** **

**UNITED STATES**

** SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20529**

 

----

 

**FORM 10-Q**

 

**MARK ONE**

 
| ** **                                             | **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------------------------------------------------------|------------|------------|---------------------------------------------------------------------------------------------------|
|                                                   |       |       |                                                                                              |
| **FOR THE  QUARTERLY PERIOD ENDED JUNE 30, 2005** |
|                                                   |       |       |                                                                                              |
| ** **                                             | **o**      | ** ** | **TRANSITION REPORT UNDER SECTION 13 OR 15(d)  OF THE EXCHANGE ACT**                         |

 

**FOR THETRANSITION PERIOD**

**FROM                           TO                           **

 

**COMMISSION FILE NUMBER  000-50771**

 

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

(Exact Name of Registrant asSpecified in Charter)

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

 

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

YES ý    NO o

 

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

YES o    NO ý

 

State the number of shares outstanding of each of the issuer’s classesof common equity, as of the latest practicable date:

 

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

 

 

----

 
| *** *** | ***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 - June 30, 2005 and  December 31, 2004                                        |         |
|         |                                                                                                                |         |
|         | Consolidated  Statements of Income - For the six months ended June 30, 2005 and 2004                           |         |
|         |                                                                                                                |         |
|         | Consolidated  Statements of Income - For the three months ended June 30, 2005 and 2004                         |         |
|         |                                                                                                                |         |
|         | Consolidated  Statements of Cash Flows - For the six months ended June 30, 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

----

 

**BGFINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville,Tennessee**

**CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION**

 

**Part I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 
| ** **                                                                                                                                                                  | ** ** | **As of  June 30, 2005** | ** ** | **As of  December 31, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| **ASSETS**                                                                                                                                                                  |       |                          |       |                              |       |
|                                                                                                                                                                        |       |                          |       |                              |       |
| Cash and due from banks                                                                                                                                                     |       | $                             | 6,225,132  |                              | $          | 5,538,897 |   |
| Federal funds sold                                                                                                                                                          |       | 7,622,449                     |       | 7,619,619                         |       |
| Cash and cash equivalents                                                                                                                                                   |       | 13,847,581                    |       | 13,158,516                        |       |
| Federal Home Loan Bank stock, at cost                                                                                                                                       |       | 238,200                       |       | 226,500                           |       |
| Loans, net of allowance for loan losses of  $970,617 in 2005 and $1,607,559 in 2004                                                                                         |       | 66,509,536                    |       | 72,355,286                        |       |
| Premises and equipment, net                                                                                                                                                 |       | 3,856,395                     |       | 3,895,500                         |       |
| Accrued income receivable                                                                                                                                                   |       | 404,439                       |       | 389,308                           |       |
| Deferred tax benefit                                                                                                                                                        |       | 387,620                       |       | 601,307                           |       |
| Foreclosed assets                                                                                                                                                           |       | 729,994                       |       | 489,649                           |       |
| Prepaid expenses                                                                                                                                                            |       | 89,264                        |       | 58,302                            |       |
| Total Assets                                                                                                                                                                |       | $                             | 86,063,029 |                              | $          | 91,174,368 |   |
|                                                                                                                                                                        |       |                          |       |                              |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                               |       |                          |       |                              |       |
|                                                                                                                                                                        |       |                          |       |                              |       |
| **LIABILITIES**                                                                                                                                                             |       |                          |       |                              |       |
| Deposits:                                                                                                                                                                   |       |                          |       |                              |       |
| Noninterest-bearing                                                                                                                                                         |       |                          |       |                              |       |
| Demand                                                                                                                                                                      |       | $                             | 6,956,781  |                              | $          | 6,755,994 |   |
| Interest-bearing                                                                                                                                                            |       |                          |       |                              |       |
| Money market, interest checking and savings                                                                                                                                 |       | 16,965,079                    |       | 16,046,823                        |       |
| Time deposits                                                                                                                                                               |       | 49,498,380                    |       | 55,584,410                        |       |
| Total Deposits                                                                                                                                                              |       | 73,420,240                    |       | 78,387,227                        |       |
| Accrued interest                                                                                                                                                            |       | 270,008                       |       | 202,564                           |       |
| Other liabilities                                                                                                                                                           |       | 98,814                        |       | 482,134                           |       |
| Federal Home Loan Bank advances                                                                                                                                             |       | 4,269,887                     |       | 4,359,346                         |       |
| Total Liabilities                                                                                                                                                           |       | 78,058,949                    |       | 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 June 30,  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                                                                                                                                                           |       | 314,833                       |       | 53,850                            |       |
| Total Stockholders’ Equity                                                                                                                                             |       | 8,004,080                     |       | 7,743,097                         |       |
| Total Liabilities and Stockholders’ Equity                                                                                                                             |       | $                             | 86,063,029 |                              | $          | 91,174,368 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

3

----

 

**BG FINANCIAL GROUP, INC. ANDSUBSIDIARY**

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF INCOME**

 
| ** **                                            | ** ** | **Six Months Ended**   | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
| **Interest and dividend income:**                     | ** ** | ** **             | ** ** | ** ** | ** ** |
| Loans, including fees                                 |       | $                      | 2,534,041  |   | $ | 2,642,483 |   |
| Dividends on Federal Home Loan Bank stock             |       | 5,359                  |       | 15,188 |   |
| Federal funds sold and other                          |       | 134,543                |       | 34,729 |   |
| Total interest and dividend income                    |       | 2,673,943              |       | 2,692,400 |   |
|                                                  |       |                   |       |   |   |
| **Interest expense:**                                 | ** ** | ** **             | ** ** | ** ** | ** ** |
| Deposits                                              |       | 919,519                |       | 666,918 |   |
| Borrowed funds                                        |       | 70,327                 |       | 72,769 |   |
| Total interest expense                                |       | 989,846                |       | 739,687 |   |
| Net interest income before provision for  loan losses |       | 1,684,097              |       | 1,952,713 |   |
| ** **                                            | ** ** | ** **             | ** ** | ** ** | ** ** |
| **Provision for (benefit from) loan losses**          |       | (368,692               | )          | 70,599 |   |
| Net interest income after provision for  loan losses  |       | 2,052,789              |       | 1,882,114 |   |
|                                                  |       |                   |       |   |   |
| **Noninterest income:**                               |       |                   |       |   |   |
| Service charges on deposit accounts                   |       | 132,169                |       | 146,537 |   |
| Fees from origination of mortgage loans               |       | 55,738                 |       | 73,847 |   |
| Investment sales commissions                          |       | 49,057                 |       | 58,143 |   |
| Other                                                 |       | 12,710                 |       | 17,496 |   |
| Total noninterest income                              |       | 249,674                |       | 296,023 |   |
|                                                  |       |                   |       |   |   |
| **Noninterest expenses:**                             |       |                   |       |   |   |
| Compensation and benefits                             |       | 942,198                |       | 688,683 |   |
| Occupancy expenses                                    |       | 235,516                |       | 183,039 |   |
| Marketing                                             |       | 106,823                |       | 71,242 |   |
| Data processing                                       |       | 92,544                 |       | 90,904 |   |
| Other operating expenses                              |       | 473,012                |       | 331,762 |   |
| Total noninterest expense                             |       | 1,850,093              |       | 1,365,630 |   |
| **Income before income taxes**                        |       | 452,370                |       | 812,507 |   |
|                                                  |       |                   |       |   |   |
| Income tax expense (benefit)                          |       | 191,387                |       | 298,680 |   |
|                                                  |       |                   |       |   |   |
| **Net income**                                        |       | $                      | 260,983    |   | $ | 513,827 |   |
|                                                  |       |                   |       |   |   |
| Earnings per share                                    |       | $                      | .11        |   | $ | .22 |   |

 

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

 

4

----

 

**BG FINANCIAL GROUP, INC. ANDSUBSIDIARY**

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF INCOME**

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
| **Interest and dividend income:**                     | ** ** | ** **             | ** ** | ** ** | ** ** |
| Loans, including fees                                 |       | $                      | 1,283,478  |   | $ | 1,326,738 |   |
| Dividends on Federal Home Loan Bank stock             |       | 2,846                  |       | 5,439 |   |
| Federal funds sold and other                          |       | 80,677                 |       | 21,249 |   |
| Total interest and dividend income                    |       | 1,367,001              |       | 1,353,426 |   |
|                                                  |       |                   |       |   |   |
| **Interest expense:**                                 | ** ** | ** **             | ** ** | ** ** | ** ** |
| Deposits                                              |       | 487,162                |       | 341,769 |   |
| Borrowed funds                                        |       | 35,051                 |       | 36,807 |   |
| Total interest expense                                |       | 522,213                |       | 378,576 |   |
| Net interest income before provision for  loan losses |       | 844,788                |       | 974,850 |   |
| ** **                                            | ** ** | ** **             | ** ** | ** ** | ** ** |
| **Provision for (benefit from) loan losses**          |       | (237,045               | )          | 3,882 |   |
| Net interest income after provision for  loan losses  |       | 1,081,833              |       | 970,968 |   |
|                                                  |       |                   |       |   |   |
| **Noninterest income:**                               |       |                   |       |   |   |
| Service charges on deposit accounts                   |       | 78,349                 |       | 70,886 |   |
| Fees from origination of mortgage loans               |       | 33,902                 |       | 44,882 |   |
| Investment sales commissions                          |       | 32,397                 |       | 26,694 |   |
| Other                                                 |       | 8,001                  |       | 1,013 |   |
| Total noninterest income                              |       | 152,649                |       | 143,475 |   |
|                                                  |       |                   |       |   |   |
| **Noninterest expenses:**                             |       |                   |       |   |   |
| Compensation and benefits                             |       | 443,123                |       | 359,553 |   |
| Occupancy expenses                                    |       | 116,292                |       | 100,950 |   |
| Marketing                                             |       | 79,845                 |       | 49,160 |   |
| Data processing                                       |       | 47,388                 |       | 43,130 |   |
| Other operating expenses                              |       | 262,394                |       | 185,727 |   |
| Total noninterest expense                             |       | 949,042                |       | 738,520 |   |
| **Income before income taxes**                        |       | 285,440                |       | 375,923 |   |
|                                                  |       |                   |       |   |   |
| Income tax expense (benefit)                          |       | 166,972                |       | 128,902 |   |
|                                                  |       |                   |       |   |   |
| **Net income**                                        |       | $                      | 118,468    |   | $ | 247,021 |   |
|                                                  |       |                   |       |   |   |
| Earnings per share                                    |       | $                      | .05        |   | $ | .11 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

5

----

 

**BG FINANCIAL GROUP, INC. ANDSUBSIDIARY**

**Greeneville,Tennessee**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                                | ** ** | **Six Months Ended**   | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
|                                                                                      |       |                   |       |   |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                 | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net income                                                                                |       | $                      | 260,983    |   | $ | 513,827 |   |
| Adjustments to reconcile net income to net  cash provided (used) by operating activities: |       |                   |       |   |   |
| Provision for loan losses                                                                 |       | (368,692               | )          | 70,599 |   |
| Depreciation                                                                              |       | 154,098                |       | 112,928 |   |
| Realized gain (loss) on sales of foreclosed  assets                                       |       | 6,211                  |       | (2,919 | ) |
| Deferred income tax benefit                                                               |       | 213,687                |       | (8,075 | ) |
| Net change in:                                                                            |       |                   |       |   |   |
| Accrued income receivable                                                                 |       | (15,131                | )          | (30,326 | ) |
| Other assets                                                                              |       | (30,962                | )          | 93,913 |   |
| Other liabilities                                                                         |       | (315,876               | )          | 314,771 |   |
| Net cash provided (used) by operating  activities                                         |       | (95,682                | )          | 1,064,718 |   |
|                                                                                      |       |                   |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                 | ** ** | ** **             | ** ** | ** ** | ** ** |
| Federal Home Loan Bank stock purchases                                                    |       | (11,700                | )          | (50,200 | ) |
| Proceeds from sales of foreclosed assets                                                  |       | 172,328                |       | 217,477 |   |
| Loan originations and principal  collections, net                                         |       | 6,214,442              |       | (5,777,471 | ) |
| Additions to foreclosed assets                                                            |       | (418,884               | )          | (139,832 | ) |
| Additions to premises and equipment                                                       |       | (114,992               | )          | (572,606 | ) |
| Net cash provided (used) by investing  activities                                         |       | 5,841,194              |       | (6,322,632 | ) |
|                                                                                      |       |                   |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                 |       |                   |       |   |   |
| Net change in deposits                                                                    |       | 1,119,042              |       | 2,319,440 |   |
| Net change in certificates of deposit                                                     |       | (6,086,030             | )          | 2,496,720 |   |
| Proceeds from short-term borrowings                                                       |       | —                 |       | 41,000 |   |
| Federal Home Loan Bank advances                                                           |       | (89,459                | )          | 276,462 |   |
| Federal Home Loan Bank repayments                                                         |       | —                 |       | (83,115 | ) |
| Net cash provided (used) by financing  activities                                         |       | (5,056,447             | )          | 5,050,507 |   |
|                                                                                      |       |                   |       |   |   |
| Net change in cash and cash equivalents                                                   |       | 689,065                |       | (207,407 | ) |
|                                                                                      |       |                   |       |   |   |
| Cash and cash equivalents at beginning of  year                                           |       | 13,158,516             |       | 12,298,970 |   |
|                                                                                      |       |                   |       |   |   |
| Cash and cash equivalents at end of year                                                  |       | $                      | 13,847,581 |   | $ | 12,091,563 |   |
|                                                                                      |       |                   |       |   |   |
| **SUPPLEMENTARY CASH FLOW INFORMATION:**                                                  | ** ** | ** **             | ** ** | ** ** | ** ** |
| Interest paid on deposits and borrowed  funds                                             |       | $                      | 922,401    |   | $ | 650,643 |   |
| Income taxes paid                                                                         |       | $                      | 126,000    |   | $ | — |   |

 

The accompanying notes are an integral part of these financialstatements.

 

6

----

 

**BGFINANCIAL GROUP, INC. AND SUBSIDIARY**

**Greeneville,Tennessee**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

*Nature of Business*:

 

BGFinancial Group, Inc. (the “Company”) is a bank holding company whosebusiness is conducted by its wholly-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, liabilitiesor operations until January, 2004, when it acquired the Bank in a Plan of ShareExchange whereby the shareholders exchanged their shares of stock in the Bankfor shares of stock 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.

 

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.  Significant intercompanytransactions and accounts 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 to Form 10-Qand Article 10 of Regulation S-X as promulgated by the Securities andExchange Commission (“SEC”). Accordingly, they do not include all the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements.  In theopinion of management, all adjustments (none of which were other than normalrecurring accruals) considered necessary for a fair presentation of thefinancial position and results of operations for the periods presented havebeen included.  Operating results for thethree months ended June 30, 2005 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2005.  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, 2004.  Certain amounts from prior period financialstatements have been reclassified to conform to the current year’spresentation.

 

*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

----

 

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

 

In December 2002, the FASB issued SFAS No. 148,“*Accounting for Stock-Based Compensation –Transition and Disclosure, an amendment of FASB Statement No. 123.*”  This Statement amends Statement No. 123,Accounting for Stock-Based Compensation, to provide alternative methods oftransition for a voluntary change to the fair value method of accounting forstock-based employee compensation.  Inaddition, this Statement amends the disclosure requirements of Statement No. 123to require prominent disclosures in both annual and interim financialstatements.  Certain of the disclosuremodifications are required for fiscal years ending after December 15, 2005and are included below.

 

The Company applies APB Opinion 25 and relatedinterpretations 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.  On May 17, 2005 theBoard of Directors approved for all non-vested employee stock options grantedto become fully vested and exercisable as of that date.  Any stock options granted after May 17,2005 are fully exercisable on the date granted. All stock options granted that are not exercised expire ten (10) yearsfrom the date granted. The purpose of the acceleration of vesting is to enablethe Company to recognize compensation expense on a pro forma basis associatedwith these options in future periods in our Consolidated Statements of Incomebefore adoption of SFAS 123R in January 2006.  The following table illustrates the effect onnet income and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123 to stock-based employeecompensation.  

 
| ** **                                                                                                                                    | ** ** | **Three-Month Period  Ended June 30** | ** ** | **Six-Month Period  Ended June 30** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                                   | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                    | ** ** | ** **                                 | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income, as reported                                                                                                                       |       | $                                          | 118,468    |                                     | $          | 247,021 |   | $ | 260,983 |   | $ | 513,827 |   |
| ** **                                                                                                                                    | ** ** | ** **                                 | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | 83,774                                     |       | 15,300                                   |       | 125,675 |   | 30,600 |   |
| ** **                                                                                                                                    | ** ** | ** **                                 | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pro forma net income                                                                                                                          |       | $                                          | 34,694     |                                     | $          | 231,721 |   | $ | 135,308 |   | $ | 483,227 |   |
| ** **                                                                                                                                    | ** ** | ** **                                 | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Earnings per share                                                                                                                            | ** ** | ** **                                 | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic – as reported                                                                                                                      |       | $                                          | .05        |                                     | $          | .11 |   | $ | .11 |   | $ | .22 |   |
|                                                                                                                                          |       |                                       |       |                                     |       |   |   |   |   |
| Basic – pro forma                                                                                                                        |       | $                                          | .02        |                                     | $          | .10 |   | $ | .06 |   | $ | .21 |   |
|                                                                                                                                          |       |                                       |       |                                     |       |   |   |   |   |
| Diluted – as reported                                                                                                                    |       | $                                          | .05        |                                     | $          | .11 |   | $ | .11 |   | $ | .22 |   |
|                                                                                                                                          |       |                                       |       |                                     |       |   |   |   |   |
| Diluted – pro forma                                                                                                                      |       | $                                          | .01        |                                     | $          | .10 |   | $ | .05 |   | $ | .21 |   |

 

8

----

 

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

 

**Impactof Inflation**

 

The financial statementsand related financial data presented herein have been prepared in accordancewith accounting principles generally accepted in the United States andpractices within the banking industry which require the measurement offinancial position and operating results in terms of historical dollars withoutconsidering the changes in the relative purchasing power of money over time dueto inflation.  Unlike most industrialcompanies, virtually all the assets and liabilities of a financial institutionare monetary in nature.  As a result,interest rates have a more significant impact on a financial institution’sperformance than the effects of general levels of inflation.

 

**CriticalAccounting Estimates**

 

TheCompany follows generally accepted accounting principles that are recognized inthe United States, along with general practices within the bankingindustry.  In connection with theapplication of those principles and practices, we have made judgments andestimates which, in the case of our allowance for loan and lease losses (ALL),are material to the determination of our financial position and results ofoperation.

 

**Recent Accounting Pronouncements**

 

InMarch 2004, the SEC issued Staff Accounting Bulletin No. 105, *Application of Accounting Principles to LoanCommitments*.  Currentaccounting guidance requires the commitment to originate mortgage loans to beheld for sale be recognized on the balance sheet at fair value from inceptionthrough expiration or funding.  SAB 105requires that the fair-value measurement include only differences between theguaranteed interest rate in the loan commitment and a market interest rate,excluding any expected future cash flows related to the customer relationshipor loan servicing.  SAB 105 is effectivefor commitments to originate mortgage loans to be held for sale that areentered into after March 31, 2004. Its adoption did not have a materialimpact on the consolidated financial position or results of operations of theCompany.

 

InMarch 2004, the Financial Accounting Standards Board’s (“FASB”) EmergingIssues Task Force reached a consensus on EITF Issue No. 03-1, *The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments. *EITF03-1 provides guidance for determining when an investment is consideredimpaired, whether impairment is other-than-temporary, and measurement of animpairment loss.  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 thecost of the investment is recoverable within a reasonable period of timeoutweighs evidence to the contrary.  Ifimpairment is determined to be other-than-temporary, then an impairment lossshould be recognized equal to the difference between the investment’s cost andits fair value.  The recognition andmeasurement provisions were initially effective for other-than-temporaryimpairment evaluations in reporting periods beginning after June 15,2004.  However, in September 2004,the effective date of these provisions was delayed until the finalization of aFASB Staff Position (FSP) to provide additional implementation guidance.  Due to the recognition and measurementprovisions being suspended and the final rule delayed, the Company is notable to determine whether the adoption of these new provisions will have amaterial impact on the consolidated financial position or results of income.

 

9

----

 

Statement of Position 03-03,*Accounting for Certain Loans or DebtSecurities Acquired in a Transfer* (SOP 03-03) addresses accountingfor differences between contractual cash flows and cash flows expected to becollected from an investor’s initial investment in loans or debt securities(loans) acquired in a transfer if those differences are attributable, at leastin part, to credit quality.  It includesloans acquired in purchase business combinations and applies to allnongovernmental entities, including not-for-profit organizations.  The SOP does not apply to loans originated bythe entity.  The SOP is effective forloans acquired in fiscal years beginning after December 15, 2004.  Early adoption is encouraged.  Specific transition guidance applies tocertain loans that currently are within the scope of Practice Bulletin 6,Amortization of Discounts on Certain Acquired Loans.  Its adoption is not expected to have materialimpact on the consolidated financial position or results of operations of theCompany.

 

InDecember 2004, the FASB issued Statement of Financial Accounting Standards(“SFAS”) No. 123 (revised 2004), *Share-BasedPayment* (“SFAS No. 123R”), which revised SFAS No. 123, “Accountingfor Stock-Based Compensation.” This statement supercedes APB Opinion No. 25,“Accounting for Stock Issued to Employees.” The revised statement addresses the accounting for share-based paymenttransactions with employees and other third parties, eliminates the ability toaccount for share-based compensation transactions using APB 25, and requiresthat the compensation costs relating to such transactions be recognized in theconsolidated statement of income.  On April 14,2005, the Securities and Exchange Commission deferred implementation of SFAS No. 123Rfor registrants until the next fiscal year following June 15, 2005.  We are currently evaluating the provisions ofSFAS No. 123R and will adopt it on January 1, 2006 as required.

 

**Forward-Looking Statements**

 

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 of federaland state securities laws.  Although theCompany believes that the assumptions underlying such forward-lookingstatements contained in this Report are reasonable, any of the assumptionscould be inaccurate and, accordingly, there can be no assurance that theforward-looking statements included herein will prove to be accurate.  The use of such words as “expect,” “anticipate,”“forecast,” and comparable terms should be understood by the reader to indicatethat the statement is “forward-looking” and thus subject to change in a mannerthat can be unpredictable.  Factors thatcould cause actual results to differ from the results anticipated, but notguaranteed, in this Report, include (without limitation) economic and socialconditions, competition for loans, mortgages, and other financial services andproducts, changes in interest rates, unforeseen changes in liquidity, resultsof operations, and financial conditions affecting the Company’s customers, andother risks that cannot be accurately quantified or completely identified.  Many factors affecting the Company’sfinancial condition and profitability, including changes in economicconditions, the volatility of interest rates, political events and competitionfrom other providers of financial services simply cannot be predicted. Becausethese factors are unpredictable and beyond the Company’s control, earnings mayfluctuate from period to period.  Thepurpose of this type of information is to provide readers with informationrelevant to understanding and assessing the financial condition and results 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.

 

10

----

 

**General**

 

On January 23, 2004, BG Financial Group, Inc.(“Company”), became a one bank holding company, when it acquired all of theoutstanding shares of common stock of Bank of Greeneville (“Bank”) in a one forone 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 June 30, 2005, the Company had liquid assetsof approximately $13.8 million in the form of cash and federal funds sold comparedto approximately $13.2 million on December 31, 2004.  Management believes that the liquid assetsare adequate at June 30, 2005. 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 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 $118,468 or$.05 per share for the quarter ended June 30, 2005 compared to $247,021 or$.11 per share for the same period in 2004.  Net income for the six months ended June 30, 2005 was $260,983 ascompared to a net income of $513,827 for the same period in 2004. Most of thedecrease in net income can be accounted for by the addition of seniormanagement personnel and their related salary and benefit costs, an increase indepreciation expense from the new operations center,  along with reductions in the total loanportfolio.

 

*Net Interest Income/Margin*

 

Net interest income represents the amount bywhich interest earned on various assets exceeds interest paid on deposits andother interest-bearing liabilities and is the most significant component of theCompany’s earnings.  Net interest incomefor the quarter ended June 30, 2005 was $844,788 compared to $974,850 forthe same period in 2004. Net interest income for the six months ended June 30,2005 was $1,684,097, compared to $1,952,713 for the same period in 2004. Inaddition to a reduction in the total loan portfolio, the Company pursues localdeposits aggressively, which has resulted in compression of net interestmargin.  Based on the Company’s mix ofinterest earning assets and interest bearing liabilities, management believesthat net interest margin should begin to increase for the remainder of theyear.  This assumption is based on acontinued rising interest rate environment. If interest rates remain stable or begin to decline, net interest margincould decline due to competitive pricing of both loans and interest bearingdeposits.

 

11

----

 

*Benefit from / Provision for Loan Losses*

 

The provision for loan losses represents acharge to operations necessary to establish an allowance for possible loanlosses, which in management’s evaluation, is adequate to provide coverage forestimated losses on outstanding loans and to provide for uncertainties in theeconomy. There was a benefit from the estimate for loan losses during the threemonths and six months ended June 30, 2005 due to a change in themethodology used to evaluate impaired loans to identify specific reserves needed.  The benefit from estimated losses was also aresult of certain loans, which were considered impaired during the firstquarter, being settled with minimal losses. The benefit was $(237,045) and$(368,692), respectively, as compared to the provision of $3,882 and $70,599for the same periods in 2004.  The benefit for the three and six monthsending June 30, 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 benefit is due also in part to areduction in the loan portfolio. During the three and six months ended June 30,2005, loan charge-offs were $129,190 and $274,425 respectively as compared to$19,499 and $25,322 for the same periods in 2004.  The recoveries for the three and six monthperiods ended June 30, 2005 were $1,254 and $6,174 respectively ascompared to $23,192 and $27,982 for the same periods in 2004.  The benefit from loan losses lowered thetotal allowance for loan losses to $970,617 at June 30, 2005 from the December 31,2004 total of $1,607,559, a decrease of 39.6%. Management believes theallowance for possible loan losses at June 30, 2005 to be adequate andwill increase during the year to match normal loan growth.

 

*Provisions for Income Taxes*

 

In 2002, the Company posted pre-tax income of$130,109 causing management to believe that it is more likely than not that itwill generate future taxable income to utilize its net deferred tax asset.   As a result, the valuation allowance waseliminated and a net deferred tax asset was recorded for the deductibletemporary differences and carryforwards that are expected to be available toreduce future taxable income.  The Company’sprovision for income tax expense for the three months and six months ended June 30,2005, was $166,972 and $191,387 respectively when compared to $128,902 and$298,680 for the same periods in 2004. Management believes the provision for income taxes at June 30, 2005to be adequate.

 

*Noninterest Income*

* *

The Company’s noninterest income consists ofservice charges on deposit accounts and other fees and commissions.  Total noninterest income for three months andsix months ended June 30, 2005 was $152,649 and $249,674, respectivelywhen compared to $143,475 and $296,023, for the same periods in 2004.  Management believes that other fees andcommissions and service charges will begin to increase during the remainderof  2005. Although the noninterest income for the six months ended June 30,2005 is $46,349 less than for the same period in 2004, the noninterest incomefor the three months ended June 30, 2005 shows an increase of $9,174 overthe same period in 2004.

 

*Noninterest Expense*

* *

Noninterest expenses for the three months and sixmonths ended June 30, 2005, were $949,042 and $1,850,093, respectively ascompared to $738,520 and $1,365,630 for the same periods in 2004.  These expenses consisted of increasedemployee costs due to additions in senior management as well as otherdepartments, and annual review of other employees. Occupancy expenses increaseddue to the addition of the Company’s Operations Center, which caused greatercosts in maintenance, utilities and depreciation expense. Other operatingexpenses increased also, with the greatest single increase in marketingcosts.  Salaries and employee benefitsfor the three and six months ended June 30, 2005, were $443,123 and$942,198 respectively compared to $359,553 and $688,683 for the same periods in2004, or an increase of 23.2% and  26.9%respectively.

 

12

----

 

**Financial Condition**

 

Totalassets at June 30, 2005, were $86,063,029, a decrease of $5,111,339 or5.6% compared to 2004 year-end assets of $91,174,368.  The decrease in total assets is mainly due tomanagement’s aggressive efforts to improve the quality of the loan portfolio byrecognizing troubled loans and taking appropriate action to have the loaneither paid and moved or charged off. Competitive pressures in the localinterest rate environment for fixed rate loans have also contributed to theloan portfolio reduction. Deposits decreased to $73,420,240 at June 30,2005, a decrease of $4,966,987 or 6.3% from $78,387,227 at December 31,2004.  The decrease in deposits wasmainly due to management’s efforts through Asset/Liability Committeerecommendations to best match liquidity and profitability.  Securities were $238,200 at June 30,2005 compared to $226,500 at December 31, 2004.

 

The Company places an emphasis on an integratedapproach to its balance sheet management. Significant balance sheet components of investment securities, loans andsources of funds are managed in an integrated manner with the management ofinterest rate risk, liquidity, and capital. These components are discussed below.

 

*Loans*

* *

Net loans outstanding totaled $66,509,536 at June 30,2005 compared to $72,355,286 at December 31, 2004.  Commercial and real estate negative loangrowth accounted for almost all of the approximately $5.8 million decline forthe first and second quarters of 2005. This negative growth is in partattributable to potential customers seeking fixed rate loans with longer termsthan the Company presently offers.

 

Management feels theoverall quality of loans remains solid, as problem loans have been identifiedand either charged off or adequate provision has been made for any potentialloss that might occur.  In the event thata loan is 90 days or more past due the accrual of income is generallydiscontinued when the full collection of principal or interest is in doubtunless the obligations are both well secured and in the process ofcollection.  At June 30, 2005, totalloans 90 days or more past due and still accruing interest were $0 while totalloans 90 days or more past due and in non-accrual status equaled $3,298,186.

 

*Securities*

* *

Federal Home Loan Bank (FHLB) stock at June 30,2005 had an amortized cost of $238,200 and a market value of $238,200 ascompared to an amortized cost of $226,500 and a market value of $226,500 at December 31,2004.   As a member of the FHLB, theCompany is required to maintain stock in an amount equal to 0.15% of totalassets.  Federal Home Loan Bank stock iscarried at cost under the available-for-sale category.  Federal Home Loan Bank stock is maintained bythe Company at par value of one hundred dollars per share.

 

*Deposits*

* *

Total deposits, which are the principal source offunds for the Company, were $73,420,240 at June 30, 2005, compared to$78,387,227 at December 31, 2004 representing a decrease of 6.3%.  As previously stated the decline in totaldeposits is mainly due to management’s efforts through Asset/LiabilityCommittee recommendations to best match liquidity and profitability. TheCompany has targeted local consumers, professional and commercial businesses asits central clientele, therefore, deposit instruments in the form of demanddeposits, savings accounts, money market demand accounts, NOW accounts,certificates of deposit and individual retirement accounts are offered tocustomers.   The Company established aline of credit with the Federal Home Loan Bank secured by a blanket-pledge of 1-4family residential mortgage loans.   AtJune 30, 2005 the Company had outstanding advances of $4,269,887 at theFederal Home Loan Bank.

 

13

----

 

*Capital*

* *

Equity capital at June 30,2005 was $8,004,080, an increase of $260,983 from $7,743,097 at December 31,2004, due to a net profit of $260,983 for the first two quarters of 2005.

 

At June 30, 2005, both the Company’s andBank’s capital ratios were in excess of the regulatory minimums.  Those ratios are as follows:

 
| ** **                      | ** ** | **Required  Minimum  Ratio** | ** ** | **To Be Well  Capitalized  Ratio** | ** ** | **Bank** | ** ** | **Company** | ** ** |
|---------------------------------|------------|------------------------------|------------|------------------------------------|------------|----------|------------|-------------|------------|
| Tier 1 Leverage ratio           |       | 4.00                         | %          | 5.00                               | %          | 8.98     | %          | 9.00        | %          |
| Tier 1 risk-based capital ratio |       | 4.00                         | %          | 6.00                               | %          | 11.15    | %          | 11.17       | %          |
| Total risk-based capital ratio  |       | 8.00                         | %          | 10.00                              | %          | 12.32    | %          | 12.35       | %          |

 

The Company’s primary sourceof liquidity is dividends paid by the Bank. The Bank is subject to the Tennessee Banking Act,which limits a bank’s ability to pay dividends. The payment of dividends by any bank is dependent upon its earnings andfinancial condition and subject to the statutory power of certain federal andstate regulatory agencies to act to prevent what they deem unsafe or unsoundbanking practices.  The payment ofdividends could, depending upon the financial condition of the Bank, be deemedto constitute such an unsafe or unsound banking practice.  Under Tennessee law, the board of directorsof a state bank may not declare dividends in any calendar year that exceeds thetotal of its retained net income of the preceding two (2) years withoutthe prior approval of the Tennessee Department of Financial Institutions.  The FDIA prohibits a state bank, the depositsof which are insured by the FDIC, from paying dividends if it is in default inthe payment of any assessments due the FDIC. The Bank is also subject to the minimum capital requirements of the FDICwhich impact the Bank’s ability to pay dividends.  If the Bank fails to meet these standards, itmay not be able to pay dividends or to accept additional deposits because ofregulatory requirements.

 

If, in the opinion of theapplicable federal bank regulatory authority, a depository institution isengaged in or is about to engage in an unsafe or unsound practice (which,depending on the financial condition of the depository institution, couldinclude the payment of dividends), such authority may require that suchinstitution cease and desist from such practice.  The federal banking agencies have indicated thatpaying dividends that deplete a depository institution’s capital base to aninadequate level would be such an unsafe and unsound banking practice.  Moreover, the Federal Reserve Board, theComptroller of the Currency and the FDIC have issued policy statements whichprovide that bank holding companies and insured depository institutionsgenerally should only pay dividends out of current operating earnings.

 

The payment of dividendsby the Bank may also be affected or limited by other factors, such as therequirement to maintain adequate capital above regulatory guidelines.

 

14

----

 

*Liability and Asset Management*

* *

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

 

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

 

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

 

AtJune 30, 2005, approximately 59.5% of the Company’s gross loans hadadjustable rates.  Based on theasset/liability modeling management believes that these loans reprice at afaster pace than liabilities held at the Company.  Because the majority of the Company’sliabilities are 12 months and under and the gap in repricing is asset sensitivemanagement believes that a rising rate environment would have a positive impacton the Company’s net interest margin. Floors in the majority of the Company’s adjustable rate assets also mitigateinterest rate sensitivity in a decreasing rate environment.

 

**Off-Balance Sheet Arrangements**

 

The Company, at June 30, 2005, had outstandingunused lines of credit and standby letters of credit that totaled approximately$9,670,000.  These commitments have fixedmaturity dates and many will mature without being drawn upon, meaning that thetotal commitment does not necessarily represent the future cashrequirements.  The Company has theability to liquidate Federal funds sold or, on a short-term basis, to purchaseFederal funds from other banks and to borrow from the Federal Home LoanBank.  At June 30, 2005, the Companyhad established the ability to purchase Federal funds with correspondent banksif needed.

 

**Item3.  Quantitative and Qualitative Disclosuresabout Market Risk**

 

The information set forthon pages 9 through 15 of Item 2, “MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS is incorporated herein byreference.

 

**Item 4.  Controls and Procedures**

 

a)                                      Evaluation of Disclosure Controls andProcedures

 

The Company maintains disclosure controls andprocedures, as defined in Rule 13a-15(e) and 15d-15(e) promulgatedunder the Securities Exchange Act of 1934 (the “Exchange Act”), that aredesigned to ensure that information required to be disclosed by it in thereports 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 communicatedto the 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 disclosure controlsand procedures, the Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures were effective.

 

15

----

 

b)                                     Changes in Internal Controls andProcedures

 

There were nochanges in our internal controls over financial reporting during the quarterended June 30, 2005, that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

16

----

 

**PART II - OTHER INFORMATION**

 

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

 

 None.

 

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

 

(a)        None.

 

(b)       Not applicable.

 

(c)        No repurchases of Company securities were made duringthe quarter ended June 30, 2005.

 

The onlyrestrictions on working capital and the payment of dividends are those reportedin Part I.

 

**Item 3.****           DEFAULTS UPON SENIORSECURITIES**

 

None.

 

**Item 4.****           SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

 

(a)             The annual meeting of the Company’s shareholders washeld May 24, 2005.

 

(b)            The following members of the board of directors wereeach re-elected as Class I directors to serve for additional three-yearterms or until their respective successors are duly elected and qualified:

 

J. Robert Grubbs

Leonard B. Lawson

 

The followingmembers of the board of directors were each re-elected as Class IIdirectors to serve for additional one-year terms or until their respectivesuccessors are duly elected and qualified:

 

Don E. Claiborne

Wendy C. Warner

 

The term of officefor the following members of the board of directors continued after themeeting:  William J. Smead and Roger A.Woolsey (Class III directors).

 

(c)             (1)       The following directors were elected bythe following tabulation:

 
| **Name**          | ** ** | **Number of  Shares  Voting** | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-Votes** | ** ** |
|-------------------|------------|-------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|-----------------------|------------|
|              |       |                          |       |      |       |        |       |        |       |                  |       |
| J. Robert Grubbs  |       | 1,283,392                     |       | 1,274,627 |       | 8,765       |       | 0           |       | 0                     |       |
| Leonard B. Lawson |       | 1,283,392                     |       | 1,274,627 |       | 8,765       |       | 0           |       | 0                     |       |
| Don E. Claiborne  |       | 1,283,392                     |       | 1,274,627 |       | 8,765       |       | 0           |       | 0                     |       |
| Wendy C. Warner   |       | 1,283,392                     |       | 1,274,627 |       | 8,765       |       | 0           |       | 0                     |       |

 

17

----

 

 

(2)          The ratification of the appointment of PershingYoakley & Associates, P.C. as independent auditors for the Company forfiscal year 2005 was as follows:

 
| **Number of  Shares Voting** | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-Votes** | ** ** |
|------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|-----------------------|------------|
|                         |       |      |       |        |       |        |       |                  |       |
| 1,274,898                    |       | 1,268,487 |       | 1,855       |       | 4,556       |       | 0                     |       |

 

(d)                                 None.

 

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

 

(a)                                  None.

 

(b)                                 None.

 

18

----

 

**Item 6.****           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               |
| 11                   |       | Computation of earnings per share.                                                       |
| 31.1                 |       | Certification pursuant to  Rule 13a-14a/15d-14(a)                                   |
| 31.2                 |       | Certification pursuant to  Rule 13a-14a/15d-14(a)                                   |
| 32.1                 |       | Certification pursuant to Rule 18 USC  Section 1350-Sarbanes-Oxley Act of 2002 |
| 32.2                 |       | Certification pursuant to Rule 18 USC  Section 1350-Sarbanes-Oxley Act of 2002 |

 

----

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

 

19

----

 

***SIGNATURES***

 

In accordance with therequirements of the Exchange Act, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|   |   | BG FINANCIAL  GROUP, INC. |   |   |
|--------|--------|---------------------------|--------|--------|
|   |   | (Registrant)              |   |   |

 

 
| DATE:  | August 22,  2005                         |   | /s/ J. Robert Grubbs |   |
|--------|-----------------------------------------------|--------|----------------------|--------|
|   | J. Robert Grubbs                              |
|   | President & Chief Executive  Officer |

 

20

----