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

**FORM 10-Q**

** (Mark One)**

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

**For thequarterly period ended September 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 registrant as specified in its charter)
| **Tennessee**                                                 | ** ** | **20-0307691**                        |
|---------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of                              |       | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                               |       |                                  |
|                                                          |       |                                  |
| **3095  East Andrew Johnson Highway  Greeneville, Tennessee** | ** ** | **37745**                             |
| (Address of  principal executive offices)                     |       | (Zip Code)                            |

 

Registrant’s telephone number, including areacode:  **(423) 636-1555**

 

**NotApplicable**

(Former name, formeraddress 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 acceleratedfiler o        Acceleratedfiler o          Non-acceleratedfiler 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  November1,  2006, there were 2,310,771 shares ofcommon 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 - September 30, 2006 and  December 31, 2005.                                 |   |
|                                |                                                                                                     |   |
|                                | Consolidated Statements of Income - For the nine  months ended September 30, 2006 and 2005.              |   |
|                                |                                                                                                     |   |
|                                | Consolidated  Statements of Income - For the three months ended September 30, 2006 and  2005.            |   |
|                                |                                                                                                     |   |
|                                | Consolidated Statements of Cash Flows - For the nine  months ended September 30, 2006 and 2005.          |   |
|                                |                                                                                                     |   |
|                                | Notes to Consolidated Financial Statements.                                                              |   |
|                                |                                                                                                     |   |
| **Item 2.**                         | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations.**         | ** ** |
| ** **                          | ** **                                                                                               | ** ** |
| **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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**BGFINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF FINANCIALCONDITION**

**Part I. FINANCIALINFORMATION**

**Item 1. Financial Statements**
| ** **                                                                                                                                         | ** ** | **As of**                   | ** ** | **As of**                  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                         | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
| ** **                                                                                                                                         | ** ** | **(Unaudited)**                  | ** ** | ** **                      | ** ** |
| **ASSETS**                                                                                                                                         |       |                             |       |                            |       |
|                                                                                                                                               |       |                             |       |                            |       |
| Cash and due from banks                                                                                                                            |       | $                                | 4,012,540  |                            | $          | 4,716,153 |   |
| Federal funds sold                                                                                                                                 |       | 11,255,047                       |       | 13,557,689                      |       |
| Cash and cash  equivalents                                                                                                                         |       | 15,267,587                       |       | 18,273,842                      |       |
| Federal Home Loan Bank  stock, at cost                                                                                                             |       | 255,000                          |       | 244,500                         |       |
| Loans, net of allowance  for loan losses of $700,772 in 2006 and $697,013 in 2005                                                                  |       | 69,923,845                       |       | 64,054,625                      |       |
| Premises and equipment,  net                                                                                                                       |       | 3,807,923                        |       | 3,777,981                       |       |
| Accrued income  receivable                                                                                                                         |       | 461,549                          |       | 418,329                         |       |
| Deferred tax benefit                                                                                                                               |       | 198,362                          |       | 236,743                         |       |
| Foreclosed assets                                                                                                                                  |       | 431,500                          |       | 616,279                         |       |
| Other assets                                                                                                                                       |       | 96,117                           |       | 162,411                         |       |
| Total Assets                                                                                                                                       |       | $                                | 90,441,883 |                            | $          | 87,784,710 |   |
| ** **                                                                                                                                         |       |                             |       |                            |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                     |       |                             |       |                            |       |
|                                                                                                                                               |       |                             |       |                            |       |
| **LIABILITIES**                                                                                                                                    |       |                             |       |                            |       |
| Deposits:                                                                                                                                          |       |                             |       |                            |       |
| Noninterest-bearing                                                                                                                                |       |                             |       |                            |       |
| Demand                                                                                                                                             |       | $                                | 8,511,101  |                            | $          | 8,624,411 |   |
| Interest-bearing                                                                                                                                   |       |                             |       |                            |       |
| Money market, interest  checking and savings                                                                                                       |       | 31,650,527                       |       | 22,070,383                      |       |
| Time deposits                                                                                                                                      |       | 38,371,801                       |       | 44,007,894                      |       |
| Total Deposits                                                                                                                                     |       | 78,533,429                       |       | 74,702,688                      |       |
| Accrued interest                                                                                                                                   |       | 589,502                          |       | 353,534                         |       |
| Income taxes                                                                                                                                       |       | 72,549                           |       | —                          |       |
| Other  liabilities                                                                                                                                 |       | 217,968                          |       | 208,613                         |       |
| Federal Home  Loan Bank advances                                                                                                                   |       | 2,415,168                        |       | 4,179,052                       |       |
| Total  Liabilities                                                                                                                                 |       | 81,828,616                       |       | 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 September 30, 2006 and December 31, 2005 |       | 770,256                          |       | 770,256                         |       |
| Additional  paid-in capital                                                                                                                        |       | 6,932,307                        |       | 6,932,307                       |       |
| Retained  earnings                                                                                                                                 |       | 910,704                          |       | 638,260                         |       |
| Total  Stockholders’ Equity                                                                                                                   |       | 8,613,267                        |       | 8,340,823                       |       |
| Total Liabilities and  Stockholders’ Equity                                                                                                   |       | $                                | 90,441,883 |                            | $          | 87,784,710 |   |

 

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

3

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**BGFINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**
| ** **                                                           | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
| ** **                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Interest  and dividend income:**                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Loans, including fees                                                |       | $                                | 4,446,807  |   | $ | 3,862,213 |   |
| Dividends on Federal Home Loan Bank stock                            |       | 10,664                           |       | 8,286 |   |
| Federal funds sold and other                                         |       | 428,986                          |       | 220,913 |   |
| Total interest and dividend income                                   |       | 4,886,457                        |       | 4,091,412 |   |
| ** **                                                           |       |                             | ** ** | ** ** | ** ** |
| **Interest  expense:**                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Deposits                                                             |       | 1,971,983                        |       | 1,439,974 |   |
| Borrowed funds                                                       |       | 90,728                           |       | 105,153 |   |
| Total interest expense                                               |       | 2,062,711                        |       | 1,545,127 |   |
| Net interest income before provision for (benefit  from) loan losses |       | 2,823,746                        | ** ** | 2,546,285 | ** ** |
| ** **                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Provision  for (benefit from) loan losses**                        |       | 39,075                           |       | (367,819 | ) |
| Net interest income after provision for (benefit  from) loan losses  | ** ** | 2,784,671                        | ** ** | 2,914,104 | ** ** |
|                                                                 |       |                             |       |   |   |
| **Noninterest  income:**                                             |       |                             |       |   |   |
| Service charges on deposit accounts                                  |       | 184,805                          |       | 202,471 |   |
| Fees from origination of mortgage loans                              |       | 72,849                           |       | 105,958 |   |
| Investment sales commissions                                         |       | 107,486                          |       | 78,039 |   |
| Other                                                                |       | 1,706                            |       | 28,704 |   |
| Total noninterest income                                             |       | 366,846                          |       | 415,172 |   |
|                                                                 |       |                             |       |   |   |
| **Noninterest  expenses:**                                           |       |                             |       |   |   |
| Compensation and benefits                                            |       | 1,341,232                        |       | 1,402,042 |   |
| Occupancy expenses                                                   |       | 369,903                          |       | 355,977 |   |
| Marketing                                                            |       | 65,691                           |       | 98,757 |   |
| Data processing                                                      |       | 158,294                          |       | 141,102 |   |
| Legal and professional fees                                          |       | 291,128                          |       | 319,866 |   |
| Other operating expenses                                             |       | 476,284                          |       | 434,808 |   |
| Total noninterest expense                                            |       | 2,702,532                        |       | 2,752,552 |   |
| **Income before income taxes**                                       |       | 448,985                          |       | 576,724 |   |
|                                                                 |       |                             |       |   |   |
| Income tax  expense                                                  |       | 176,541                          |       | 208,724 |   |
|                                                                 |       |                             |       |   |   |
| **Net income**                                                       |       | $                                | 272,444    |   | $ | 368,000 |   |
|                                                                 |       |                             |       |   |   |
| Earnings per share                                                   |       | $                                | .12        |   | $ | .16 |   |

 

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

4

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**BGFINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**
| ** **                                                           | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
| ** **                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Interest  and dividend income:**                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Loans, including fees                                                |       | $                                | 1,558,255  |   | $ | 1,328,172 |   |
| Dividends on Federal Home Loan Bank stock                            |       | 3,644                            |       | 2,927 |   |
| Federal funds sold and other                                         |       | 158,253                          |       | 86,370 |   |
| Total interest and dividend income                                   |       | 1,720,152                        |       | 1,417,469 |   |
| ** **                                                           |       |                             | ** ** | ** ** | ** ** |
| **Interest  expense:**                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Deposits                                                             |       | 731,256                          |       | 520,455 |   |
| Borrowed funds                                                       |       | 22,365                           |       | 34,826 |   |
| Total interest expense                                               |       | 753,621                          |       | 555,281 |   |
| Net interest income before provision for (benefit  from) loan losses |       | 966,531                          | ** ** | 862,188 | ** ** |
| ** **                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Provision  for (benefit from) loan losses**                        |       | (60,796                          | )          | 873 |   |
| Net interest income after provision for (benefit  from) loan losses  | ** ** | 1,027,327                        | ** ** | 861,315 | ** ** |
|                                                                 |       |                             |       |   |   |
| **Noninterest  income:**                                             |       |                             |       |   |   |
| Service charges on deposit accounts                                  |       | 58,611                           |       | 70,302 |   |
| Fees from origination of mortgage loans                              |       | 29,799                           |       | 50,220 |   |
| Investment sales commissions                                         |       | 22,110                           |       | 28,982 |   |
| Other                                                                |       | —                           |       | 15,994 |   |
| Total noninterest income                                             |       | 110,520                          |       | 165,498 |   |
|                                                                 |       |                             |       |   |   |
| **Noninterest  expenses:**                                           |       |                             |       |   |   |
| Compensation and benefits                                            |       | 433,612                          |       | 459,844 |   |
| Occupancy expenses                                                   |       | 129,003                          |       | 120,461 |   |
| Marketing                                                            |       | 22,865                           |       | 32,898 |   |
| Data processing                                                      |       | 51,219                           |       | 48,558 |   |
| Legal and professional expense                                       |       | 73,642                           |       | 103,728 |   |
| Other operating expenses                                             |       | 158,583                          |       | 136,970 |   |
| Total noninterest expense                                            |       | 868,924                          |       | 902,459 |   |
| **Income before income taxes**                                       |       | 268,923                          |       | 124,354 |   |
|                                                                 |       |                             |       |   |   |
| Income tax expense                                                   |       | 114,859                          |       | 17,337 |   |
|                                                                 |       |                             |       |   |   |
| **Net income**                                                       |       | $                                | 154,064    |   | $ | 107,017 |   |
|                                                                 |       |                             |       |   |   |
| Earnings per share                                                   |       | $                                | .07        |   | $ | .05 |   |

 

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

5

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**BGFINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                         | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
| ** **                                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                         |       |                             |       |   |   |
| Net income                                                                         |       | $                                | 272,444    |   | $ | 368,000 |  |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                             |       |   |   |
| Provision for (benefit from) loan losses                                           |       | 39,075                           |       | (367,819 | ) |
| Depreciation                                                                       |       | 197,638                          |       | 228,909 |  |
| Realized loss on sales of foreclosed assets                                        |       | 27,088                           |       | 5,347 |   |
| Deferred income tax expense                                                        |       | 38,381                           |       | 231,508 |   |
| Net change in:                                                                     |       |                             |       |   |   |
| Accrued income receivable                                                          |       | (43,220                          | )          | (23,478 | ) |
| Other assets                                                                       |       | 66,193                           |       | (29,591 | ) |
| Other liabilities                                                                  |       | 317,974                          |       | (270,691 | ) |
| Net cash provided by operating activities                                          |       | 915,573                          |       | 142,185 |   |
|                                                                               |       |                             |       |   |   |
| **CASH FLOWS  FROM INVESTING ACTIVITIES:**                                         |       |                             |       |   |   |
| Federal Home Loan Bank stock purchases                                             |       | (10,500                          | )          | (14,600 | ) |
| Proceeds from sales of foreclosed assets                                           |       | 138,267                          |       | 525,265 |   |
| Loan originations and principal collections, net                                   |       | (5,888,871                       | )          | 4,527,699 |   |
| Additions to premises and equipment                                                |       | (227,580                         | )          | (136,544 | ) |
| Net cash provided by (used in) by investing  activities                            |       | (5,988,684                       | )          | 4,901,820 |   |
|                                                                               |       |                             |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                         |       |                             |       |   |   |
| Net change in deposits                                                             |       | 9,466,834                        |       | 3,591,975 |  |
| Net change in certificates of deposit                                              |       | (5,636,094                       | )          | (9,995,205 | ) |
| Issuance of stock                                                                  |       | —                           |       | 13,316 |   |
| Federal Home Loan Bank repayments                                                  |       | (1,763,884                       | )          | (134,703 | ) |
| Net cash provided by (used in) financing activities                                |       | 2,066,856                        |       | (6,524,617 | ) |
|                                                                               |       |                             |       |   |   |
| Net change in  cash and cash equivalents                                           |       | (3,006,255                       | )          | (1,480,612 | ) |
|                                                                               |       |                             |       |   |   |
| Cash and cash  equivalents at beginning of year                                    |       | 18,273,842                       |       | 13,158,516 |   |
|                                                                               |       |                             |       |   |   |
| Cash and cash  equivalents at end of year                                          |       | $                                | 15,267,587 |   | $ | 11,677,904 |   |
|                                                                               |       |                             |       |   |   |
| **SUPPLEMENTARY  CASH FLOW INFORMATION:**                                          |       |                             |       |   |   |
| Interest paid on deposits and borrowed funds                                       |       | $                                | 1,826,743  |   | $ | 1,343,077 |   |
| Income taxes paid                                                                  |       | $                                | —     |   | $ | 126,000 |   |
|                                                                               |       |                             |       |   |   |
| **SUPPLEMENTAL  SCHEDULE OF NON-CASH ACTIVITIES:**                                 |       |                             |       |   |   |
| Foreclosed assets sold during the period and  financed through loans               |       | $                                | 204,203    |   | $ | 65,412 |   |
| Loans moved to  foreclosed assets                                                  |       | $                                | 184,779    |   | $ | 868,016 |   |

 

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

6

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**BGFINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville,Tennessee**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

**Note 1.****   Summary of SignificantAccounting 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 theSecurities and Exchange 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 nine months ended September 30, 2006 are not necessarily indicativeof the results 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.

*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.

7

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

On July 1, 2005,the Company adopted the provisions of Statement of Financial AccountingStandards (“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 for share-basedcompensation transactions using APB 25 and requires that the compensation costsrelating to such transactions be recognized in the consolidated statement ofincome.   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 options granted after May 17, 2005are fully exercisable on the date granted. Accordingly, no compensation cost was recognized prior to the adoptionof SFAS No. 123R on July 1, 2005.  Noadditional options were granted during the period ended September 30, 2006,therefore, no compensation cost is recognized in the consolidated statement ofincome for the period ended September 30, 2006. The following table illustrates the effect on net income and earningsper share if the Company had applied the fair value recognition provisions ofSFAS No. 123R to stock-based employee compensation for comparative periodsended September 30.
|                                                                                                                                               | ** ** | **Three-Month Period**      | ** ** | **Nine-Month Period**       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **Ended September 30** | ** ** | **Ended September 30** | ** ** |
| ** **                                                                                                                                    | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                  | ** ** |
| ** **                                                                                                                                    | ** ** | **2006**                         | ** ** | **2005**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                                                    | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income, as reported                                                                                                                       |       | $                                | 154,064    |                             | $          | 107,017 |   | $ | 272,444 |   | $ | 368,000 |   |
| ** **                                                                                                                                    | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects | ** ** | —                           | ** ** | —                           | ** ** | — | ** ** | 125,675 | ** ** |
| ** **                                                                                                                                    | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pro forma net  income                                                                                                                         |       | $                                | 154,064    |                             | $          | 107,017 |   | $ | 272,444 |   | $ | 242,325 |   |
|                                                                                                                                          |       |                             | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Earnings per  share                                                                                                                           |       |                             | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic – as  reported                                                                                                                     |       | $                                | .07        |                             | $          | .05 |   | $ | .12 |   | $ | .16 |   |
|                                                                                                                                          |       |                             | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic – pro  forma                                                                                                                       |       | $                                | .07        |                             | $          | .05 |   | $ | .12 |   | $ | .10 |   |
|                                                                                                                                          |       |                             | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Diluted – as  reported                                                                                                                   |       | $                                | .06        |                             | $          | .04 |   | $ | .11 |   | $ | .15 |   |
|                                                                                                                                          |       |                             | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Diluted – pro forma                                                                                                                      |       | $                                | .06        |                             | $          | .04 |   | $ | .11 |   | $ | .10 |   |

** **

8

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**Note 3.****   Earnings Per Share of CommonStock**

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 nine months ended September30, 2006, 19,000 options are excluded from the effect of dilutive securitiesbecause they are anti-dilutive; 19,000 options are similarly excluded from theeffect of dilutive securities for the three and nine months ended September 30,2005.

Thefollowing is a reconciliation of the numerators and denominators used in thebasic and diluted earnings per share computations for the three and nine monthsended September 30, 2006 and 2005:
| ** **                                                        | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **Income**                                               | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| ** **                                                        | ** ** | **(Numerator)**                                          | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** |
|                                                              |       |                                                     |       |   |   |   |   |   |   |
| Basic EPS                                                         |       |                                                     |       |   |   |   |   |   |   |
| Income available to common stockholders                           |       | $                                                        | 154,064    |   | 2,310,771 |   | $ | 107,017 |   | 2,307,881 |   |
|                                                              |       |                                                     |       |   |   |   |   |   |   |
| Effect of  dilutive securities                                    |       |                                                     |       |   |   |   |   |   |   |
| Stock options outstanding                                         |       | —                                                   |       | 133,523 |   | — |   | 159,973 |   |
|                                                              |       |                                                     |       |   |   |   |   |   |   |
| Diluted EPS                                                       |       |                                                     |       |   |   |   |   |   |   |
| Income available to common shareholders plus assumed  conversions |       | $                                                        | 154,064    |   | 2,444,294 |   | $ | 107,017 |   | 2,467,854 |   |

 
| ** **                                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **Income**                                              | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| ** **                                                        | ** ** | **(Numerator)**                                         | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** |
|                                                              |       |                                                    |       |   |   |   |   |   |   |
| Basic EPS                                                         |       |                                                    |       |   |   |   |   |   |   |
| Income available to common stockholders                           |       | $                                                       | 272,444    |   | 2,310,771 |   | $ | 368,000 |   | 2,307,881 |   |
|                                                              |       |                                                    |       |   |   |   |   |   |   |
| Effect of dilutive securities                                     |       |                                                    |       |   |   |   |   |   |   |
| Stock options outstanding                                         |       | —                                                  |       | 148,234 |   | — |   | 159,973 |   |
|                                                              |       |                                                    |       |   |   |   |   |   |   |
| Diluted EPS                                                       |       |                                                    |       |   |   |   |   |   |   |
| Income available  to common shareholders plus assumed conversions |       | $                                                       | 272,444    |   | 2,459,005 |   | $ | 368,000 |   | 2,467,854 |   |

 

9

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

**Impactof Inflation**

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

**CriticalAccounting Estimates**

The Company followsgenerally accepted accounting principles that are recognized in the UnitedStates, along with general practices within the banking industry.  In connection with the application of thoseprinciples and practices, we have made judgments and estimates which, in thecase of our allowance for loan and lease losses (ALLL), are material to thedetermination of our financial position and results of operation.  Other estimates relate to the valuation ofassets acquired in connection with foreclosures or in satisfaction of loans,and realization of deferred tax assets.

** ****Recent AccountingPronouncements**

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

FASB Staff Position onFAS 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 is other-than-temporary;and how to measure an impairment loss. The FSP also addresses accounting considerations subsequent to therecognition of an other-than-temporary impairment on a debt security, andrequires certain disclosures about unrealized losses that have not beenrecognized as other-than-temporary impairments. The FSP replaces the impairment guidance on Emerging Issues Task Force(EITF) Issue No. 03-1 with references to existing authoritative literatureconcerning other-than-temporary determinations. Under the FSP, losses arising from impairment deemed to beother-than-temporary, must be recognized in earnings at an amount equal to theentire difference between the securities cost and its fair value at thefinancial statement date, without considering partial recoveries subsequent tothat date.  The FSP also required that aninvestor recognize an other-than-temporary impairment loss when a decision tosell a security has been made and the investor does not expect the fair valueof the security to fully recover prior to the expected time of sale.  The FSP is effective for reporting periodsbeginning after December 15, 2005.  Theadoption of this statement did not have a material impact on the Company’sconsolidated financial statements.

10

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In December 2004, theFASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123(revised 2004), *Share-Based Payment*(“SFAS No. 123R”), which revised SFAS No. 123, “Accounting for Stock-BasedCompensation.”  This statement 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 compensationtransactions using APB 25 and requires that the compensation costs relating tosuch transactions be recognized in the consolidated statement of income.  The revised statement was effective as of thefirst interim or annual period beginning after September 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.

The FASB issued an FSP onDecember 15, 2005, “SOP 94-6-1 - Terms of Loan Products That May Give Rise to aConcentration of Credit Risk” which addresses the disclosure requirements forcertain nontraditional mortgage and other loan products, the aggregation ofwhich may constitute a concentration of credit risk under existing accountingliterature.  Pursuant to this FSP, theFASB’s intentions were to reemphasize the adequacy of such disclosures andnoted that the recent popularity of certain loan products such as negativeamortization loans, high loan-to-value loans, interest only loans, teaser rateloans, option adjusted rate mortgage loans and other loan product types mayaggregate to the point of being a concentration of credit risk to an issuer andthus may require enhanced disclosures under existing guidance.  This FSP was effective immediately.  The adoption of this FSP did not have amaterial impact on the consolidated financial statements.

In July, 2006, FASBissued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN48”).  FIN 48 is effective for fiscalyears beginning after December 15, 2006. FIN 48 applies to all income tax positions subject to FASB Statement No.109, Accounting for Income Taxes (“SFAS 109”), including tax positionsconsidered to be routine and those with a high degree of uncertainty.  FIN 48 is not expected to have a materialimpact on the Company’s consolidated financial statements.

In September, 2006, theFASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”).  SFAS 157 defines fair value, establishes a frameworkfor measuring fair value and expands disclosures about fair valuemeasurements.  SFAS will be appliedprospectively and is effective for fiscal years beginning after November 15,2007 and interim periods within those fiscal years.  SFAS 157 is not expected to have a materialimpact on the Company’s 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 assumptions underlying suchforward-looking statements contained in this Report are reasonable, any of theassumptions could be inaccurate and, accordingly, there can be no assurancethat the forward-looking statements included herein will prove to beaccurate.  The use of such words as “expect,”“anticipate,” “forecast,” and comparable terms should be understood by thereader to indicate that the statement is “forward-looking” and thus subject tochange in a manner that can be unpredictable. Factors that could cause actual results to differ from the results anticipated,but not guaranteed, in this Report, include (without limitation) economic andsocial conditions, competition for loans, mortgages, and other financialservices and products, changes in interest rates, unforeseen changes inliquidity, results of operations, and financial conditions affecting theCompany’s customers, and other risks that cannot be accurately quantified orcompletely identified.  Many factorsaffecting the Company’s financial condition and profitability, includingchanges in economic conditions, the volatility of interest rates, politicalevents and competition from other providers of financial services simply cannotbe predicted. Because these factors are unpredictable and beyond the Company’scontrol, earnings may fluctuate from period to period.  The purpose of this type of information is toprovide readers with information relevant to understanding and assessing thefinancial condition and results of operations of the Company, and not to predictthe future or to guarantee results.  TheCompany is unable to predict the types of circumstances, conditions and factorsthat can cause anticipated results to change. The Company undertakes no obligation to publish revised forward-lookingstatements to reflect the occurrence of changed or unanticipated events,circumstances or results.

11

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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 share 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 September 30, 2006, the Company had liquid assetsof approximately $15.3 million in the form of cash and federal funds soldcompared to approximately $18.3 million on December 31, 2005.  This $3 million decrease in liquidity wascaused primarily by the funding of an approximately $3 million commercial realestate loan during the three months ended September 30, 2006.   Management believes that the liquid assetsare adequate at September 30, 2006. Additional liquidity should be provided bythe growth in deposit accounts and loan repayments.  The Company also has the ability to purchasefederal funds and is a member of the Federal Home Loan Bank of Cincinnati thatwill provide a credit line if necessary. Management is not aware of any trends, events or uncertainties that arereasonably likely to have a material impact on the Company’s short term or longterm liquidity.

**Resultsof Operations**

The Company had net income of $154,064 or $.07 pershare for the quarter ended September 30, 2006 compared to net income of$107,017 or $.05 per share for the quarter ended September 30, 2005.  Net income for the nine months endedSeptember 30, 2006 was $272,444 as compared to a net income of $368,000 for thesame period in 2005.  During the ninemonths ended September 30, 2006, the Company made a provision for loan losses of$39,075, while recording a benefit from loan losses of $367,819 for the sameperiod 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 September 30, 2006 was $1,720,152 compared to $1,417,469 forthe same period in 2005. Total interest expense was $753,621 in 2006 comparedto $555,281 in 2005 for the same period. Interest income for the nine months ended September 30, 2006 was$4,886,457, compared to $4,091,412 for the same period in 2005, and totalinterest expense was $2,062,711 for the nine months ended September 30, 2006compared to $1,545,127 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 nine months ended September 30,2006. Based on the Company’s mix of interest earning assets and interestbearing liabilities, management believes that net interest margin should remainstable or begin to increase slightly for the remainder of the year.  This assumption is based on a continuedrising interest rate environment.  Ifinterest rates remain stable or begin to decline, net interest margin coulddecline due to competitive pricing of both loans and interest bearing deposits.

12

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*Provision for / Benefit from Loan Losses*

The provision for(benefit from) loan losses represents a charge (or recovery) to operationsnecessary to establish an allowance for possible loan losses, which inmanagement’s evaluation, is adequate to provide coverage for estimated losseson outstanding loans and to provide for uncertainties in the economy. Theprovision for (benefit from) loan losses during the three and nine monthperiods ended September 30, 2006 was $(60,796) and $39,075, respectively, ascompared to the provision for (benefit from) loan losses of $873 and $(367,819)for the same periods in 2005. Duringthe three months and nine months ended September 30, 2006, the Bank recordedadditional benefit from loan losses due to favorable settlements on certainclassified loans.  There wereseveral reasons for the benefit recognized during the nine month period endedSeptember 30, 2005. One factor was thatseveral loans, which were classified as special mention, substandard or doubtfulas of December 31, 2004, were paid out during the first nine months of 2005with minimal losses. In addition, the Bank’s loan portfolio as a whole haddecreased significantly during the same periods in 2005. During the sameperiods in 2005, the Bank was under competitive pressure from local creditunions and other local banks offering lower rates on fixed rate loans.  Management made the decision to let certainoutstanding loans refinance at credit unions and other local banks, versussubjecting the Bank to the interest rate and credit risks that would be createdto retain the loans.  During the three and nine months endedSeptember 30, 2006, loan charge-offs were $2,050 and $36,185 respectively.  The recoveries for the three and nine monthperiods ended September 30, 2006 were $0 and $869, respectively.  The allowance for loan losses was $700,772 atSeptember 30, 2006 as compared to $697,013 at December 31, 2005, an increase of0.5%.  The allowance was 1.0% of loans atSeptember 30, 2006.  Management believesthe allowance for loan losses at September 30, 2006 to be adequate and willincrease during the year to match normal loan growth.

*Provision for / Benefit from Income Taxes*

Due to the Company’s subsidiary bank’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 for income tax expense for thethree and nine months ended September 30, 2006 was $114,859 and $176,541,respectively when compared to $17,337 and $208,724 for the same periods in2005.  Management believes the provisionfor income taxes for the period ended September 30, 2006 to be adequate.

*Noninterest Income*

The Company’s noninterestincome consists of service charges on deposit accounts and other fees andcommissions.  Total noninterest incomefor three and nine months ended September 30, 2006 was $103,039 and $366,846,respectively when compared to $165,498 and $415,172 for the same periods in2005.  The main reasons for the decreasefor the three and the nine month periods ended September 30, 2006, weredecreases in service charges on deposit accounts and a decrease in fees fromorigination of mortgage loans. Management projects that noninterest income willimprove during the remainder of 2006 due to more aggressive collection of feesand renewed marketing efforts.

13

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*Noninterest Expense*

Noninterest expenses totaled$868,924 and $2,702,532 for the three and nine months ended September 30, 2006,as compared to $902,459 and $2,752,552 for the same periods in 2005.   Salaries and benefits decreased $26,232 forthe three months ended September 30, 2006, while the nine months endedSeptember 30, 2006 decreased $60,810, as compared to the same periods in2005.   The decrease was mainly due tothe non-replacement of personnel in positions that were not critical to theCompany’s operations. Legal and professional fees decreased $30,086 for thethree months ended September 30, 2006, while decreasing $28,738 for the ninemonths ended September 30, 2006, as compared to the same periods in 2005.  During 2005, the Company incurred severallegal and professional fees developing a long-term strategic plan and gearingup to meet the additional reporting requirements of Sarbanes- Oxley that werenon-reoccurring in 2006.  Other operatingexpenses increased $21,613 for the three months ended September 30, 2006, whileincreasing $41,476 for the nine months ended September 30, 2006, when comparedto the same periods in 2005.  Most of theincrease in other operating expenses is accounted for by additional collectionand data processing expenses.

**Financial Condition**

Totalassets at September 30, 2006, were $90,441,883, an increase of $2,657,173 or3.0% compared to 2005 year-end assets of $87,784,710.  Deposits increased to $78,533,429 atSeptember 30, 2006, an increase of $3,830,741 or 5.1% from $74,702,688 atDecember 31, 2005.  The increase indeposits was mainly due to management’s aggressive efforts to obtain localdeposits. Federal Home Loan Bank Stock was $255,000 at September 30, 2006compared 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 $69,923,845 at September 30, 2006 compared to$64,054,625 at December 31, 2005. Commercial real estate loan growth accountedfor almost all of the approximately $5.9 million increase for the first threequarters of 2006. Management believes the overall quality of loans remainssolid.  In the event that a loan is 90 daysor more past due, the accrual of income is generally discontinued when the fullcollection of principal or interest is in doubt unless the obligations are bothwell secured and in the process of collection. At September 30, 2006, total loans 90 days or more past due and stillaccruing interest were $0, while total loans in non-accrual status were$1,713,310.  At December 31, 2005, totalloans 90 days or more past due and still accruing interest were $78,509, whiletotal loans in non-accrual status were $2,094,311.

*Securities*

Federal Home Loan Bank (FHLB) stock at September 30,2006 had an amortized cost and market value of $255,000 as compared to anamortized cost 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.

14

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*Deposits*

Total deposits, which are the principal source offunds for the Company, were $78,533,429 at September 30, 2006, compared to$74,702,688 at December 31, 2005 representing an increase of 5.1%.  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 September 30, 2006 the Company hadoutstanding advances of $2,415,168 at the Federal Home Loan Bank.

*Capital*

Equity capital atSeptember 30, 2006 was $8,613,267, an increase of $272,444 from $8,340,823 atDecember 31, 2005, due to a net profit of $272,444 for the first nine months of2006.

AtSeptember 30, 2006, both the Company’s and Bank’s capital ratios were in excessof the regulatory minimums.  Those ratiosare as follows:
| ** **                       | ** ** | **Required  Minimum  Ratio** | ** ** | **To be  Well  Capitalized** | ** ** | **Bank** | ** ** | **Company** | ** ** |
|----------------------------------|------------|------------------------------|------------|-----------------------------------|------------|----------|------------|-------------|------------|
| Tier 1 Leverage  ratio           |       | 4.00                         | %          | 5.00                              | %          | 9.57     | %          | 9.58        | %          |
| Tier 1  risk-based capital ratio |       | 4.00                         | %          | 6.00                              | %          | 12.00    | %          | 12.01       | %          |
| Total risk-based capital  ratio  |       | 8.00                         | %          | 10.00                             | %          | 12.98    | %          | 12.99       | %          |

 

*Liability and Asset Management*

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

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

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

AtSeptember 30, 2006, approximately 58% of the Bank’s gross loans had adjustablerates.  Based on the asset/liabilitymodeling, management believes that these loans reprice at a faster pace thanliabilities held at the institution. Because the majority of the institution’s liabilities are 12 months andunder and the gap in repricing is asset sensitive, management believes that arising rate environment would have a positive impact on the Company’s netinterest margin.  Floors in the majorityof the institution’s adjustable rate assets also mitigate interest ratesensitivity in a decreasing rate environment.

15

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*Off-BalanceSheet Arrangements*

The Company, at September 30, 2006, had outstandingunused lines of credit and standby letters of credit that totaled approximately$11,894,000.  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 September 30, 2006, the Companyhad established with correspondent banks the ability to purchase Federal fundsif needed.

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

The information set forthon pages 10 through 16 of Item 2, “MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS is incorporated herein byreference.

**Item4.  Controls and Procedures**

a)             Evaluation of Disclosure Controls and Procedures

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

b)            Changes in Internal Controls and Procedures

There were nochanges in our internal controls over financial reporting during the quarterended September 30, 2006, that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

16

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**PART II - OTHER INFORMATION**

**Item 1.****                                   LEGALPROCEEDINGS**

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.

**Item 2.****                                   UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

(a)   None.

(b)   Not applicable.

(c)   No repurchases of Companysecurities were made during the quarter ended September 30, 2006.

The Company’s ability topay dividends is derived from the income of the Bank.  The Bank’s ability to declare and paydividends is limited by its obligations to maintain sufficient capital and byother general restrictions on its dividends that are applicable to banks thatare regulated by the FDIC and the Tennessee 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.

**Item 3.****                                   DEFAULTSUPON SENIOR SECURITIES**

(a)   None.

(b)   None.

**Item 4.****                                   SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

None.

**Item 5.****                                OTHERINFORMATION**

(a)   None.

(b)   None.

17

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**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  |

 

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

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

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***SIGNATURES***

In accordance with 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:  | November 14, 2006 |                     | /s/ J. Robert Grubbs                     |
|   |              |                     | J. Robert Grubbs                         |
|   |              |                     | President &  Chief Executive Officer |
|   |              |                     |                                     |
|   |              |                     |                                     |
| DATE:  | November 14, 2006 |                     | /s/ T. Don Waddell                       |
|   |              |                     | T. Don Waddell                           |
|   |              |                     | Chief Financial  Officer                 |
|        |                   |                          |                                          |  |  |

 

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