** **

**UNITEDSTATES**

** SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20529**

----

**FORM 10-Q**

 

 

**MARK ONE**

 

**   ****ý****                    QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**FOR THEQUARTERLY PERIOD ENDED MARCH 31, 2005**

** **

**   ****o****                       TRANSITION REPORT UNDERSECTION 13 OR 15(d)**

**OF THE EXCHANGE ACT**

 

**FOR THETRANSITION PERIOD**

**FROM                     TO                      **

** **

**COMMISSIONFILE NUMBER  000-50771**

 

***BG FINANCIAL GROUP, INC.***

(Exact Name ofRegistrant as Specified in Charter)

 

| **Tennessee**                                                 | ** ** | **20-0307691**         |
|---------------------------------------------------------------|------------|------------------------|
| (State or Other  Jurisdiction of                              |       | (I.R.S. Employer       |
| Incorporation or  Organization)                               |       | Identification Number) |
|                                                          |       |                   |
| **3095 East Andrew Johnson Highway,  Greeneville, Tennessee** | **37745**  |
| (Address of Principal  Executive Offices)                     |       | (Zip Code)             |
|                                                               |            |                        |  |

 

Registrant’s telephonenumber, including area code:                **(423) 636-1555                                                                       **

 

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

YES ý     NO o

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act.)

YES o    NO ý

 

State the numberof shares outstanding of each of the issuer’s classes of common equity, as ofthe latest practicable date:

 

**Common Stock, $1.00 par value, outstanding:2,306,775 at May 1, 2005**

 

 

 

 

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| ***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, 2005 and December 31, 2004.

  |
|                                 |   | Consolidated Statements of Income - For the  three months ended March 31, 2005 and 2004.

  |
|                                 |   | Consolidated  Statements of Cash Flows - For the three months ended March 31, 2005 and  2004.

  |
|                                 |   | 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 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****.FINANCIAL INFORMATION**

 

**Item 1****. Financial Statements**

** **
| ** **                                                                                                                                                         | ** ** | **As of**          | ** ** | **As of**             | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                         | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
| **ASSETS**                                                                                                                                                         |       |               |       |                  |       |
|                                                                                                                                                               |       |               |       |                  |       |
| Cash and due  from banks                                                                                                                                           |       | $                  | 4,936,747  |                  | $          | 5,538,897 |   |
| Federal funds  sold                                                                                                                                                |       | 8,849,873          |       | 7,619,619             |       |
| Cash and cash  equivalents                                                                                                                                         |       | 13,786,620         |       | 13,158,516            |       |
| Federal Home  Loan Bank stock, at cost                                                                                                                             |       | 229,000            |       | 226,500               |       |
| Loans, net of  allowance for loan losses of $1,335,599 in 2005 and $1,607,559 in 2004                                                                              |       | 69,080,761         |       | 72,355,286            |       |
| Premises and  equipment, net                                                                                                                                       |       | 3,896,515          |       | 3,895,500             |       |
| Accrued income  receivable                                                                                                                                         |       | 393,962            |       | 389,308               |       |
| Deferred tax benefit                                                                                                                                               |       | 575,772            |       | 601,307               |       |
| Foreclosed  assets                                                                                                                                                 |       | 476,662            |       | 489,649               |       |
| Prepaid expenses                                                                                                                                                   |       | 167,236            |       | 58,302                |       |
| Total Assets                                                                                                                                                       |       | $                  | 88,606,528 |                  | $          | 91,174,368 |   |
|                                                                                                                                                               |       |               |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                      |       |               |       |                  |       |
|                                                                                                                                                               |       |               |       |                  |       |
| **LIABILITIES**                                                                                                                                                    |       |               |       |                  |       |
| Deposits:                                                                                                                                                          |       |               |       |                  |       |
| Noninterest-bearing                                                                                                                                                |       |               |       |                  |       |
| Demand                                                                                                                                                             |       | $                  | 6,337,971  |                  | $          | 6,755,994 |   |
| Interest-bearing                                                                                                                                                   |       |               |       |                  |       |
| Money market,  interest checking and savings                                                                                                                       |       | 17,040,234         |       | 16,046,823            |       |
| Time deposits                                                                                                                                                      |       | 52,709,618         |       | 55,584,410            |       |
| Total Deposits                                                                                                                                                     |       | 76,087,823         |       | 78,387,227            |       |
| Accrued interest                                                                                                                                                   |       | 193,590            |       | 202,564               |       |
| Other  liabilities                                                                                                                                                 |       | 124,716            |       | 482,134               |       |
| Federal Home  Loan Bank advances                                                                                                                                   |       | 4,314,787          |       | 4,359,346             |       |
| Total  Liabilities                                                                                                                                                 |       | 80,720,916         |       | 83,431,271            |       |
|                                                                                                                                                               |       |               |       |                  |       |
| **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 2,306,775  shares at March 31, 2005 and 2,306,775 shares at December 31, 2004 |       | 768,925            |       | 768,925               |       |
| Additional  paid-in capital                                                                                                                                        |       | 6,920,322          |       | 6,920,322             |       |
| Retained  earnings                                                                                                                                                 |       | 196,365            |       | 53,850                |       |
| Total  Stockholders’ Equity                                                                                                                                   |       | 7,885,612          |       | 7,743,097             |       |
| Total  Liabilities and Stockholders’ Equity                                                                                                                   |       | $                  | 88,606,528 |                  | $          | 91,174,368 |   |
|                                                                                                                                                                    |            |                    |            |                       |            |  |  |  |

 

The accompanyingnotes are an integral part of these financial statements.

 

3

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**BGFINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF INCOME**

 

 

** **
| ** **                                            | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **March 31, 2005**     | ** ** | **March 31, 2004** | ** ** |
| ** **                                            | ** ** | ** **             | ** ** | ** ** | ** ** |
| **Interest  and dividend income:**                    | ** ** | ** **             | ** ** | ** ** | ** ** |
| Loans, including  fees                                |       | $                      | 1,250,563  |   | $ | 1,315,745 |   |
| Dividends on  Federal Home Loan Bank stock            |       | 2,513                  |       | 9,749 |   |
| Federal funds  sold and other                         |       | 53,866                 |       | 13,480 |   |
| Total interest  and dividend income                   |       | 1,306,942              |       | 1,338,974 |   |
|                                                  |       |                   |       |   |   |
| **Interest  expense:**                                | ** ** | ** **             | ** ** | ** ** | ** ** |
| Deposits                                              |       | 432,357                |       | 325,149 |   |
| Borrowed funds                                        |       | 35,275                 |       | 35,962 |   |
| Total interest  expense                               |       | 467,632                |       | 361,111 |   |
| Net interest  income before provision for loan losses | ** ** | 839,310                | ** ** | 977,863 | ** ** |
| ** **                                            | ** ** | ** **             | ** ** | ** ** | ** ** |
| **Provision  for (benefit from) loan losses**         |       | (131,647               | )          | 66,717 |   |
| Net interest  income after provision for loan losses  |       | 970,957                |       | 911,146 |   |
|                                                  |       |                   |       |   |   |
| **Noninterest  income:**                              |       |                   |       |   |   |
| Service charges  on deposit accounts                  |       | 53,820                 |       | 75,651 |   |
| Fees from  origination of mortgage loans              |       | 21,836                 |       | 28,965 |   |
| Investment sales  commissions                         |       | 16,660                 |       | 31,449 |   |
| Other                                                 |       | 4,709                  |       | 16,483 |   |
| Total  noninterest income                             |       | 97,025                 |       | 152,548 |   |
|                                                  |       |                   |       |   |   |
| **Noninterest  expenses:**                            |       |                   |       |   |   |
| Compensation and  benefits                            |       | 499,075                |       | 329,130 |   |
| Occupancy  expenses                                   |       | 119,225                |       | 82,089 |   |
| Marketing                                             |       | 26,978                 |       | 22,082 |   |
| Data processing                                       |       | 45,156                 |       | 47,774 |   |
| Other operating  expenses                             |       | 210,618                |       | 146,035 |   |
| Total  noninterest expense                            |       | 901,052                |       | 627,110 |   |
| **Income  before income taxes**                       |       | 166,930                |       | 436,584 |   |
|                                                  |       |                   |       |   |   |
| Income tax  expense (benefit)                         |       | 24,415                 |       | 169,778 |   |
|                                                  |       |                   |       |   |   |
| **Net  income**                                       |       | $                      | 142,515    |   | $ | 266,806 |   |
|                                                  |       |                   |       |   |   |
| Earnings per  share                                   |       | $                      | .06        |   | $ | .12 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

 

4

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

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

 
| ** **                                                                                | ** ** | ** **             | ** ** | ** **          | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------|------------|
| ** **                                                                                | ** ** | **Three Months Ended** | ** ** |
|                                                                                      |       | **March  31, 2005**    | ** ** | **March  31, 2004** |       |
|                                                                                      |       |                   |       |                |       |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                |       |                   |       |                |       |
| Net income                                                                                |       | $                      | 142,515    |                | $          | 266,806 |   |
| Adjustments to  reconcile net income to net cash provided (used) by operating activities: |       |                   |       |                |       |
| Provision for  loan losses                                                                |       | (131,647               | )          | 66,717              |       |
| Depreciation                                                                              |       | 76,418                 |       | 53,062         |       |
| Realized gain  (loss) on sales of foreclosed assets                                       |       | (3,913                 | )          | (500                | )          |
| Deferred income  tax benefit                                                              |       | 25,535                 |       | (6,775              | )          |
| Net change in:                                                                            |       |                   |       |                |       |
| Accrued income  receivable                                                                |       | (4,654                 | )          | (79,368             | )          |
| Other assets                                                                              |       | (110,055               | )          | 98,411              |       |
| Other  liabilities                                                                        |       | (365,269               | )          | 132,838             |       |
| Net cash  provided (used) by operating activities                                         |       | (371,070               | )          | 531,191             |       |
|                                                                                      |       |                   |       |                |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                |       |                   |       |                |       |
| Federal Home  Loan Bank stock purchases                                                   |       | (2,500                 | )          | (1,700              | )          |
| Proceeds from  sales of foreclosed assets                                                 |       | 125,888                |       | 2,700               |       |
| Loan  originations and principal collections, net                                         |       | 3,406,171              |       | (4,667,045          | )          |
| Additions to  foreclosed assets                                                           |       | (108,988               | )          | (30,219             | )          |
| Additions to  premises and equipment                                                      |       | (77,432                | )          | (236,107            | )          |
| Net cash  provided (used) by investing activities                                         |       | 3,343,139              |       | (4,932,371          | )          |
|                                                                                      |       |                   |       |                |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                |       |                   |       |                |       |
| Net change in  deposits                                                                   |       | 575,388                |       | 654,337        |       |
| Net change in  certificates of deposit                                                    |       | (2,874,794             | )          | 5,214,843      |       |
| Federal Home  Loan Bank advances                                                          |       | —                 |       | 276,460             |       |
| Federal Home  Loan Bank repayments                                                        |       | (44,559                | )          | (36,560             | )          |
| Net cash  provided (used) by financing activities                                         |       | (2,343,965             | )          | 6,106,080      |       |
|                                                                                      |       |                   |       |                |       |
| Net change in  cash and cash equivalents                                                  |       | 628,104                |       | 1,704,900           |       |
|                                                                                      |       |                   |       |                |       |
| Cash and cash  equivalents at beginning of year                                           |       | 13,158,516             |       | 12,298,970          |       |
|                                                                                      |       |                   |       |                |       |
| Cash and cash  equivalents at end of year                                                 |       | $                      | 13,786,620 |                | $          | 14,003,870 |   |
| ** **                                                                                |       |                   |       |                |       |
| **SUPPLEMENTARY  CASH FLOW INFORMATION:**                                                 |       |                   |       |                |       |
| Interest paid on  deposits and borrowed funds                                             |       | $                      | 476,605    |                | $          | 268,396 |   |
| Income taxes  paid                                                                        |       | $                      | 126,000    |                | $          | 7,960 |   |
|                                                                                           |            |                        |            |                     |            |  |  |  |  |

 

The accompanyingnotes are an integral part of these financial statements.

 

 

5

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**BGFINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville,Tennessee**

**NOTES****TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

 

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

 

*Nature of Business*:

 

BG Financial Group, Inc.(the “Company”) is a bank holding company whose business is conducted by itswholly-owned subsidiary, Bank of Greeneville (the “Bank”).  Bank of Greeneville is engaged in thebusiness of originating loans within its lending area, Greeneville and GreeneCounty in Tennessee.  The Bank obtainsdeposits both inside and outside of its primary lending area.  The Company was organized in October, 2003. The Company had minimal assets, liabilities or operations until January,2004, when it acquired the Bank in a Plan of Share Exchange whereby theshareholders 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 Share Exchange, theBank became a wholly owned subsidiary of the Company.

 

The following is a descriptionof the significant policies used in the preparation of the accompanyingconsolidated financial statements.

 

*Basisof Presentation:*

 

These consolidatedfinancial statements include the accounts of the BG Financial Group, Inc.  Significant intercompany transactions andaccounts are eliminated in consolidation.

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States for interimfinancial information and in accordance with the instructions to Form 10-Q andArticle 10 of Regulation S-X as promulgated by the Securities and ExchangeCommission(“SEC”).  Accordingly, they donot include all the information and footnotes required by accounting  principles generally accepted in the UnitedStates for complete financial statements. In the opinion of management, all adjustments (none of which were otherthan normal recurring accruals) considered necessary for a fair presentation ofthe financial position and results of operations for the periods presented havebeen included.  Operating results for thethree months ended March 31, 2005 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2005.  For further information, refer to theconsolidated financial statements and note thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2004.  Certain amounts from prior period financialstatements have been reclassified to conform to current year’s presentation.

 

*Use ofEstimates:*

 

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities as of the balance sheet dateand the reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates.  The most significant management accountingestimate is the appropriate level for the allowance for loan losses.  The allowance for loan losses is evaluated ona regular basis by management and is based upon management’s periodic review ofthe collectibility of the loans in light of historical experience, the natureand volume of the loan portfolio, adverse situations that may affect theborrower’s ability to repay, estimated value of any underlying collateral andprevailing economic conditions.  Thisevaluation is inherently subjective as it requires estimates that aresusceptible to significant revision as more information becomes available.

 

 

6

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

 

                                                  In December 2002, the FASB issued SFASNo. 148, “*Accounting for Stock-BasedCompensation — Transition and Disclosure, an amendment of FASB Statement No.123.*”  This Statement amendsStatement No. 123, Accounting for Stock-Based Compensation, to providealternative methods of transition for a voluntary change to the fair valuemethod of accounting for stock-based employee compensation.  In addition, this Statement amends thedisclosure requirements of Statement No. 123 to require prominent disclosuresin both annual and interim financial statements.  Certain of the disclosure modifications arerequired for fiscal years ending after December 15, 2003 and are includedbelow.

 

                                                  The Company applies APB Opinion 25 andrelated interpretations in accounting for the stock option plan.  All option grants carry exercise prices equalto or above the fair value of the common stock on the date of the grant.  Accordingly, no compensation cost has beenrecognized.  The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS No. 123 to stock-basedemployee compensation.

 
| ** **                                                                                                                                          | ** ** | **Three-Month Period** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                          | ** ** | **Ended March 31**     | ** ** |
| ** **                                                                                                                                          | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                                                                                                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net income, as  reported                                                                                                                            |       | $                      | 142,515    |   | $ | 266,806 |   |
| ** **                                                                                                                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Deduct: Total  stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects | ** ** | 41,901                 | ** ** | 15,300 | ** ** |
| ** **                                                                                                                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Pro forma net  income                                                                                                                               |       | $                      | 100,614    |   | $ | 251,506 |   |
| ** **                                                                                                                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Earnings per  share                                                                                                                                 | ** ** | ** **             | ** ** | ** ** | ** ** |
| Basic — as  reported                                                                                                                           |       | $                      | .06        |   | $ | .12 |   |
| ** **                                                                                                                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Basic — pro  forma                                                                                                                             |       | $                      | .04        |   | $ | .11 |   |
| ** **                                                                                                                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Diluted — as  reported                                                                                                                         |       | $                      | .06        |   | $ | .11 |   |
| ** **                                                                                                                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Diluted — pro  forma                                                                                                                           |       | $                      | .04        |   | $ | .11 |   |

 

 

7

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**Item 2****.  Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

**Impact of 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 which 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 most industrial companies, virtuallyall the assets and liabilities of a financial institution are monetary innature.  As a result, interest rates havea more significant impact on a financial institution’s performance than theeffects of general levels of inflation.

**Critical Accounting 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.

 

**RecentAccounting Pronouncements**

                                                                                                In March 2004, the SECissued Staff Accounting Bulletin No. 105, *Applicationof Accounting Principles to Loan Commitments*.  Current accounting guidance requires thecommitment to originate mortgage loans to be held for sale be recognized on thebalance sheet at fair value from inception through expiration or funding.  SAB 105 requires that the fair-valuemeasurement include only differences between the guaranteed interest rate inthe loan commitment and a market interest rate, excluding any expected futurecash flows related to the customer relationship or loan servicing.  SAB 105 is effective for commitments tooriginate mortgage loans to be held for sale that are entered into after March31, 2004. Its adoption did not have a material impact on the consolidated financialposition or results of operations of the Company.

 

              In March 2004, theFinancial Accounting Standards Board’s (“FASB”) Emerging Issues Task Forcereached a consensus on EITF Issue No. 03-1, *TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments. *EITF 03-1provides guidance for determining when an investment is considered impaired,whether impairment is other-than-temporary, and measurement of an impairmentloss.  An investment is consideredimpaired if the fair value of the investment is less than its cost.  Generally, an impairment is consideredother-than temporary unless:  (i) theinvestor has the ability and intent to hold an investment for a reasonableperiod of time sufficient for an anticipated recovery of fair value up to (orbeyond) the cost of the investment; and (ii) evidence indicating that the costof the investment is recoverable within a reasonable period of time outweighsevidence to the contrary.  If impairmentis determined to be other-than-temporary, then an impairment loss should berecognized equal to the difference between the investment’s cost and its fairvalue.  The recognition and measurementprovisions were initially effective for other-than-temporary impairmentevaluations in reporting periods beginning after June 15, 2004.  However, in September 2004, the effectivedate of these provisions was delayed until the finalization of a FASB StaffPosition (FSP) to provide additional implementation guidance.  Due to the recognition and measurementprovisions being suspended and the final rule delayed, the Company is not ableto determine whether the adoption of these new provisions will have a materialimpact on the consolidated financial position or results of income.

 

8

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                 Statement ofPosition 03-03, *Accounting for Certain Loansor Debt Securities Acquired in a Transfer* (SOP 03-03) addressesaccounting for differences between contractual cash flows and cash flowsexpected to be collected from an investor’s initial investment in loans or debtsecurities (loans) acquired in a transfer if those differences areattributable, at least in part, to credit quality.  It includes loans acquired in purchase businesscombinations and applies to all nongovernmental entities, includingnot-for-profit organizations.  The SOPdoes not apply to loans originated by the entity.  The SOP is effective for loans acquired infiscal years beginning after December 15, 2004. Early adoption is encouraged. Specific transition guidance applies to certain loans that currently arewithin the scope of Practice Bulletin 6, Amortization of Discounts on CertainAcquired Loans.  Its adoption is notexpected to have material impact on the consolidated financial position or resultsof operations of the Company.

 

              In December 2004,the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123(revised 2004), *Share-Based Payment*(“SFAS No. 123R”), which revised SFAS No. 123, “Accounting for Stock-BasedCompensation.  This statement supercedesAPB Opinion No. 25, “Accounting for Stock Issued to Employees.”  The revised statement addresses theaccounting for share-based payment transactions with employees and other thirdparties eliminates the ability to account for share-based compensationtransactions using APB 25 and requires that the compensation costs relating tosuch transactions be recognized in the consolidated statement of income.  The revised statement is effective as of thefirst interim period beginning after June 15, 2005.  The Company is currently evaluating theprovisions of SFAS No. 123R and will adopt it on July 1, 2005 as required.

 

**Forward-LookingStatements**

 

                Management’s discussion of theCompany and management’s analysis of the Company’s operations and prospects,and other matters, may include forward-looking statements within the meaning ofthe Private 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 understoodby the reader to indicate that the statement is “forward-looking” and thussubject to change in a manner that can be unpredictable.  Factors that could cause actual results todiffer from the results anticipated, but not guaranteed, in this Report,include (without limitation) economic and social conditions, competition forloans, mortgages, and other financial services and products, changes ininterest rates, unforeseen changes in liquidity, results of operations, andfinancial conditions affecting the Company’s customers, and other risks thatcannot be accurately quantified or completely identified.  Many factors affecting the Company’s financialcondition and profitability, including changes in economic conditions, thevolatility of interest rates, political events and competition from otherproviders of financial services simply cannot be predicted. Because thesefactors are unpredictable and beyond the Company’s control, earnings mayfluctuate from period to period.  Thepurpose of this type of information is to provide readers with informationrelevant to understanding and assessing the financial condition and results ofoperations of the Company, and not to predict the future or to guaranteeresults.  The Company is unable topredict the types of circumstances, conditions and factors that can causeanticipated results to change.  TheCompany undertakes no obligation to publish revised forward-looking statementsto reflect the occurrence of changed or unanticipated events, circumstances orresults.

 

 

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**General**

 

                On January 23, 2004, BG Financial Group, Inc.(“Company”), a bank holding company, acquired all of the outstanding shares ofBank of Greeneville (“Bank”) in a one for one share exchange.  The Bank is a Tennessee-chartered,FDIC-insured, non-Member commercial bank offering a wide range of banking services,including checking, savings, and money market deposit accounts, certificates ofdeposit and loans for consumers, commercial and real estate purposes, and isthe principal business of the Company.  The Company and the Bank are located at 3095 East Andrew JohnsonHighway, Greeneville, Tennessee  37745.

 

**Liquidity**

 

                At March 31, 2005, the Companyhad liquid assets of approximately $13.7 million in the form of cash andfederal funds sold compared to approximately $13.2 million on December 31,2004.  Management believes that the liquidassets are adequate at March 31, 2005. Additional liquidity should be providedby the 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.

 

**Results of Operations**

 

                The Company had net income of$142,515 or $.06 per share for the quarter ended March 31, 2005 compared to netincome of $266,806 or $.12 per share for the quarter ended March 31, 2004 afteremployee salaries and other operating expenses.

 

*NetInterest Income/Margin*

 

                Net interest income representsthe amount by which interest earned on various assets exceeds interest paid ondeposits and other interest-bearing liabilities and is the most significantcomponent of the Company’s earnings. Interest income for the three months ended March 31, 2005 was $1,306,942compared to $1,338,974 for the same period in 2004, and total interest expensewas $467,632 in 2005 compared to $361,111 in 2004 for those same periods.

 

*Provisionfor Loan Losses*

 

                The provision for loan lossesrepresents a charge to operations necessary to establish an allowance forpossible loan losses, which in management’s evaluation, is adequate to providecoverage for estimated losses on outstanding loans and to provide foruncertainties in the economy. The provision for loan losses during thethree-month period ended March 31, 2005 was $(131,647) as compared to $66,717for the same three-month period ended March 31, 2004.  The $(131,647) provision for the three monthsending March 31, 2005 has a positive effect on income and represents animprovement in the overall quality of the loan portfolio, as well as a moredetailed review of specific loans by management.  This negative provision is due also in partto a reduction in the loan portfolio. During the three months ended March 31,2005, loan charge-offs were $145,234. The recoveries for the three-month period ended March 31, 2005 were$4,921.  The allowance for loan losseswas $1,335,599 at March 31, 2005 as compared to $1,607,559 at December 31,2004, a decrease of 17.0%.  The 17.0%decrease in the allowance for loan losses is due mainly to improvement in thequality of the loan portfolio, the reduction of the loan portfolio size, andbetter collection efforts. The allowance was 1.90% of loans at March 31,2005.  Management believes the allowancefor loan losses at March 31, 2005 to be adequate.

 

 

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*Provisionsfor Income Taxes*

 

                In 2002, the Company postedpre-tax income of $130,109 causing management to believe that it is more likelythan not that it will generate future taxable income to utilize its netdeferred tax asset.   As a result, thevaluation allowance was eliminated and a net deferred tax asset was recordedfor the deductible temporary differences and carryforwards that are expected tobe available to reduce future taxable income. The Company’s provision for income tax expense for the three monthsended March 31, 2005 and 2004 was $24,415 and $169,778, respectively.  Management believes the provision for incometaxes at March 31, 2005 to be adequate

 

*NoninterestIncome*

 

                The Company’s noninterest incomeconsists of service charges on deposit accounts and other fees andcommissions.  Total noninterest incomefor three months ended March 31, 2005 was $97,025 compared to $152,548 for thesame period in 2004.  The main reasonsfor the decrease were the decrease in investment sales commissions, and thedecrease in service charges on deposits. Even though the Company experienced negative growth during the quarterending March 31, 2005, management projects that other fees and commissions andservice charges will increase in 2005 due to the anticipated growth of theCompany for the remainder of the year.

 

*NoninterestExpense*

 

                Noninterest expenses totaled$901,052 for the three months ended March 31, 2005 as compared to $627,110 forthe three months ended March 31, 2004 and consisted of employee costs,occupancy expense and other operating expenses. Salaries and employee benefits (which increased from $329,130 for thethree months ended March 31, 2004 when compared to $499,075 for the threemonths ended March 31, 2005 representing a 51.6% increase).  This increasewas due mainly to employment of new senior managers and operations personnel.

 

**FinancialCondition**

 

Total assets at March 31,2005, were $88,606,528, a decrease of $2,567,840 or 2.8% compared to 2004year-end assets of $91,174,368.  Thedecrease in total assets is mainly due to management’s aggressive efforts toimprove the quality of the loan portfolio by recognizing trouble loans andtaking appropriate action to have the loan either paid and moved or chargedoff.  Deposits decreased to $76,087,823at March 31, 2005, a decrease of $2,299,404 or 2.9% from $78,387,227 at December31, 2004.  The decrease in deposits wasmainly due to management’s efforts through ALCO Committee meetings to bestmatch liquidity and profitability. Securities were $229,000 at March 31, 2005 compared to $226,500 atDecember 31, 2004.

**               **The Company places anemphasis on an integrated approach to its balance sheet management.  Significant balance sheet components ofinvestment securities, loans and sources of funds are managed in an integratedmanner with the management of interest rate risk, liquidity, and capital.  These components are discussed below.

 

*Loans*

 

                Net loans outstanding totaled$69,080,761 at March 31, 2005 compared to $72,355,286 at December 31,2004.  Commercial and real estatenegative loan growth accounted for almost all of the approximately $3.3 milliondecline for the first quarter of 2005.

 

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Management feels the overall quality of loans remainssolid.  In the event that a loan is 90days or more past due the accrual of income is generally discontinued when thefull collection of principal or interest is in doubt unless the obligations areboth well secured and in the process of collection.  At March 31, 2005, total loans 90 days ormore past due and still accruing interest were $0 while total loans 90 days ormore past due and in non-accrual status equaled $2,560,097.

*Securities*

FederalHome Loan Bank (FHLB) stock at March 31, 2005 had an amortized cost of $229,000and a market value of $229,000 as compared to an amortized cost of $226,500 anda market value of $226,500 at December 31, 2004.   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.

*Deposits*

 

                Total deposits, which are theprincipal source of funds for the Company, were $76,087,823 at March 31, 2005,compared to $78,387,227 at December 31, 2004 representing a decrease of2.9%.  As previously stated the declinein total deposits is mainly due to management’s efforts through ALCO committeemeetings to best match liquidity and profitability. The Company has targetedlocal consumers, professional and commercial businesses as its centralclientele, therefore, deposit instruments in the form of demand deposits,savings accounts, money market demand accounts, NOW accounts, certificates ofdeposit and individual retirement accounts are offered to customers.   The Company established a line of creditwith the Federal Home Loan Bank secured by a blanket-pledge of 1-4 familyresidential mortgage loans.   At March31, 2005 the Company had outstanding advances of $4,314,787 at the Federal HomeLoan Bank.

 

*Capital*

 

                Equity capital at March 31, 2005 was $7,885,612, an increase of $142,515from $7,743,097 at December 31, 2004, due to a net profit of $142,515 for thefirst quarter of 2005.

 

                At March 31, 2005, both the Company’s and Bank’scapital ratios were in excess of the regulatory minimums.  Those ratios are as follows:

 
|  

                    | **Required**

**Minimum**

**Ratio** |   | **Bank**   | ** ** | **Company** | ** ** |
|----------------------------------|--------------------------------------|--------|------------|------------|-------------|------------|
| Tier  1 Leverage ratio           | 4.00                                 | %      |  8.81 | %          | 8.78        | %          |
| Tier  1 risk-based capital ratio | 4.00                                 | %      | 10.59      | %          | 10.71       | %          |
| Total  risk-based capital ratio  | 8.00                                 | %      | 11.85      | %          | 11.97       | %          |

 

*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 for implementing the Company’sasset/liability management policies, overseeing the formulation andimplementation of strategies to improve balance sheet positioning and earnings,and reviewing the Company’s interest rate sensitivity position.

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

Like any forecastingtechnique, interest rate simulation modeling is based on a large number ofassumptions.  In this case, theassumptions relate primarily to loan and deposit growth, asset and liabilityprepayments, interest rates and balance sheet management strategies.  Management believes that both individuallyand in the aggregate the assumptions are reasonable.  Nevertheless, the simulation modeling processproduces only a sophisticated estimate, not a precise calculation of exposure.

At March 31, 2005,approximately 60% of the institution’s gross loans had adjustable rates.  Based on the asset/liability modelingmanagement believes that these loans reprice at a faster pace than liabilitiesheld at the institution.  Because themajority of the institutions liabilities are 12 months and under and the gap inrepricing is asset sensitive management believes that a rising rate environmentwould have a positive impact on the Company’s net interest margin.  Floors in the majority of the institutionsadjustable rate assets also mitigate interest rate sensitivity in a decreasingrate environment.

*Off-BalanceSheet Arrangements*

 

The Company, at March 31, 2005, hadoutstanding unused lines of credit and standby letters of credit that totaledapproximately $8,450,000.  Thesecommitments have fixed maturity dates and many will mature without being drawnupon, meaning that the total commitment does not necessarily represent thefuture cash requirements.  The Companyhas the ability to liquidate Federal funds sold or, on a short-term basis, topurchase Federal funds from other banks and to borrow from the Federal Home LoanBank.  At March 31, 2005, the Company hadestablished with correspondent banks the ability to purchase Federal funds ifneeded.

 

**Item 3****.  Quantitative and Qualitative Disclosuresabout 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

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

 

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                b)            Changes in Internal Controls andProcedures

                                Therewere no changes in our internal controls over financial reporting during thequarter ended March 31, 2005, that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II****- OTHER INFORMATION**

 

**Item 1****.     LEGAL PROCEEDINGS**

 

None.

**Item 2****.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

(a)        None.

(b)       Not applicable.

(c)        No repurchases of Company securities were made duringthe quarter ended March 31, 2005.

**Item 3****.    DEFAULTS UPON SENIOR SECURITIES**

 

None.

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

 

None.

 

**Item 5****.    OTHER INFORMATION**

 

**               **(a) None.

 

**               **(b) None.

 

 

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**Item6****.    EXHIBITS**

 

**               **Index to Exhibits.

 
| **Exhibit  No.** | ** ** | **Description**                                                                |
|------------------|------------|--------------------------------------------------------------------------------|
| 3.1*             |       | Charter of BG Financial  Group, Inc.                                           |
| 3.2*             |       | Bylaws of BG Financial  Group, Inc.                                            |
| 10.1*            |       | Stock Option Agreement  between BG Financial Group, Inc. and J.Robert Grubbs   |
| 10.2*            |       | Stock Option Agreement  between BG Financial Group, Inc 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 BGFinancial Group, Inc.’s Form 8-K, as filed with the Securities ExchangeCommission on May 21, 2004.

 

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***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 FINANCIALGROUP, INC.(Registrant)

 

 
| DATE:  | May 16, 2005 |   | /s/ J. Robert Grubbs                    |   |
|--------|--------------|--------|-----------------------------------------|--------|
|   |         |   | J. Robert Grubbs                        |   |
|   |         |   | President & Chief Executive Officer |

 

 

 

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