consolidated financial statements.

 

**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 assumptionsunderlying such forward-looking statements contained in this Report arereasonable, any of the assumptions could be inaccurate and, accordingly, therecan be no assurance that the forward-looking statements included herein willprove to be accurate. The use of such words as “expect,” “anticipate,” “forecast,”and comparable terms should be understood by the reader to indicate that thestatement is “forward-looking” and thus subject to change in a manner that canbe unpredictable. Factors that could cause actual results to differ from theresults anticipated, but not guaranteed, in this Report, include (withoutlimitation) economic and social conditions, competition for loans, mortgages,and other financial services and products, changes in interest rates,unforeseen changes in liquidity, results of operations, and financialconditions affecting the Company’s customers, and other risks that cannot beaccurately quantified or completely identified. Many factors affecting theCompany’s financial 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. 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 predictthe types of circumstances, conditions and factors that can cause anticipatedresults to change. The Company undertakes no obligation to publish revisedforward-looking statements to reflect the occurrence of changed orunanticipated events, circumstances or results.

 

**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 a Tennessee-chartered, FDIC-insured,non-Member commercial bank offering a wide range of banking services, includingchecking, savings, and money market deposit accounts, certificates of depositand loans for consumers, commercial and real estate purposes, and is theprincipal business of the Company. The Company and the Bank are located at 3095East Andrew Johnson Highway, Greeneville, Tennessee  37745.

 

9

 

**Liquidity**

 

At March 31, 2006, the Company had liquid assets ofapproximately $14.7 million in the form of cash and federal funds sold comparedto approximately $18.3 million on December 31, 2005. Management believes thatthe liquid assets are adequate at March 31, 2006. Additional liquidity shouldbe provided by the growth in deposit accounts and loan repayments. The Companyalso has the ability to purchase federal funds and is a member of the FederalHome Loan Bank of Cincinnati that will provide a credit line if necessary. Managementis not aware of any trends, events or uncertainties that are reasonably likelyto have a material impact on the Company’s short term or long term liquidity.

 

**Resultsof Operations**

 

The Company had net income of $165,344 or $.07 pershare for the quarter ended March 31, 2006 compared to net income of $142,515or $.06 per share for the quarter ended March 31, 2005 after employee salariesand other operating expenses.

 

*NetInterest 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 for the three months ended March 31, 2006was $1,649,854 compared to $1,306,942 for the same period in 2005, and totalinterest expense was $628,997 in 2006 compared to $467,632 in 2005 for thosesame periods. The Company pursues local deposits aggressively, which hasresulted in compression of net interest margin. The Company benefited from a “catchup” interest payment of $136,267 received from a large loan previously in nonaccrual status during the three months ended March 31, 2006. Based on theCompany’s mix of interest earning assets and interest bearing liabilities,management believes that net interest margin should remain stable or begin toincrease slightly for the remainder of the year. This assumption is based on acontinued rising interest rate environment. If interest rates remain stable orbegin to decline, net interest margin could decline due to competitive pricingof both loans and interest bearing deposits.

 

*Benefit from / Provision for 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 benefit from loan losses duringthe three-month period ended March 31, 2006 was $(50,497) as compared to$(131,647) for the same three-month period ended March 31, 2005. The benefitfrom loan losses $(50,497) and $(131,647) for the three months ending March 31, 2006 and 2005, respectively, had apositive effect on income. The benefit from loan losses for the three monthsended March 31, 2006, represents management’s evaluation of further improvementin the overall quality of the loan portfolio. During the three months endedMarch 31, 2006, loan charge-offs were $30,903. The recoveries for thethree-month period ended March 31, 2006 were $869. The allowance for loanlosses was $616,481 at March 31, 2006 as compared to $697,013 at December 31,2005, a decrease of 11.6%. The 11.6% decrease in the allowance for loan lossesis due mainly to improvement in the quality of the loan portfolio. Theallowance was .92% of loans at March 31, 2006. Management believes theallowance for loan losses at March 31, 2006 to be adequate.

 

10

 

*Provisionsfor 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 postedpre-tax income of $130,109, $343,206, $731,700 and $927,391, respectively;causing management to believe that it is more likely than not that it willgenerate future taxable income to utilize its net deferred tax asset. TheCompany’s provision for income tax expense for the three months ended March 31,2006 and 2005 was $106,485 and $24,415, respectively. Management believes theprovision for income taxes at March 31, 2006 to be adequate.

 

*Noninterest Income*

 

The Company’s noninterest income consists of servicecharges on deposit accounts and other fees and commissions. Total noninterestincome for three months ended March 31, 2006 was $125,889 compared to $97,025for the same period in 2005. The main reasons for the increase were an increasein investment sales commissions, and an increase in service charges on depositsas management continues to emphasize growth in non-traditional products andservices. Even though the Company experienced negative asset growth during thequarter ending March 31, 2006, management projects that other fees andcommissions and service charges will increase in 2006. This assumption issupported by the 45.9% increase for the three months ended March 31, 2006compared to the same period in 2005.

 

*NoninterestExpense*

 

Noninterest expenses totaled $925,414 for the threemonths ended March 31, 2006 as compared to $901,052 for the three months endedMarch 31, 2005 and consisted of employee costs, occupancy expense and otheroperating expenses. Salaries and employee benefits decreased from $499,075 forthe three months ended March 31, 2005 when compared to $461,095 for the threemonths ended March 31, 2006 representing a 7.6% decrease. This decrease wasmainly due to the non-replacement of personnel in positions that were not criticalto the Company’s operations. Legal and professional fees increased $30,310 to$115,811 for the three month ended March 31, 2006 from $85,501 for the sameperiod in 2005, as management continues to strengthen all departments of theCompany to meet the new demands of regulatory requirements and strategic plandevelopment. Other operating expenses increased $38,936 to $164,053 for thethree months ended March 31, 2006 from $125,117 for the same period in 2005. Mostof the other operating expense increase can be accounted for by increases incollection expenses for repossessions and other real estate owned.

 

**FinancialCondition**

 

Total assets at March 31,2006, were $85,904,228, a decrease of $1,880,482 or 2.1% compared to 2005year-end assets of $87,784,710. Deposits decreased to $72,663,013 at March 31,2006, a decrease of $2,039,675 or 2.7% from $74,702,688 at December 31, 2005. Thedecrease in deposits was mainly due to management’s efforts through ALCOCommittee meetings to best match liquidity and profitability. Federal Home LoanBank Stock was $247,900 at March 31, 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 componentsof loans and sources of funds are managed in an integrated manner with themanagement of interest rate risk, liquidity, and capital. These components arediscussed below.

 

11

 

*Loans*

 

Net loans outstanding totaled $65,817,765 at March31, 2006 compared to $64,054,625 at December 31, 2005. Commercial and realestate loan growth accounted for almost all of the approximately $1.8 millionincrease for the first quarter of 2006.

 

Management feels the overall quality of loans remainssolid. 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, 2006, total loans 90 days or more past dueand still accruing interest were $7,915, while total loans 90 days or more pastdue and in non-accrual status were $499,384. At December 31, 2005, total loans90 days or more past due and still accruing interest were $78,509, while totalloans 90 days or more past due and in non-accrual status were $2,094,311.

 

*Securities*

 

FederalHome Loan Bank (FHLB) stock at March 31, 2006 had an amortized cost and marketvalue of $247,900 as compared to an amortized cost and a market value of$244,500 at December 31, 2005. As a member of the FHLB, the Company is requiredto maintain stock in an amount equal to .15% of total assets. Federal Home LoanBank stock is carried at cost under the available-for-sale category. FederalHome Loan Bank stock is maintained by the Company at par value of one hundreddollars per share.

 

*Deposits*

 

Total deposits, which are the principal source offunds for the Company, were $72,663,013 at March 31, 2006, compared to$74,702,688 at December 31, 2005 representing a decrease of 2.7%. As previouslystated the decline in total deposits is mainly due to management’s effortsthrough ALCO committee meetings to best match liquidity and profitability. TheCompany has targeted local consumers, professional and commercial businesses asits central clientele, therefore, deposit instruments in the form of demanddeposits, savings accounts, money market demand accounts, NOW accounts,certificates of deposit and individual retirement accounts are offered tocustomers. The Company established a line of credit with the Federal Home LoanBank secured by a blanket-pledge of 1-4 family residential mortgage loans. AtMarch 31, 2006 the Company had outstanding advances of $4,208,111 at theFederal Home Loan Bank.

 

*Capital*

 

Equity capital at March31, 2006 was $8,506,167, an increase of $165,344 from $8,340,823 at December31, 2005, due to a net profit of $165,344 for the first quarter of 2006.

 

AtMarch 31, 2006, both the Company’s and Bank’s capital ratios were in excess ofthe regulatory minimums. Those ratios are as follows:

 
| ** **                       | ** ** | **Required  MinimumRatio** | ** ** | **To be  WellCapitalized** | ** ** | **Bank** | ** ** | **Company** | ** ** |
|----------------------------------|------------|----------------------------|------------|----------------------------|------------|----------|------------|-------------|------------|
| Tier 1 Leverage  ratio           |       | 4.00%                      |       | 5.00%                      |       | 9.88%    |       | 9.79%       |       |
| Tier 1  risk-based capital ratio |       | 4.00%                      |       | 6.00%                      |       | 12.22%   |       | 12.24%      |       |
| Total risk-based  capital ratio  |       | 8.00%                      |       | 10.00%                     |       | 13.11%   |       | 13.13%      |       |

 

12

 

*Liabilityand Asset Management*

 

The Company’sAsset/Liability Committee (“ALCO”) actively measures and manages interest raterisk using a process developed by the Company. The ALCO is also responsible forimplementing the Company’s asset/liability management policies, overseeing theformulation and implementation of strategies to improve balance sheetpositioning and earnings, and reviewing the Company’s interest rate sensitivityposition.

 

The primary tool thatmanagement uses to measure short-term interest rate risk is a net interestincome simulation model prepared by an independent correspondent institution. Thesesimulations estimate the impact that various changes in the overall level ofinterest rates over one- and two-year time horizons would have on net interestincome. The results help the Company develop strategies for managing exposuresto interest rate risk.

 

Like any forecastingtechnique, interest rate simulation modeling is based on a large number ofassumptions. In this case, the assumptions relate primarily to loan and depositgrowth, asset and liability prepayments, interest rates and balance sheetmanagement strategies. Management believes that both individually and in theaggregate the assumptions are reasonable. Nevertheless, the simulation modelingprocess produces only a sophisticated estimate, not a precise calculation ofexposure.

 

At March 31, 2006,approximately 59% of the institution’s gross loans had adjustable rates. Basedon the asset/liability modeling, management believes that these loans repriceat a faster pace than liabilities held at the institution. Because the majorityof the institution’s liabilities are 12 months and under and the gap inrepricing is asset sensitive, management believes that a rising rateenvironment would have a positive impact on the Company’s net interest margin. Floorsin the majority of the institution’s adjustable rate assets also mitigate interestrate sensitivity in a decreasing rate environment.

 

*Off-Balance Sheet Arrangements*

 

TheCompany, at March 31, 2006, had outstanding unused lines of credit and standbyletters of credit that totaled approximately $10,171,000. These commitmentshave fixed maturity dates and many will mature without being drawn upon,meaning that the total commitment does not necessarily represent the futurecash requirements. The Company has the ability to liquidate Federal funds soldor, on a short-term basis, to purchase Federal funds from other banks and toborrow from the Federal Home Loan Bank. At March 31, 2006, the Company hadestablished with correspondent banks the ability to purchase Federal funds ifneeded.

 

**Item 3. Quantitative and QualitativeDisclosures about Market Risk**

 

Theinformation set forth on pages 8 through 13 of Item 2, “MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” is incorporatedherein by reference.

 

**Item 4. Controls and Procedures**

 

a)             Evaluationof Disclosure Controls and Procedures

 

The Company maintains disclosure controls andprocedures, as defined in Rule 13a-15(e) and 15d-15(e) promulgated under theSecurities Exchange Act of 1934 (the “Exchange Act”), that are designed toensure that information required to be disclosed by it in the reports that itfiles or submits under the Exchange Act is recorded, processed, summarized andreported within the time period specified in the SEC’s rules and forms and thatsuch information is accumulated and communicated to the Company’s management,including its Chief Executive Officer and Chief Financial Officer. The Companycarried out an evaluation, under the supervision and with the participation ofits management, including its Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of its disclosurecontrols and procedures as of the end of the period covered by this report. Basedon the evaluation of these disclosure controls and procedures, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure control and procedures were effective.

 

13

 

b)            Changes in Internal Controls and Procedures

 

There were no changes in our internal controls overfinancial reporting during the quarter ended March 31, 2006, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

14

 

**PART II - OTHER INFORMATION**

 

**Item1.    LEGAL PROCEEDINGS**

 

None.

 

**Item1A. RISK FACTORS**

 

There have been no materialchanges to our risk factors as previously disclosed in Part I, Item 1A    of our Annual Report on Form 10-K for thefiscal year ended December 31, 2005, as filed with   the Securities and Exchange Commission on April 17, 2006.

 

**Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS**

 

(a)          None.

 

(b)         Not applicable.

 

(c)          No repurchases of Company securities weremade during the quarter ended March 31, 2006.

 

The Company’s ability to pay dividends is derived fromthe income of the Bank. The Bank’s ability to declare and pay dividends islimited by its obligations to maintain sufficient capital and by other generalrestrictions on its dividends that are applicable to banks that are regulatedby the FDIC and the Department of Financial Institutions. In addition, the FederalReserve Board may impose restrictions on the Company’s ability to paydividends on its common stock. As a result, the Company cannot assure itsshareholders that it will declare or pay dividends on shares of its commonstock in the future.

 

**Item 3.    DEFAULTS UPONSENIOR SECURITIES**

 

(a)   None

 

(b)   None

 

**Item 4.    SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**Item 5.    OTHERINFORMATION**

 

(a)   None.

 

(b)   None.

 

15

 

**Item 6.    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 filed as an exhibit to a Form 8-K filedby BG Financial Group, Inc. with the Securities and Exchange Commission on May21, 2004, and incorporated herein 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.

 

16

 

***SIGNATURES***

 

In accordance with the requirements of the ExchangeAct, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
| BG FINANCIAL  GROUP, INC. |
|---------------------------|
| (Registrant)              |
|                      |   |   |
|                      |   |   |
| DATE:                     | May 22, 2006 |   | /s/ J. Robert Grubbs |   |
|                      | J. Robert Grubbs |   |
|                      | President & Chief  Executive Officer |   |
|                      |   |   |
|                      |   |   |
| DATE:                     | May 22, 2006 |   | /s/ T. Don Waddell |   |
|                      | T. Don Waddell |   |
| ** **                | Chief  Financial Officer | ** ** |

 

17