UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549



FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2007



Commission File Number: 000-33355



| |                                                        | 
| | ------------------------------------------------------ | 
| | TRANSCOMMUNITY FINANCIAL CORPORATION                   | 
| | (Exact name of registrant as specified in its charter) | 



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Virginia                                                       |  | 54-2032355                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|4235 Innslake Drive
Glen Allen, Virginia |  | 23060     
|(Address of principal executive offices) |  | (Zip Code)



| |                                                      | 
| | ---------------------------------------------------- | 
| | (804) 934-9999                                       | 
| | (Registrants telephone number, including area code) | 





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [ X ] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [  ]  Accelerated filer [  ] Non-accelerated filer [ X ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ] No [ X ]

The number of shares outstanding of the registrants common stock at the close of business on May 14, 2007 was 4,586,741 shares of common stock, $.01 par value.





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TRANSCOMMUNITY FINANCIAL CORPORATION





INDEX





|         |                                                                                       |         
|-------- | ------------------------------------------------------------------------------------- | --------
|         |                                                                                       | Page No.
|         |                                                                                       |         
|PART I   | FINANCIAL INFORMATION                                                                 |         
|         |                                                                                       |         
|Item 1.  | Financial Statements                                                                  | 1       
|         |                                                                                       |         
|         | Consolidated Statements of Financial Condition                                       |         
|         | March 31, 2007 (Unaudited) and December 31, 2006                                      | 1       
|         |                                                                                       |         
|         | Consolidated Statements of Operations                                                |         
|         | Three Months Ended March 31, 2007 and 2006 (Unaudited)                                | 2       
|         |                                                                                       |         
|         | Consolidated Statements of Changes in Stockholders' Equity                           |         
|         | Three Months Ended March 31, 2007 and 2006 (Unaudited)                                | 3       
|         |                                                                                       |         
|         | Consolidated Statements of Cash Flows                                                |         
|         | Three Months Ended March 31, 2007 and 2006 (Unaudited)                                | 4       
|         |                                                                                       |         
|         | Notes to Consolidated Financial Statements (Unaudited)                                | 5       
|         |                                                                                       |         
|Item 2.  | Managements Discussion and Analysis of Financial Condition and Results of Operations | 15      
|         |                                                                                       |         
|Item 3.  | Quantitative and Qualitative Disclosures About Market Risk                            | 23      
|         |                                                                                       |         
|Item 4.  | Controls and Procedures                                                               | 23      
|         |                                                                                       |         
|PART II  | OTHER INFORMATION                                                                     |         
|         |                                                                                       |         
|Item 1.  | Legal Proceedings                                                                     | 26      
|         |                                                                                       |         
|Item 1A. | Risk Factors                                                                          | 26      
|         |                                                                                       |         
|Item 2.  | Unregistered Sales of Equity Securities and Use of Proceeds                           | 26      
|         |                                                                                       |         
|Item 3.  | Defaults Upon Senior Securities                                                       | 26      
|         |                                                                                       |         
|Item 4.  | Submission of Matters to a Vote of Security Holders                                   | 26      
|         |                                                                                       |         
|Item 5.  | Other Information                                                                     | 26      
|         |                                                                                       |         
|Item 6.  | Exhibits                                                                              | 26      
|         |                                                                                       |         
|         | SIGNATURES                                                                            | 27      



2



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PART I  FINANCIAL INFORMATION



Item 1.

Financial Statements



TRANSCOMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

MARCH 31, 2007 AND DECEMBER 31, 2006

(unaudited)

(dollars in thousands)



|                                                                                                                                                                       |                |         |                   |   |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------- | ----------------- | - | -------
|                                                                                                                                                                       | March 31, 2007 |         | December 31, 2006
|                                                                                                                                                                       | Unaudited      |         |                   |  
|Assets                                                                                                                                                                 |                |         |                   |   |        
|Cash and due from banks                                                                                                                                                | $              | 4,725   |                   | $ | 3,669  
|Federal funds sold                                                                                                                                                     |                | 346     |                   |   | 1,422  
|Total cash and cash equivalents                                                                                                                                        |                | 5,071   |                   |   | 5,091  
|Securities available for sale, at fair value                                                                                                                           |                | 21,403  |                   |   | 13,597 
|Securities held to maturity, fair value of $7,299 and $21,286 at March 31, 2007 and December 31, 2006, respectively                                                    |                | 7,400   |                   |   | 21,420 
|Loans                                                                                                                                                                  |                | 162,427 |                   |   | 151,399
|Allowance for loan losses                                                                                                                                              |                | (1,973) |                   |   | (2,065)
|Total loans, net                                                                                                                                                       |                | 160,454 |                   |   | 149,334
|Premises and equipment, net                                                                                                                                            |                | 7,243   |                   |   | 6,689  
|Other investments                                                                                                                                                      |                | 896     |                   |   | 896    
|Assets from discontinued operations, net                                                                                                                               |                | -       |                   |   | 88     
|Other assets                                                                                                                                                           |                | 1,302   |                   |   | 1,330  
|Total assets                                                                                                                                                           | $              | 203,769 |                   | $ | 198,445
|Liabilities                                                                                                                                                            |                |         |                   |   |        
|Deposits:                                                                                                                                                              |                |         |                   |   |        
|Demand:                                                                                                                                                                |                |         |                   |   |        
|Noninterest bearing                                                                                                                                                    | $              | 21,722  |                   | $ | 20,450 
|Interest bearing                                                                                                                                                       |                | 36,077  |                   |   | 37,850 
|Savings                                                                                                                                                                |                | 10,152  |                   |   | 9,478  
|Time                                                                                                                                                                   |                | 103,914 |                   |   | 97,195 
|Total deposits                                                                                                                                                         |                | 171,865 |                   |   | 164,973
|Note payable                                                                                                                                                           |                | -       |                   |   | 500    
|Federal funds purchased                                                                                                                                                |                | 1,019   |                   |   | 1,517  
|Accrued interest payable                                                                                                                                               |                | 562     |                   |   | 540    
|Liabilities from discontinued operations, net                                                                                                                          |                | -       |                   |   | 10     
|Accrued expenses and other liabilities                                                                                                                                 |                | 415     |                   |   | 352    
|Total liabilities                                                                                                                                                      |                | 173,861 |                   |   | 167,892
|Commitments and contingencies                                                                                                                                          |                | -       |                   |   | -      
|Stockholders' Equity                                                                                                                                                   |                |         |                   |   |        
|Common stock (25,000,000 shares authorized $.01 par value) 4,586,741 and 4,581,741 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively |                | 46      |                   |   | 46     
|Additional paid in capital                                                                                                                                             |                | 39,858  |                   |   | 39,809 
|Accumulated deficit                                                                                                                                                    |                | (9,960) |                   |   | (9,262)
|Accumulated other comprehensive loss                                                                                                                                   |                | (36)    |                   |   | (40)   
|Total stockholders' equity                                                                                                                                             |                | 29,908  |                   |   | 30,553 
|Total liabilities and stockholders' equity                                                                                                                             | $              | 203,769 |                   | $ | 198,445



See accompanying notes to unaudited consolidated financial statements



1



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TRANSCOMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006

(unaudited)

(dollars in thousands)



|                                                                           |                    |        |                |                 |       
|-------------------------------------------------------------------------- | ------------------ | ------ | -------------- | --------------- | ------
|                                                                           | Three months ended
|                                                                           | March 31, 2007     |        | March 31, 2006
|                                                                           |                    |        |                | As restated (1)
|Interest and dividend income                                               |                    |        |                |                 |       
|Interest on loans, including fees                                          | $                  | 3,512  |                | $               | 2,827 
|Interest on federal funds sold                                             |                    | 200    |                |                 | 244   
|Dividends on equity securities                                             |                    | 195    |                |                 | 167   
|Interest on debt securities                                                |                    | 5      |                |                 | -     
|Total interest and dividend income                                         |                    | 3,912  |                |                 | 3,238 
|Interest expense                                                           |                    |        |                |                 |       
|Interest on deposits                                                       |                    | 1,431  |                |                 | 905   
|Interest on other borrowed funds                                           |                    | 20     |                |                 | 204   
|Total interest expense                                                     |                    | 1,451  |                |                 | 1,109 
|Net interest income                                                        |                    | 2,461  |                |                 | 2,129 
|Provision for loan losses                                                  |                    | 446    |                |                 | 52    
|Net interest income after provision for loan losses                        |                    | 2,015  |                |                 | 2,077 
|Noninterest income                                                         |                    |        |                |                 |       
|Bank service charges and fees                                              |                    | 280    |                |                 | 238   
|Total noninterest income                                                   |                    | 280    |                |                 | 238   
|Noninterest expense                                                        |                    |        |                |                 |       
|Salaries and employee benefits                                             |                    | 1,316  |                |                 | 1,208 
|Occupancy expenses                                                         |                    | 173    |                |                 | 172   
|Equipment expenses                                                         |                    | 184    |                |                 | 148   
|Other operating expenses                                                   |                    | 1,245  |                |                 | 752   
|Total noninterest expense                                                  |                    | 2,918  |                |                 | 2,280 
|(Loss) income from continuing operations before income taxes               |                    | (623)  |                |                 | 35    
|Income tax expense                                                         |                    | -      |                |                 | -     
|Net (loss) income from continuing operations                               |                    | (623)  |                |                 | 35    
|Net loss from discontinued operations                                      |                    | (77)   |                |                 | (158) 
|Net loss                                                                   | $                  | (700)  |                | $               | (123) 
|Net (loss) income per share from continuing operations (basic and diluted) | $                  | (0.14) |                | $               | 0.01  
|Net loss per share (basic and diluted)                                     | $                  | (0.15) |                | $               | (0.03)
|Weighted average number of shares outstanding (in thousands)               |                    | 4,586  |                |                 | 4,582 



(1) See Note 11, Correction of an Error of the Notes to the Unaudited Consolidated Financial Statements.



See accompanying notes to unaudited consolidated financial statements.



2



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TRANSCOMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006

(Unaudited)

(dollars and shares in thousands)



|                                                 |                        |  |                            |   |              |   |                            |  |                     |        |                                               |   |         |  |   |      |  |   |       
|------------------------------------------------ | ---------------------- |  | -------------------------- | - | ------------ | - | -------------------------- |  | ------------------- | ------ | --------------------------------------------- | - | ------- |  | - | ---- |  | - | ------
|                                                 | Shares of Common Stock |  | Common Stock Subscriptions |   | Common Stock |   | Additional Paid in Capital |  | Accumulated Deficit |        | Accumulated Other Comprehensive Income (Loss) |   | Total  
|Balance,                                         |                        |  |                            |   |              |   |                            |  |                     |        |                                               |   |         |  |   |      |  |   |       
|December 31, 2005                                | 4,582                  |  | $                          | - |              | $ | 46                         |  | $                   | 39,778 |                                               | $ | (9,379) |  | $ | (75) |  | $ | 30,370
|Net loss                                         | -                      |  |                            | - |              |   | -                          |  |                     | -      |                                               |   | (123)   |  |   | -    |  |   | (123) 
|Unrealized gain on securities available for sale | -                      |  |                            | - |              |   | -                          |  |                     | -      |                                               |   | -       |  |   | (1)  |  |   | (1)   
|Total comprehensive loss                         | -                      |  |                            | - |              |   | -                          |  |                     | -      |                                               |   | -       |  |   | -    |  |   | (124) 
|Stock-based compensation expense                 | -                      |  |                            | - |              |   | -                          |  |                     | 18     |                                               |   | -       |  |   | -    |  |   | 18    
|Balance,                                         |                        |  |                            |   |              |   |                            |  |                     |        |                                               |   |         |  |   |      |  |   |       
|March 31, 2006                                   | 4,582                  |  | $                          | - |              | $ | 46                         |  | $                   | 39,796 |                                               | $ | (9,502) |  | $ | (76) |  | $ | 30,264
|Balance,                                         |                        |  |                            |   |              |   |                            |  |                     |        |                                               |   |         |  |   |      |  |   |       
|December 31, 2006                                | 4,582                  |  | $                          | - |              | $ | 46                         |  | $                   | 39,809 |                                               | $ | (9,262) |  | $ | (40) |  | $ | 30,553
|Net loss                                         | -                      |  |                            | - |              |   | -                          |  |                     | -      |                                               |   | (700)   |  |   | -    |  |   | (700) 
|Unrealized gain on securities available for sale | -                      |  |                            | - |              |   | -                          |  |                     | -      |                                               |   | -       |  |   | 4    |  |   | 4     
|Total comprehensive loss                         |                        |  |                            |   |              |   |                            |  |                     |        |                                               |   |         |  |   |      |  |   | (696) 
|Common Stock issued                              | 5                      |  |                            | - |              |   | -                          |  |                     | 38     |                                               |   |         |  |   |      |  |   | 38    
|Stock-based compensation expense                 | -                      |  |                            | - |              |   | -                          |  |                     | 11     |                                               |   | -       |  |   | -    |  |   | 11    
|Dissolution of subsidiary                        | -                      |  |                            | - |              |   | -                          |  |                     | -      |                                               |   | 2       |  |   | -    |  |   | 2     
|Balance,                                         |                        |  |                            |   |              |   |                            |  |                     |        |                                               |   |         |  |   |      |  |   |       
|March 31, 2007                                   | 4,587                  |  | $                          | - |              | $ | 46                         |  | $                   | 39,858 |                                               | $ | (9,960) |  | $ | (36) |  | $ | 29,908





See accompanying notes to unaudited consolidated financial statements.





3



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TRANSCOMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006

(Unaudited)

(dollars in thousands)



|                                                                                |                            |          |                |                 |         
|------------------------------------------------------------------------------- | -------------------------- | -------- | -------------- | --------------- | --------
|                                                                                | For the three months ended
|                                                                                | March 31, 2007             |          | March 31, 2006
|                                                                                |                            |          |                | As restated (1)
|Operating activities:                                                           |                            |          |                |                 |         
|Net loss                                                                        | $                          | (700)    |                | $               | (123)   
|Adjustments to reconcile net loss to net cash provided by operating activities: |                            |          |                |                 |         
|Provision for loan losses                                                       |                            | 446      |                |                 | 52      
|Amortization of security premiums and accretion of discounts, net               |                            | (1)      |                |                 | (10)    
|Depreciation                                                                    |                            | 139      |                |                 | 140     
|Stock-based compensation expense                                                |                            | 11       |                |                 | 18      
|Decrease in other assets                                                        |                            | 31       |                |                 | 151     
|Increase in interest payable                                                    |                            | 22       |                |                 | 21      
|Decrease (increase) in accrued expenses and other liabilities                   |                            | 54       |                |                 | (115)   
|Net cash provided by operating activities                                       |                            | 2        |                |                 | 134     
|Investing activities:                                                           |                            |          |                |                 |         
|Purchase of securities held to maturity                                         |                            | (1,000)  |                |                 | (19,000)
|Purchase of securities available for sale                                       |                            | (15,522) |                |                 | (2,000) 
|Proceeds from maturities of securities held to maturity                         |                            | 15,025   |                |                 | 19,500  
|Proceeds from maturities of securities available for sale                       |                            | 7,716    |                |                 | -       
|Purchase of Federal Reserve Bank stock                                          |                            | -        |                |                 | (37)    
|Net (increase) decrease in loans                                                |                            | (11,549) |                |                 | 2,955   
|Purchase of premises and equipment                                              |                            | (625)    |                |                 | (85)    
|Net cash provided by (used in) investing activities                             |                            | (5,955)  |                |                 | 1,333   
|Financing activities:                                                           |                            |          |                |                 |         
|Net change in federal funds purchased                                           |                            | (498)    |                |                 | 777     
|Proceeds from stock options exercised                                           |                            | 38       |                |                 | -       
|Net decrease in note payable                                                    |                            | (500)    |                |                 | -       
|Net decrease in secured borrowings                                              |                            | -        |                |                 | (2,118) 
|Net decrease in noninterest bearing and interest bearing demand deposits        |                            | (501)    |                |                 | (6,892) 
|Net increase in savings deposits                                                |                            | 674      |                |                 | 1,282   
|Net increase in time deposits                                                   |                            | 6,720    |                |                 | 2,191   
|Net cash provided by (used in) financing activities                             |                            | 5,933    |                |                 | (4,760) 
|Net decrease in cash and cash equivalents                                       |                            | (20)     |                |                 | (3,293) 
|Cash and cash equivalents:                                                      |                            |          |                |                 |         
|Beginning of the period                                                         |                            | 5,091    |                |                 | 16,816  
|End of the period                                                               | $                          | 5,071    |                | $               | 13,523  
|Supplemental disclosures of cash flow information:                              |                            |          |                |                 |         
|Interest paid                                                                   | $                          | 1,429    |                | $               | 1,088   



(1) See Note 11, Correction of an Error of the Notes to the Unaudited Consolidated Financial Statements.



See accompanying notes to unaudited consolidated financial statements.



4



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NOTE 1

Principles of Consolidation and Basis of Presentation:



The accompanying unaudited consolidated financial statements include the accounts of TransCommunity Financial Corporation (TransCommunity or the Company) and its consolidated subsidiaries, including Bank of Powhatan, N.A. (Bank of Powhatan), Bank of Goochland, N.A. (Bank of Goochland), Bank of Louisa, N.A. (Bank of Louisa), Bank of Rockbridge (Bank of Rockbridge), and Main Street Mortgage and Investment Corporation (Main Street Mortgage), a former wholly-owned subsidiary of Bank of Powhatan.  All significant intercompany transactions and balances associated with consolidated subsidiaries have been eliminated.



The consolidated financial statements of TransCommunity conform to accounting principles generally accepted in the United States of America, to general industry practices, and the instructions for Form 10-Q and Regulation S-X.  In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at March 31, 2007, and the results of operations for the three-month periods ended March 31, 2007 and 2006.  The Consolidated Statement of Financial Condition at December 31, 2006 was derived from audited financial data.  The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities in the financial statements, and the disclosure of revenue and expense during the reporting periods.  The assumptions are based on information available as of the date of the financial statements and could differ from actual results.  The results for the interim periods are not necessarily indicative of annual performance.  The notes included herein should be read in conjunction with the notes to consolidated financial statements included in the audited December 31, 2006 financial statements for TransCommunity, which statements were included in the Companys Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission (the Commission).



NOTE 2

Impacts of Certain Accounting Pronouncements:



In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, that addresses the accounting for share-based payment transactions in which an enterprise exchanges its equity instruments for goods and services. The Statement eliminates the ability to account for share-based compensation transactions using Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and requires instead that such transactions be accounted for using a fair-value-based method. The Commission requires companies to implement SFAS No. 123R by the beginning of the first fiscal year that begins after June 15, 2005. On January 1, 2006, TransCommunity implemented SFAS No. 123R using the modified prospective transition method.  By implementing SFAS No. 123R, TransCommunity recorded $11 thousand of additional compensation expense during the three months ended March 31, 2007, resulting from the application of fair-value-based accounting to its stock-based compensation programs. See Note 4 for more information about TransCommunitys stock-based compensation programs.



In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments - an Amendment of FASB Statements No. 133 and 140 (SFAS 155).  SFAS 155 amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.  SFAS 155 resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.  SFAS 155 provides a fair value measurement option for certain hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation.



Adoption of SFAS 155 was required as of the beginning of the first fiscal year subsequent to September 15, 2006.  Implementation of SFAS 155 in January 2007 will not have a material effect on the Companys consolidated financial position and results of operations.





5



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NOTE 2

Impacts of Certain Accounting Pronouncements: (Continued)



In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets - an Amendment of FASB Statement No. 140 (SFAS 156).  SFAS 156 amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities.  SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract to be initially measured at fair value, if practicable.SFAS 156 also permits entities to subsequently measure servicing assets and liabilities using an amortization method or fair value measurement method.  Under the amortization method, servicing assets and liabilities are amortized in proportion to and over the estimated period of servicing.  Under the fair value measurement method, servicing assets are measured at fair value at each reporting date and changes in fair value are reported in net income for the period the change occurs.



Adoption of SFAS 156 was required as of the beginning of the first fiscal year subsequent to September 15, 2006.  Earlier adoption was permitted as of the beginning of an entitys fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year.  Implementation of SFAS 156 in January 2007 will not have a material effect on the Companys consolidated financial position and results of operations.



In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48).  FIN 48 clarifies the accounting and reporting for income taxes recognized in accordance with SFAS No. 109, Accounting for Income Taxes.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.  Implementation of FIN 48 will not have a material effect on the Companys consolidated financial position and results of operations.



In September 2006, the FASB released SFAS No. 157, Fair Value Measurement, which provides guidance for using fair value to measure assets and liabilities. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The standard also responds to investors requests for more information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect that fair value measurements have on earnings. SFAS No. 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value to any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. SFAS No. 157 is effective for the Company for years beginning after January 1, 2008, and interim periods within that year.  The Company is in the process of evaluating the impact that the adoption of SFAS No. 157 will have on its consolidated financial position and results of operations.



In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities."  This Standard permits entities to choose to measure many financial instruments and certain other items at fair value.  Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings.  This Statement is effective as of the beginning of an entitys first fiscal year beginning after November 15, 2007.  Early adoption is permitted as of the beginning of the fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157 Fair Value Measurement.  The Company does not plan for early adoption.  The Company is currently in the process of evaluating the impact that the adoption will have on its consolidated financial position and results of operations.





6



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NOTE 3

Investment Securities:



The carrying values, unrealized gains, unrealized losses and approximate fair values of investment securities at March 31, 2007 and December 31, 2006 are shown in the table below. As of March 31, 2007, 17 U.S. Agency Securities with a carrying value of $12.3 million were pledged as collateral for public deposits.



|                                            |                |        |                        |   |                         |  |            |       |  |   |       
|------------------------------------------- | -------------- | ------ | ---------------------- | - | ----------------------- |  | ---------- | ----- |  | - | ------
|Securities Available for Sale               |                |        |                        |   |                         |  |            |       |  |   |       
|March 31, 2007                              |                |        |                        |   |                         |  |            |       |  |   |       
|(dollars in thousands)                      | Amortized Cost |        | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Fair Value
|Gov't sponsored enterprises-discount notes* | $              | 13,513 |                        | $ | -                       |  | $          | (11)  |  | $ | 13,502
|Gov't sponsored enterprises-notes*          |                | 7,926  |                        |   | 1                       |  |            | (26)  |  |   | 7,901 
|Total Securities Available for Sale         | $              | 21,439 |                        | $ | 1                       |  | $          | (37)  |  | $ | 21,403
|                                            |                |        |                        |   |                         |  |            |       |  |   |       
|Securities Held to Maturity                 |                |        |                        |   |                         |  |            |       |  |   |       
|March 31, 2007                              |                |        |                        |   |                         |  |            |       |  |   |       
|(dollars in thousands)                      | Amortized Cost |        | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Fair Value
|Gov't sponsored enterprises-discount notes* | $              | 1,000  |                        | $ | -                       |  | $          | (1)   |  | $ | 999   
|Gov't sponsored enterprises-notes*          |                | 6,400  |                        |   | -                       |  |            | (100) |  |   | 6,300 
|Total Securities Held to Maturity           | $              | 7,400  |                        | $ | -                       |  | $          | (101) |  | $ | 7,299 
|                                            |                |        |                        |   |                         |  |            |       |  |   |       
|Securities Available for Sale               |                |        |                        |   |                         |  |            |       |  |   |       
|December 31, 2006                           |                |        |                        |   |                         |  |            |       |  |   |       
|(dollars in thousands)                      | Amortized Cost |        | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Fair Value
|Gov't sponsored enterprises-discount notes* | $              | 7,213  |                        | $ | -                       |  | $          | (7)   |  | $ | 7,206 
|Gov't sponsored enterprises-notes*          |                | 6,424  |                        |   | -                       |  |            | (33)  |  |   | 6,391 
|Total Securities Available for Sale         | $              | 13,637 |                        | $ | -                       |  | $          | (40)  |  | $ | 13,597
|                                            |                |        |                        |   |                         |  |            |       |  |   |       
|Securities Held to Maturity                 |                |        |                        |   |                         |  |            |       |  |   |       
|December 31, 2006                           |                |        |                        |   |                         |  |            |       |  |   |       
|(dollars in thousands)                      | Amortized Cost |        | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Fair Value
|Gov't sponsored enterprises-discount notes* | $              | 13,008 |                        | $ | -                       |  | $          | (12)  |  | $ | 12,996
|Gov't sponsored enterprises-notes*          |                | 8,412  |                        |   | -                       |  |            | (122) |  |   | 8,290 
|Total Securities Held to Maturity           | $              | 21,420 |                        | $ | -                       |  | $          | (134) |  | $ | 21,286
|                                            |                |        |                        |   |                         |  |            |       |  |   |       
|*FHLB                                       |                |        |                        |   |                         |  |            |       |  |   |       





7



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NOTE 3

Investment Securities: (Continued)



Investments in an unrealized loss position that are considered temporarily impaired at March 31, 2007 and December 31, 2006, segregated between investments sustaining unrealized losses for periods less than twelve months and twelve months or greater, are displayed in the following tables:



|                                             |                     |        |                   |   |            |  |                 |       |            |   |                 |  |   |        |  |   |      
|-------------------------------------------- | ------------------- | ------ | ----------------- | - | ---------- |  | --------------- | ----- | ---------- | - | --------------- |  | - | ------ |  | - | -----
|Securities Available for Sale                |                     |        |                   |   |            |  |                 |       |            |   |                 |  |   |        |  |   |      
|March 31, 2007                               | Less than 12 months |        | 12 months or more |   | Total     
|(dollars in thousands)                       | Fair Value          |        | Unrealized Loss   |   | Fair Value |  | Unrealized Loss |       | Fair Value |   | Unrealized Loss
|Description of securities:                   |                     |        |                   |   |            |  |                 |       |            |   |                 |  |   |        |  |   |      
|Gov't sponsored enterprises-discount notes*  | $                   | 3,492  |                   | $ | (2)        |  | $               | 1,407 |            | $ | (23)            |  | $ | 4,899  |  | $ | (25) 
|Gov't sponsored enterprises-notes*           |                     | 13,502 |                   |   | (11)       |  |                 | -     |            |   | -               |  |   | 13,502 |  |   | (11) 
|Total                                        | $                   | 16,994 |                   | $ | (13)       |  | $               | 1,407 |            | $ | (23)            |  | $ | 18,401 |  | $ | (36) 
|                                             |                     |        |                   |   |            |  |                 |       |            |   |                 |  |   |        |  |   |      
|Securities Held to Maturity                  |                     |        |                   |   |            |  |                 |       |            |   |                 |  |   |        |  |   |      
|March 31, 2007                               | Less than 12 months |        | 12 months or more |   | Total     
|(dollars in thousands)                       | Fair Value          |        | Unrealized Loss   |   | Fair Value |  | Unrealized Loss |       | Fair Value |   | Unrealized Loss
|Description of securities:                   |                     |        |                   |   |            |  |                 |       |            |   |                 |  |   |        |  |   |      
|Gov't sponsored enterprises-discount notes*  | $                   | -      |                   | $ | -          |  | $               | 6,300 |            | $ | (100)           |  | $ | 6,300  |  | $ | (100)
|Gov't sponsored enterprises-notes*           |                     | 999    |                   |   | (1)        |  |                 | -     |            |   | -               |  |   | 999    |  |   | (1)  
|Total                                        | $                   | 999    |                   | $ | (1)        |  | $               | 6,300 |            | $ | (100)           |  | $ | 7,299  |  | $ | (101)
|                                             |                     |        |                   |   |            |  |                 |       |            |   |                 |  |   |        |  |   |      
|Securities Available for Sale                |                     |        |                   |   |            |  |                 |       |            |   |                 |  |   |        |  |   |      
|December 31, 2006                            | Less than 12 months |        | 12 months or more |   | Total     
|(dollars in thousands)                       | Fair Value          |        | Unrealized Loss   |   | Fair Value |  | Unrealized Loss |       | Fair Value |   | Unrealized Loss
|Description of securities:                   |                     |        |                   |   |            |  |                 |       |            |   |                 |  |   |        |  |   |      
|Gov't sponsored enterprises-discount notes*  | $                   | 4,990  |                   | $ | (4)        |  | $               | 1,401 |            | $ | (29)            |  | $ | 6,391  |  | $ | (33) 
|Gov't sponsored enterprises-notes*           |                     | 7,206  |                   |   | (7)        |  |                 | -     |            |   | -               |  |   | 7,206  |  |   | (7)  
|Total                                        | $                   | 12,196 |                   | $ | (11)       |  | $               | 1,401 |            | $ | (29)            |  | $ | 13,597 |  | $ | (40) 
|                                             |                     |        |                   |   |            |  |                 |       |            |   |                 |  |   |        |  |   |      
|Securities Held to Maturity                  |                     |        |                   |   |            |  |                 |       |            |   |                 |  |   |        |  |   |      
|December 31, 2006                            | Less than 12 months |        | 12 months or more |   | Total     
|(dollars in thousands)                       | Fair Value          |        | Unrealized Loss   |   | Fair Value |  | Unrealized Loss |       | Fair Value |   | Unrealized Loss
|Description of securities:                   |                     |        |                   |   |            |  |                 |       |            |   |                 |  |   |        |  |   |      
|Gov't sponsored enterprises-discount notes*  | $                   | 1,999  |                   | $ | (1)        |  | $               | 6,291 |            | $ | (121)           |  | $ | 8,290  |  | $ | (122)
|Gov't sponsored enterprises-notes*           |                     | 12,996 |                   |   | (12)       |  |                 | -     |            |   | -               |  |   | 12,996 |  |   | (12) 
|Total                                        | $                   | 14,995 |                   | $ | (13)       |  | $               | 6,291 |            | $ | (121)           |  | $ | 21,286 |  | $ | (134)
|                                             |                     |        |                   |   |            |  |                 |       |            |   |                 |  |   |        |  |   |      
|*Issued by the Federal Home Loan Bank (FHLB) |                     |        |                   |   |            |  |                 |       |            |   |                 |  |   |        |  |  









8



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NOTE 3

Investment Securities: (Continued)



The March 31, 2007 unrealized loss was the aggregate of 19 U.S. Agency notes, of which 11 had a continuous loss period of more than 12 months.  The December 31, 2006 unrealized loss was the aggregate of 20 U.S. Agency notes, of which 11 had a continuous loss period of more than 12 months. The unrealized loss positions in both years were primarily related to interest rate movements as there is minimal credit risk exposure in these investments. All securities are investment grade or better.  No impairment loss has been recognized on these securities because management has both the intent and the ability to hold these securities until maturity or call dates.



Management evaluates securities for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of TransCommunitys subsidiary banks to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.



NOTE 4

Stock Based Compensation:



A stock option plan (the Plan) was adopted by the Board of Directors of the Bank of Powhatan on May 8, 2001.  This Plan was adopted by TransCommunity effective August 15, 2001 in connection with the reorganization in which the Bank of Powhatan became a subsidiary of TransCommunity.  The purpose of the Plan is to reward employees and directors for services rendered and to promote the success of TransCommunity and its subsidiaries by providing incentives to employees and directors that will promote the alignment of their personal financial interest with the long-term financial success of TransCommunity and its subsidiaries and with growth in stockholder value.  The Plan provides that options for up to 330,000 shares of TransCommunity common stock may be issued.  Under the Plan, annual grants of stock options are limited to 10,000 shares for each employee and 7,500 shares for each director.  The exercise price may not be less than 100% of the fair market value of the shares on the grant date.  Unless the Compensation Committee of TransCommunitys Board of Directors determines otherwise, one-third of a grant becomes vested and exercisable on each of the first three anniversaries of the initial grant date.  Each grant becomes fully vested and exercisable in the event of a change in control of TransCommunity.  All options are subject to exercise or forfeiture if TransCommunitys capital falls below its minimum requirements, as determined by its primary regulator, and TransCommunitys primary regulator so directs.  At March 31, 2007, options to acquire 296,725 shares were outstanding, of which 241,358 were exercisable at that date.



Effective January 1, 2006, TransCommunity adopted SFAS No. 123R, Share-Based Payment, using the modified prospective transition method. SFAS No. 123R requires companies to calculate compensation expense arising from stock-based compensation based on the respective fair values of awards at grant date.



A summary of the options granted is shown in the following table:



|                                                       |                              |           |      |   |           |  | 
|------------------------------------------------------ | ---------------------------- | --------- | ---- | - | --------- |  | 
|                                                       | Three months ended March 31,
|                                                       | 2007                         |           | 2006
|                                                       |                             
|Outstanding at January 1                               |                              | 246,725   |      |   | 281,425  
|Granted                                                |                              | 55,000    |      |   | 5,000    
|Exercised                                              |                              | (5,000)   |      |   | -        
|Lapsed                                                 |                              | -         |      |   | (1,200)  
|Options outstanding at March 31                        |                              | 296,725   |      |   | 285,225  
|Options exercisable at March 31                        |                              | 241,358   |      |   | 274,492  
|Weighted average exercise price                        | $                            | 9.71      |      | $ | 9.96     
|Weighted average remaining contracted life at March 31 |                              | 68 months |      |   | 85 months





9



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NOTE 4

Stock Based Compensation: (Continued)



The weighted-average fair value of options granted during the three months ended March 31, 2007 was $1.60 per share.



Options granted under the Plan generally expire ten years after the date of grant and are granted at market value of the stock on the date of grant. Option terms are determined by the Compensation Committee of TransCommunitys Board of Directors at the time of the grant. TransCommunity utilizes the Black Scholes model to calculate fair values of options awarded. This model requires assumptions as to expected volatility, dividends, terms and risk free rates. Assumptions used for the periods covered herein are outlined in the following table:



|                      |                    |               
|--------------------- | ------------------ | --------------
|                      | Three months ended
|                      | March 31, 2007     | March 31, 2006
|                      |                    |               
|Expected volatility   | 20%                | 5%            
|Expected dividend     | 0                  | 0             
|Expected term (years) | 10                 | 10            
|Risk free rate        | 4.65%              | 4.36%         



Expected volatilities are based on volatility trends of similar entities in the region, as defined by the SNL Mid-Atlantic Bank Index.  Expected dividends reflect the experience of TransCommunitys common stock.  Expected terms represent the period of time that options granted are expected to be outstanding. The risk free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the appropriate life of each option.



NOTE 5

Earnings (Losses) Per Share:



Basic earnings per share (EPS) is computed by dividing net income or loss by the weighted average number of shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, including the effect of dilutive potential common shares outstanding attributable to stock awards.  Basic and dilutive earnings per share are identical and the effect on losses per share of TransCommunitys outstanding stock options would be antidilutive.



NOTE 6

Business Segments:



TransCommunity has two reportable business segments: Community Banking and Holding Company Operations.  The Community Banking segment consists of the Companys four subsidiary banks, each of which provides loan, deposit, mortgage and investment services to retail and commercial customers in their respective market areas.  Holding Company Operations consists of the parent company, which provides managerial support, as well as an operational platform of shared services utilized by each of the subsidiary banks.

During 2006, the Company had two additional business segments, Main Street Mortgage, which provided a variety of mortgage loan products across the country under the exemption granted as a subsidiary of a nationally-chartered bank, and Financial Services, which offered trust, asset management and securities and insurance brokerage services.  The activities of both of these business segments were discontinued during 2006.  The services previously provided by both of these business segments have been transferred to the Community Banking segment.





10



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NOTE 6

Business Segments: (Continued)



A summary of the business segments is shown in the following table:



|                                             |                                       |         |             |   |                 |  |              |         |              |   |          |  |   |        
|-------------------------------------------- | ------------------------------------- | ------- | ----------- | - | --------------- |  | ------------ | ------- | ------------ | - | -------- |  | - | -------
|                                             | For three months ended March 31, 2007
|                                             | (dollars in thousands)               
|                                             | Community Banking                     |         | Main Street |   | Trans-Community |  | Eliminations |         | Consolidated
|Net interest income (expense)                | $                                     | 2,471   |             | $ | -               |  | $            | (10)    |              | $ | -        |  | $ | 2,461  
|Provision for loan losses                    |                                       | (446)   |             |   | -               |  |              | -       |              |   | -        |  |   | (446)  
|Noninterest income                           |                                       | 280     |             |   | -               |  |              | 888     |              |   | (888)    |  |   | 280    
|Noninterest expense                          |                                       | (2,698) |             |   | -               |  |              | (1,124) |              |   | 904      |  |   | (2,918)
|(Loss) income from subsidiaries              |                                       | (77)    |             |   | -               |  |              | (470)   |              |   | 547      |  |   | -      
|Net (loss) income from continuing operations |                                       | (470)   |             |   | -               |  |              | (716)   |              |   | 563      |  |   | (623)  
|Net loss from discontinued operations        |                                       | -       |             |   | (77)            |  |              | -       |              |   | -        |  |   | (77)   
|Net (loss) income                            | $                                     | (470)   |             | $ | (77)            |  | $            | (716)   |              | $ | 563      |  | $ | (700)  
|Total Assets                                 | $                                     | 203,419 |             | $ | -               |  | $            | 30,290  |              | $ | (29,940) |  | $ | 203,769
|                                             |                                       |         |             |   |                 |  |              |         |              |   |          |  |   |        
|                                             |                                       |         |             |   |                 |  |              |         |              |   |          |  |   |        
|                                             |                                       |         |             |   |                 |  |              |         |              |   |          |  |   |        
|                                             | For three months ended March 31, 2006
|                                             | (dollars in thousands)               
|                                             | Community Banking                     |         | Main Street |   | Trans-Community |  | Eliminations |         | Consolidated
|Net interest income (expense)                | $                                     | 2,018   |             | $ | -               |  | $            | 111     |              | $ | -        |  | $ | 2,129  
|Provision for loan losses                    |                                       | (52)    |             |   | -               |  |              | -       |              |   | -        |  |   | (52)   
|Noninterest income                           |                                       | 239     |             |   | -               |  |              | 102     |              |   | (103)    |  |   | 238    
|Noninterest expense                          |                                       | (1,579) |             |   | -               |  |              | (818)   |              |   | 117      |  |   | (2,280)
|Income (loss) from subsidiaries              |                                       | (158)   |             |   | -               |  |              | 310     |              |   | (152)    |  |   | -      
|Net income (loss) from continuing operations |                                       | 468     |             |   | -               |  |              | (295)   |              |   | (138)    |  |   | 35     
|Net loss from discontinued operations        |                                       | -       |             |   | (158)           |  |              | -       |              |   | -        |  |   | (158)  
|Net income (loss)                            | $                                     | 468     |             | $ | (158)           |  | $            | (295)   |              | $ | (138)    |  | $ | (123)  
|Total Assets                                 | $                                     | 175,676 |             | $ | 780             |  | $            | 30,552  |              | $ | (21,319) |  | $ | 185,689





11



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NOTE 7

Secured Borrowings:



As of March 31, 2007, there were no secured borrowings.  Secured borrowings at March 31, 2006 resulted from loan participations identified in August 2006 as being not properly accounted for during 2005.  The Company discovered that it had incorrectly accounted for loans subject to certain loan participation agreements entered into with third-party financial institutions since the second quarter of 2004.  Pursuant to SFAS Statement 140, certain loan participation agreements did not qualify for sale accounting due to buyback provisions included in the agreement, thus the Company had not surrendered control over the transferred loans and has accounted for the transfers as secured borrowings.  During September 2006, the Company amended all participation loan agreements such that as of September 29, 2006, all loan participation agreements became eligible for sale accounting in accordance with Statement 140 and, as a result, the secured borrowings were eliminated as of September 30, 2006.  See Note 11, Correction of an Error, for further information.



NOTE 8

Capital:



TransCommunitys consolidated regulatory capital levels are displayed in the following table:



|                                |                |        |                   |   |       
|------------------------------- | -------------- | ------ | ----------------- | - | ------
|                                | March 31, 2007 |        | December 31, 2006
|                                | (in thousands)
|Tier 1 Leverage Capital Ratio   |                |        |                   |   |       
|Amount                          | $              | 29,824 |                   | $ | 30,457
|Actual Ratio                    |                | 15.65% |                   |   | 15.86%
|Minimum Capital Requirement     |                | 4.00%  |                   |   | 4.00% 
|                                |                |        |                   |   |       
|Tier 1 Risk-Based Capital Ratio |                |        |                   |   |       
|Amount                          | $              | 29,824 |                   | $ | 30,457
|Actual Ratio                    |                | 16.15% |                   |   | 17.16%
|Minimum Capital Requirement     |                | 4.00%  |                   |   | 4.00% 
|                                |                |        |                   |   |       
|Total Risk-Based Capital Ratio  |                |        |                   |   |       
|Amount                          | $              | 31,797 |                   | $ | 32,522
|Actual Ratio                    |                | 17.21% |                   |   | 18.32%
|Minimum Capital Requirement     |                | 8.00%  |                   |   | 8.00% 





NOTE 9

Litigation:



In the ordinary course of operations, TransCommunity and its subsidiaries may be parties to various legal proceedings.  The following matters involve pending or potential claims:



Gould Lawsuit.On June 14, 2006, an individual and a company controlled by the individual (Dean H. Gould and Cal-Flo Investments, LLC) filed a lawsuit against Main Street Mortgage & Investment Corporation (Main Street), a wholly-owned subsidiary of Bank of Powhatan, and five other defendants that are not affiliated with Main Street in the General Court of Justice, Superior Court Division, in Wake County, North Carolina.  The lawsuit arises from three properties on which Main Street originated mortgage loans.  The loans at issue were made by third-party lenders, and neither the Company nor any of its subsidiary banks hold any of the loans for its own account.  The plaintiffs allege that the defendants developed a fraudulent scheme to originate these mortgage loans through Main Street employing, with Main Streets knowledge, inflated appraisals and other devices that resulted in damages to the plaintiffs in the aggregate amount of $100,000 to $150,000.  The plaintiffs have requested both compensatory and punitive damages.



Main Street filed an answer to the lawsuit and denies any liability.  There has been no further activity in the lawsuit from any other party, and Main Street has ceased its business operations and terminated its existence as a Virginia corporation.



12



---

NOTE 9

Litigation: (Continued)



At the present time, the case is in the early stages, there has been no discovery, and accordingly, the Company can not conclude on the outcome or estimate any potential loss.



Minter Lawsuit.On November 2, 2006, James L. Minter filed a lawsuit against the Company and William C. Wiley, the former Chief Executive Officer and Chairman of the Board of Directors of the Company, in the Circuit Court of the County of Powhatan in Virginia.  The suit arises out of the Banks purchase of Main Street Mortgage and Investment Corporation in early 2001.  Mr. Minter alleges that in late 2000 Wiley withheld information concerning the value of Main Street Mortgage from the Banks board of directors and that the Bank would not have acquired Main Street Mortgage if the valuation had been provided to the Banks board.  Mr. Minters suit claims that the Company aided and abetted and conspired with Wiley in his misrepresentation of Main Street Mortgages value.  Mr. Minters suit also alleges that the December 2005 separation agreement between the Company and William Wiley improperly released claims the Company had against Wiley arising out of Wileys alleged concealment of the Main Street Mortgage valuation from the Banks board in late 2000.



Minter seeks unspecified rescissionary and compensatory damages, unspecified treble damages and punitive damages of $350,000 against each defendant, jointly and severally and with interest.  Minter also seeks to recover his attorneys fees.



The Company believes that insofar as it concerns the Company, Mr. Minters suit is without merit.



The Company has moved for a dismissal; has brought claims against Mr. Minter for breach of fiduciary duty related to his use of confidential Company information for personal gain; and has removed him from the board of the Bank.



Based on the facts presently known, the Company believes it has limited liability exposure arising from this lawsuit.  However, since the case is in the very early stages, the Company is unable to evaluate the likelihood of an unfavorable outcome or to estimate the amount or range of potential loss, if any, in this matter.



NOTE 10

Subsequent Events:



On May 4, 2007, based upon the recommendation of its Audit Committee and approval by its Board of Directors, TransCommunity engaged Elliott Davis, LLP, as its independent public accountants for the fiscal year ended December 31, 2007.  Elliott Davis, LLP succeeds McGladrey and Pullen, LLP, who declined to stand for appointment as the Companys independent public accountants for such fiscal year.



NOTE 11

Correction of an Error:



On August 11, 2006, the Company concluded that the previously issued financial statements contained in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2005 should not be relied upon because of errors in those statements.  The Company discovered that it had incorrectly accounted for loans subject to certain loan participation agreements entered into with third-party financial institutions since the second quarter of 2004. During the second quarter of 2004, the Company implemented an automated loan documentation system which contained the option to include certain language that provided for termination of the participation agreement.  This right to repurchase the participated balance allows the Company to retain a level of control over the loans sold to third parties.  This termination clause allowed the originating institution to repurchase the loans sold to third parties and thus the loan transfers did not qualify for sale accounting treatment under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125.  The Company had previously not reflected the participated balances of loans subject to these agreements on its balance sheet as required by FASB Statement No. 140.  As a result, the Company filed a Form 10-KSB/A for the year ended December 31, 2005, and filed a Form 10-Q/A for the quarter ended March 31, 2006.



13



---



NOTE 11

Correction of an Error: (Continued)



A summary of the restatements of the accompanying financial statements is as follows:



|                                                 |                        |            |            |        |   |        
|------------------------------------------------ | ---------------------- | ---------- | ---------- | ------ | - | -------
|                                                 | As previously reported | Correction | As amended
|                                                 | (Dollars in thousands)
|For the three-month period ended March 31, 2006: |                        |            |            |        |   |        
|Loans                                            | $                      | 121,717    | $          | 10,397 | $ | 132,114
|Secured borrowings                               |                        | -          |            | 10,397 |   | 10,397 
|Interest on loans, including fees                | $                      | 2,617      | $          | 201    | $ | 2,818  
|Interest on secured borrowings                   |                        | -          |            | 201    |   | 201    



14



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Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations





The following discussion and analysis and the related financial data present a review of TransCommunitys consolidated operating results for the three-month period ended March 31, 2007 and 2006 and consolidated financial condition at March 31, 2007 and December 31, 2006. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto contained in TransCommunitys Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Commission on April 16, 2007, and the consolidated financial statements and notes in this Form 10-Q.



Forward-Looking Statements



This Quarterly Report on Form 10-Q contains forward-looking statements.  Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).  Words and phrases such as: will likely result, expect, will continue, anticipate, estimate, project, believe, intend, will, should, would, could, may, can, plan, target and similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements may include, but are not limited to, discussions concerning:



·

Projections of revenues, expenses, losses, losses per share, net interest margins, asset growth, loan production, deposit growth, and other performance measures;

·

Expansion of operations, including de novo banks and branch openings, entrance into new markets, and development of products and services; and

·

Discussions on the outlook of the economy, competition, regulation, taxation, company strategies, subsidiaries, investment risk and policies.



Actual results or performance could differ from those implied or contemplated by forward-looking statements.  Forward-looking statements are subject to certain risks and uncertainties, including, among others: general business, regulatory action or inaction, economic and market conditions, fiscal and monetary policies, war and terrorism, natural disasters, changes in interest rates, deposit flows, loan demand and real estate values; a deterioration in credit quality and/or a reduced demand for credit, competition with other providers of financial products and services; the issuance or redemption of additional Company equity or debt; volatility in the market price of the Companys common stock; changes in accounting principles, policies or guidelines, changes in laws or regulation; reliance on other companies for products and services; operational or systems risks; and other economic, competitive, servicing capacity, governmental, technological factors affecting the Companys operations, pricing, products and delivery of services.  Information in this Quarterly Report on Form 10-Q is as of the dates, and for the periods, indicated.  TransCommunity does not undertake, and specifically disclaims any obligation, to publicly update or revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements, whether as the result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in or incorporated by reference into this report might not occur.



Significant Accounting Policies



TransCommunitys financial position and results of operations are impacted by managements application of accounting policies involving judgments made to arrive at the carrying value of certain assets.  In implementing its policies, management must make estimates and assumptions about the effect of matters that are inherently less than certain. Actual results could differ significantly from these estimates which could materially affect the amounts of TransCommunitys assets, liabilities, income and expenses.  Critical accounting policies applied by TransCommunity include those that relate to the allowance for loan losses.  For a more detailed discussion on these critical accounting policies, see Significant Accounting Policies on page F-8 of TransCommunitys Annual Report on Form 10-K for the year ended December 31, 2006.





15



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Overview



TransCommunitys results of operations are dependent primarily on its net interest income, which is the difference between the interest earned on its assets, primarily its loan and securities portfolios, and its cost of funds, which consists of the interest paid on its deposits and borrowings.  TransCommunitys results of operations are also affected by its provision for loan losses as well as non-interest income and non-interest expenses. Non-interest expenses consist of employee compensation and benefits, occupancy and equipment, insurance, professional fees, telecommunications and data processing and other operating expenses.



In addition to the foregoing, results of TransCommunitys operations, like those of other financial services companies, are affected by its asset and liability composition, as well as factors beyond its control, such as general economic conditions and the monetary and fiscal policies of the federal government.  Lending activities are affected by the demand for commercial and retail financing and are thus influenced by interest rates and other factors affecting the availability of funds. Deposit flows and costs of funds are influenced by yields available on competing investments and by general market rates of interest.



In evaluating TransCommunitys financial condition and operating performance, management focuses on the following:



·

Increasing loan originations

·

Increasing total and core deposit balances

·

Maintaining TransCommunitys history of strong net interest margins

·

Maintaining high credit standards and low levels of non-performing assets

·

Maintaining an adequate loan loss reserve

·

Managing interest rate risk

·

Controlling expenses

·

Ensuring adequate funding for ongoing growth



Highlights of TransCommunitys performance for the three-months ended March 31, 2007 as compared to the same period in 2006 include:



·

Net losses of $700 thousand, a decline of $577 thousand

·

Interest income grew $675 thousand, or 20.9%

·

Net interest income increased by $333 thousand, or 15.6%

·

Asset growth of $18 million, or 9.7%

·

Yield on assets increased 89 basis points to 8.38%

·

Net interest margin increased 35 basis points to 5.27%

·

Noninterest expenses increased $638 thousand, or 28%

·

Provisions for loan losses increased $395 thousand



Results of Operations



The Company reported a net loss of $700 thousand for the first quarter ended March 31, 2007, including losses from discontinued operations of $77 thousand.  In 2006, net losses for the same period were $123 thousand, including losses from discontinued operations of $158 thousand.  Net losses per share, both basic and diluted, was $0.15, compared to net losses per share of $0.03 over the same period in 2006.



The loss for the quarter can be attributed entirely to three, one-time events:



(1)

costs associated with our charter consolidation project;

(2)

fees charged in excess than those originally expected from our external auditors; and

(3)

an unusual addition to our allowance for loan losses associated with the dissolution of our mortgage banking affiliate.





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Net Interest Income



For the three months ended March 31, 2007, net interest income totaled $2.5 million, a $333 thousand, or 15.6%, increase over TransCommunitys performance for the same period during 2006.  Average earning assets for the three-month period ended March 31, 2007 grew 8.3%, to $189.4 million compared to $174.8 million during the same period in 2006.  The net interest margin is the net interest income expressed as a percentage of average earnings assets.  For the three-month period ended March 31, 2007, the net interest margin increased 35 basis points from the same period in 2006 to 5.27% from 4.92%.  The increase in net interest margin is attributable to benefits derived from an increase on yields of earning assets of 89 basis points to 8.38%, while the cost of interest bearing deposits only increased 66 basis points from 3.33% to 3.99%.  Average loans outstanding increased $21.1 million, or 15.7%, to $156.2 million coupled with a 10.8% increase in yield on average loans to 9.12% for the three-month period ended March 31, 2007, compared to a yield of 8.46% for the same period during 2006.  For the three-month period ended March 31, 2007, loan income of $3.5 million increased approximately 24.6% from $2.8 million during the same period in 2006.



These favorable results continue to demonstrate managements ability to reprice earning assets faster than liabilities, benefiting TransCommunitys net interest margin in a rising interest rate environment.  Management believes that the overall outlook in its net interest income is positive, although the Company expects to experience higher deposit costs. Management expects commercial loans to continue to grow because of the focus placed on loan growth throughout the Company.  Loan-related earning assets tend to have a higher spread than those earned in the Companys investment portfolio.  TransCommunitys consolidated net interest margin compares favorably with the experience of many other commercial banks in its market area.



The following table details the net interest income calculations for the three-month periods ended March 31, 2007 and 2006.



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TRANSCOMMUNITY FINANCIAL CORPORATION

NET INTEREST MARGIN ANALYSIS

AVERAGE BALANCE SHEETS

FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006

(in thousand dollars)



|                                           |         |         |          |   |             |  |         |   |          |         |             |   |       |       |      |      |  
|------------------------------------------ | ------- | ------- | -------- | - | ----------- |  | ------- | - | -------- | ------- | ----------- | - | ----- | ----- | ---- | ---- | -
|                                           | 2007    |         | 2006    
|                                           | Average |         | Interest |   | Average     |  | Average |   | Interest |         | Average    
|                                           | Balance |         | Income/  |   | Rates       |  | Balance |   | Income/  |         | Rates      
|                                           | Sheet   |         | Expense  |   | Earned/Paid |  | Sheet   |   | Expense  |         | Earned/Paid
|ASSETS:                                    |         |         |          |   |             |  |         |   |          |         |             |   |       |       |      |      |  
|Loans, including fees (1)                  | $       | 156,225 |          | $ | 3,512       |  | 9.12    | % | $        | 135,084 |             | $ | 2,818 |       | 8.46 | %   
|Federal funds sold                         |         | 15,548  |          |   | 200         |  | 5.22    |   |          |         | 22,404      |   |       | 244   |      | 4.41 |  
|Investments                                |         | 17,606  |          |   | 200         |  | 4.61    |   |          |         | 17,308      |   |       | 167   |      | 3.92 |  
|Total earning assets                       |         | 189,379 |          |   | 3,912       |  | 8.38    |   |          |         | 174,796     |   |       | 3,229 |      | 7.49 |  
|Allowance for loan losses                  |         | (2,039) |          |   |             |  |         |   |          |         | (1,702)     |   |       |       |      |      |  
|Non-earning assets                         |         | 12,070  |          |   |             |  |         |   |          |         | 12,756      |   |       |       |      |      |  
|Total assets                               | $       | 199,410 |          |   |             |  |         |   |          | $       | 185,850     |   |       |       |      |      |  
|LIABILITIES AND STOCKHOLDERS' EQUITY:      |         |         |          |   |             |  |         |   |          |         |             |   |       |       |      |      |  
|Deposits:                                  |         |         |          |   |             |  |         |   |          |         |             |   |       |       |      |      |  
|Demand -                                   |         |         |          |   |             |  |         |   |          |         |             |   |       |       |      |      |  
|Interest bearing                           | $       | 35,515  |          | $ | 167         |  | 1.91    | % | $        | 37,598  |             | $ | 136   |       | 1.47 | %   
|Savings                                    |         | 9,826   |          |   | 38          |  | 1.57    |   |          |         | 10,010      |   |       | 38    |      | 1.55 |  
|Time deposits                              |         | 100,978 |          |   | 1,226       |  | 4.92    |   |          |         | 75,820      |   |       | 731   |      | 3.91 |  
|Total deposits                             |         | 146,319 |          |   | 1,431       |  | 3.97    |   |          |         | 123,428     |   |       | 905   |      | 2.97 |  
|Other borrowed funds                       |         | 1,069   |          |   | 20          |  | 7.59    |   |          |         | 11,576      |   |       | 204   |      | 7.16 |  
|Total interest-bearing liabilities         |         | 147,388 |          |   | 1,451       |  | 3.99    |   |          |         | 135,004     |   |       | 1,109 |      | 3.33 |  
|Non-interest bearing deposits              |         | 20,536  |          |   |             |  |         |   |          |         | 19,540      |   |       |       |      |      |  
|Other liabilities                          |         | 767     |          |   |             |  |         |   |          |         | 949         |   |       |       |      |      |  
|Total liabilities                          |         | 168,691 |          |   |             |  |         |   |          |         | 155,493     |   |       |       |      |      |  
|Stockholders' equity                       |         | 30,719  |          |   |             |  |         |   |          |         | 30,357      |   |       |       |      |      |  
|Total liabilities and stockholders' equity | $       | 199,410 |          |   |             |  |         |   |          | $       | 185,850     |   |       |       |      |      |  
|Net interest earnings                      |         |         |          | $ | 2,461       |  |         |   |          |         |             |   | $     | 2,120 |      |      |  
|Interest spread                            |         |         |          |   |             |  | 4.39    | % |          |         |             |   |       |       |      | 4.16 | %
|Net interest margin                        |         |         |          |   |             |  | 5.27    | % |          |         |             |   |       |       |      | 4.92 | %



(1) Loan and fee income for 2006 includes amounts derived from our discontinued operations.



Provision for Loan Losses



For the three-month period ended March 31, 2007, the provision for loan losses was $446 thousand, an increase of $395 thousand over the same period in 2006.  At March 31, 2007, nonperforming assets totaled $507 thousand.  Net charge-offs for the year to date period ended March 31, 2007 amounted to $538 thousand.  Charge-offs and provisions for the first quarter were higher than normal due primarily to loans related to the discontinued operations of Main Street Mortgage.  Management believes the overall credit quality of the portfolio is sound based on the risk inherent in the loan portfolio.





18



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The allowance for loan losses is evaluated continually by management and is based on managements review of the probability of collection, industry historical experience, the nature and volume of the loan portfolio, credit concentrations, adverse conditions that may effect a borrowers ability to repay, estimated value of any underlying collateral and prevailing economic conditions.  An adequate allowance relative to the quality of the loan portfolio sufficient to meet anticipated future loan losses is calculated using appropriate risk factors depending on the type of borrower and whether the loan is secured or unsecured.  Loans that are classified adversely are assigned a loss reserve based on their risk rating and liquidation analysis based on present value of estimated cash flow and/or collateral.  Unclassified loans are assigned a collective pool loan loss percentage based on historical peer group data in the absence of internal company loss history.  As the Companys loan portfolio seasons, the factors will be adjusted to reflect actual loss experience.  The allowance for loan loss is subjective in the absence of actual, material loss data and, as such, requires estimates that are susceptible to periodic revision as conditions change.



Noninterest Income



Noninterest income totaled $280 thousand for the three months ended March 31, 2007, an increase of 17.6% from $238 thousand for the same period in 2006.   The overall increase in noninterest income is attributable principally to higher customer service fees, particularly those associated with broker fees and commissions.  During the quarter, bank service charges and other fees increased $39 thousand, or 16.0%, when compared to the same period in 2006.



Noninterest Expense



Noninterest expense for the three month period ended March 31, 2007 increased $638 thousand, or 28%, as compared with the same period in the prior year.  Personnel costs, which represent 45.1% of total noninterest expense, were up $108 thousand or 8.9% when compared to the same period in 2006.  However, the majority of the increase in noninterest expense was attributable to growth in other operating expenses, particularly professional fees paid to accountants, attorneys, and the consulting firm assisting with the Companys charter consolidation project, which increased $493 thousand compared to the same period in 2006.  Occupancy and equipment costs remained relatively consistent.



Segment Information



For the three months ended March 31, 2007, net losses from continuing operations for the Community Banking segment were $470 thousand, a decrease of $938 thousand, or 200.4%, from income of $468 thousand during the same period of 2006.  Net interest income for the Community Banking segment increased by $453 thousand, or 22.4%, to $2.5 million in the first three months of 2007 as compared to the same period of 2006.



For the three months ended March 31, 2007, net losses from Holding Company Operations were $716 thousand, an increase of $421 thousand, or 142.7%, from losses of $295 thousand during the same period of 2006.  Noninterest expense increased $306 thousand, or 37.4%, to $1.1 million in the first three months of 2007 as compared to the same period of 2006.



The Company had two additional segments in 2006 that were discontinued by year end.



Financial Condition



At March 31, 2007, TransCommunity had total assets of $203.8 million, up 2.7% from $198.4 million at December 31, 2006.  At March 31, 2007, loans totaled $162.4 million, an increase of $11.0 million since December 31, 2006.







19



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Loans totaled $162.4 million and $132.1 million at March 31, 2007 and 2006, respectively. This represents growth of $30.3 million, or an increase of 22.9%.  Despite increased competition, the Companys banks continue to experience strong loan demand. However, TransCommunity remains focused on maintaining its pricing discipline and strong asset quality, and adhering to its conservative underwriting standards.  The amounts reported for March 2006 include $10.4 million of participated balances that were identified in August 2006 as being not properly accounted for during part of the year.  See Note 11, Correction of an error, to the unaudited consolidated financial statements for further information.





During the first three months of 2007, the Companys average cost of interest-bearing deposits increased to 3.97%, up from 2.97% during the first three months of 2006.  Average interest-bearing deposits increased $22.9 million, from $123.4 million during the first three months of 2006 to $146.3 million during the same period in 2007.  Total deposits increased $6.9 million, or 4.2%, to $171.9 million at March 31, 2007 from $165.0 million at December 31, 2006.  Noninterest-bearing deposits increased $1.3 million, or 6.2% from the amount at December 31, 2006.  Management views these deposits as a key source for funding the loan growth.



The Companys capital position remains strong with an average equity-to-average assets ratio of 15.40%.  At March 31, 2007, TransCommunity had a leverage ratio of 15.65%, a Tier 1 risk-based capital ratio of 16.15% and a total risk-based capital ratio of 17.21%.  At March 31, 2007, the book value of the Companys common stock was $6.69 per share.



Income Taxes



No income tax provision has been recorded since, at this time, there is insufficient evidence to conclude that TransCommunity will produce taxable income in the future which can be offset by loss carryforwards from the current and prior periods.  However, the Company may owe income taxes in the future, including those as determined by the alternate minimum tax (AMT) system.  Income taxes for the year ended December 31, 2006, equaled $15 thousand using AMT calculations, which is available as a credit to reduce the regular tax liability in future years.



Loans



Total loans increased $11.0 million during the first three months of 2007 to $162.4 million.



Loans by type are shown in the following schedule:



|                                        |           |         |              |   |        
|--------------------------------------- | --------- | ------- | ------------ | - | -------
|                                        | March 31, |         | December 31,
|(dollars in thousands)                  | 2007      |         | 2006        
|Real estate:                            |           |         |              |   |        
|Construction                            | $         | 34,934  |              | $ | 21,348 
|Residential                             |           | 30,612  |              |   | 29,007 
|Commercial                              |           | 54,775  |              |   | 60,571 
|Commercial, industrial and agricultural |           | 32,422  |              |   | 31,284 
|Consumer and installment                |           | 8,675   |              |   | 8,725  
|All other                               |           | 1,009   |              |   | 464    
|Total Loans                             | $         | 162,427 |              | $ | 151,399







20



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Allocation of the Allowance for Loan Losses



The allowance for loan losses consists of an allocated component and an unallocated component.  The allocated component of the allowance for loan losses reflects expected losses resulting from analyses developed through specific credit allocations for individual loans.  The unallocated portion of the allowance for loan losses reflects management's estimate of probable inherent but not specifically identified losses within the portfolio.   The Companys allocations for the allowance for loan losses were as follows:



|                                        |                |       |                   |      |           |     |         |     |     
|--------------------------------------- | -------------- | ----- | ----------------- | ---- | --------- | --- | ------- | --- | ----
|                                        | March 31, 2007 |       | December 31, 2006
|                                        | Allowance      |       | Percent           |      | Allowance |     | Percent
|Real estate:                            |                |       |                   |      |           |     |         |     |     
|Construction                            | $              | 424   |                   | 21%  |           | $   | 291     |     | 14% 
|Residential                             |                | 372   |                   | 19%  |           |     | 396     |     | 19% 
|Commercial                              |                | 665   |                   | 34%  |           |     | 826     |     | 40% 
|Commercial, industrial and agricultural | 394            |       | 20%               |      |           | 427 |         | 21%
|Consumer and installment                |                | 105   |                   | 5%   |           |     | 119     |     | 6%  
|All other                               |                | 13    |                   | 1%   |           |     | 6       |     | 0%  
|Total loans                             | $              | 1,973 |                   | 100% |           | $   | 2,065   |     | 100%



Nonaccrual, Past Due and Restructured Loans



At March 31, 2007, TransCommunity had $507 thousand in loans classified as non-accrual or past due more than 90 days.  At December 31, 2006, TransCommunity had $961 thousand in loans classified as non-accrual or past due more than 90 days.  Loans are placed in a non-accrual status when, in the opinion of management, the accrued interest income will not be collected.



Secured Borrowings



TransCommunity had recorded secured borrowings in past financial statements due to the prior accounting treatment on certain loan participation agreements entered into with third-party financial institutions since the second quarter of 2004.  As described above and in Item 4, the Company discovered that it had incorrectly accounted for loans subject to these agreements in August 2006.  Due to amendments to these agreements so that they could be properly reported under applicable accounting standards, the Company has eliminated the reporting of secured borrowings.



Liquidity and Interest Sensitivity



At March 31, 2007, TransCommunity had liquid assets of $26.5 million in the form of cash, federal funds sold and available-for-sale investments.  Management believes that liquid assets were adequate at March 31, 2007 to meet its customers deposit and credit needs.  Management anticipates that additional liquidity will be provided by the growth in deposit accounts and loan repayments at each of its subsidiary banks.  TransCommunitys bank subsidiaries, Bank of Powhatan, Bank of Goochland and Bank of Louisa, also have the ability to purchase federal funds and borrow from the Federal Reserve Bank, if necessary.



Management is not aware of any trends, events or uncertainties that are reasonably likely to have a material impact on TransCommunity's short-term or long-term liquidity.



At March 31, 2007, TransCommunity had a positive cumulative Gap Rate Sensitivity Ratio of 12.86% for the one-year repricing period.  A positive one-year Gap Rate Sensitivity Ratio reflects managements ability to generate loans and investment securities that will mature or reprice faster than interest-bearing deposits in a rising rate environment.  Management constantly monitors the interest rate risk and believes that the current position is an acceptable risk for a growing financial services company.





21



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TransCommunity's interest sensitivity analysis is shown on the following schedule:



TRANSCOMMUNITY FINANCIAL CORPORATION

INTEREST SENSITIVITY ANALYSIS

March 31, 2007

(dollars in thousands)



|                                                        |         |         |        |   |        |  |       |        |  |   |        
|------------------------------------------------------- | ------- | ------- | ------ | - | ------ |  | ----- | ------ |  | - | -------
|                                                        | 1 - 365 |         | 1 to 5 |   | Over 5 |  |       |       
|                                                        | Days    |         | Years  |   | Years  |  | Total
|Uses of Funds:                                          |         |         |        |   |        |  |       |        |  |   |        
|Loans:                                                  |         |         |        |   |        |  |       |        |  |   |        
|Real estate                                             |         |         |        |   |        |  |       |        |  |   |        
|Construction                                            | $       | 33,321  |        | $ | 1,447  |  | $     | 166    |  | $ | 34,934 
|Residential                                             |         | 19,066  |        |   | 9,413  |  |       | 2,133  |  |   | 30,612 
|Commercial                                              |         | 29,659  |        |   | 22,353 |  |       | 2,763  |  |   | 54,775 
|Commercial, industrial and agricultural                 |         | 18,892  |        |   | 12,976 |  |       | 554    |  |   | 32,422 
|Consumer and installment                                |         | 4,863   |        |   | 3,621  |  |       | 191    |  |   | 8,675  
|All other                                               |         | 395     |        |   | 479    |  |       | 135    |  |   | 1,009  
|Total Loans                                             |         | 106,196 |        |   | 50,289 |  |       | 5,942  |  |   | 162,427
|Federal funds sold                                      |         | 346     |        |   | -      |  |       | -      |  |   | 346    
|Investment securities held to maturity, at cost         |         | 2,200   |        |   | 4,200  |  |       | 1,000  |  |   | 7,400  
|Investment securities available for sale, at fair value |         | 18,618  |        |   | 2,785  |  |       | -      |  |   | 21,403 
|Total                                                   | $       | 127,360 |        | $ | 57,274 |  | $     | 6,942  |  | $ | 191,576
|                                                        |         |         |        |   |        |  |       |        |  |   |        
|                                                        |         |         |        |   |        |  |       |        |  |   |        
|Sources of Funds:                                       |         |         |        |   |        |  |       |        |  |   |        
|Demand Deposits -                                       |         |         |        |   |        |  |       |        |  |   |        
|Interest bearing                                        | $       | 36,077  |        | $ | -      |  | $     | -      |  | $ | 36,077 
|Savings accounts                                        |         | 10,152  |        |   | -      |  |       | -      |  |   | 10,152 
|Time Deposits > $100,000                                |         | 23,609  |        |   | 22,890 |  |       | -      |  |   | 46,499 
|Time Deposits < $100,000                                |         | 31,858  |        |   | 25,550 |  |       | 7      |  |   | 57,415 
|Total interest-bearing deposits                         |         | 101,696 |        |   | 48,440 |  |       | 7      |  |   | 150,143
|Federal funds purchased                                 |         | 1,019   |        |   | -      |  |       | -      |  |   | 1,019  
|Borrowings                                              |         | -       |        |   | -      |  |       | -      |  |   | -      
|Total                                                   | $       | 102,715 |        | $ | 48,440 |  | $     | 7      |  | $ | 151,162
|Discrete Gap                                            | $       | 24,645  |        | $ | 8,834  |  | $     | 6,935  |  | $ | 40,414 
|Cumulative Gap                                          | $       | 24,645  |        | $ | 33,479 |  | $     | 40,414 |  |   |        
|Ratio of Cumulative Gap to Total Earning Assets         |         | 12.86%  |        |   | 17.48% |  |       | 21.10% |  |   |        



Contractual Obligations



TransCommunity has entered into certain contractual obligations to make future payments under contracts.  The following table summarizes TransCommunitys contractual obligations as of December 31, 2006:



22



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|                            |                        |           |                    |   |           |  |           |           |                   |   |         |  |   |          
|--------------------------- | ---------------------- | --------- | ------------------ | - | --------- |  | --------- | --------- | ----------------- | - | ------- |  | - | ---------
|                            | Payments due by period
|                            | Total                  |           | Less than One Year |   | 1-3 Years |  | 3-5 Years |           | More than 5 Years
|Contractual Obligations:    |                        |           |                    |   |           |  |           |           |                   |   |         |  |   |          
|Operating lease obligations | $                      | 3,635,231 |                    | $ | 484,415   |  | $         | 956,126   |                   | $ | 954,920 |  | $ | 1,239,770
|Data processing services    |                        | 1,462,989 |                    |   | 531,996   |  |           | 930,993   |                   |   | -       |  |   | -        
|Total                       | $                      | 5,098,220 |                    | $ | 1,016,411 |  | $         | 1,887,119 |                   | $ | 954,920 |  | $ | 1,239,770



As of March 31, 2007, there have been no material changes to the contractual obligations listed above.



Future Prospects



The Companys loss for the first quarter resulted from the confluence of several one-time events which are not likely to recur.  The process of consolidating the charters of our subsidiary banks and centralizing additional back room, non-customer contact functions is well underway, and should result in reduced operating costs as we move through the remaining months of 2007.  Our newest bank, Bank of Rockbridge, is off to a good start, in spite of the loss of its original president.  We have hired a new president for this market, and, with the positive impact on operating expenses resulting from the charter consolidation and centralization efforts, that bank should still have the potential to achieve early operating profitability.



Our three other banks continue to perform well, producing net interest margins that compare favorably with the experience of our competitors.  Our regulators, our outside loan review firm, and our own internal loan review process all confirm that our loan portfolio remains strong.



Following consolidation, the Company will have assets of over $200 million, and capital of $30 million.  As we move through the remainder of 2007, these statistics will translate into higher lending limits for our bankers, and increased operating flexibility which, when combined with lower operating costs, should translate into improved returns for our shareholders.  In addition, we will also be able to use the consolidated capital to expand into additional markets far more rapidly and aggressively than would have been possible under our old corporate structure.



Item 3.

Quantitative and Qualitative Disclosures About Market Risk



Not Applicable.



Item 4.

Controls and Procedures



Disclosure Controls and Procedures



The Company is required to maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), such as this periodic report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to its management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, the Company recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.





23



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We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of March 31, 2007. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer determined that, as a result of the material weakness described below, our disclosure controls and procedures were not effective.



In light of the material weakness described below, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements are prepared in accordance with generally accepted accounting principles.



Internal Control over Financial Reporting



Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) for the Company. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.



As more fully described in Note 25 of the Notes to Consolidated Financial Statements in our 2005 Form 10KSB/A, we discovered accounting errors in our previously reported financial results for 2005 and concluded on August 10, 2006 that previously issued financial statements would need to be restated due to the determination that there was a material weakness in our internal control over financial reporting.  A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of June 2006, we identified the following material weakness:



·

The Companys methods of accounting and documentation for loans participated to third-parties failed certain tests to qualify for sale accounting treatment under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125.  Specifically, the Company discovered that it had incorrectly accounted for loans subject to certain loan participation agreements entered into with third-party financial institutions from the second quarter of 2004.  During the second quarter of 2004, the Company implemented an automated loan documentation system which contained the option to include certain language that provided for termination of the participation agreement.  This right to repurchase the participated balance allows the Company to retain a level of control over the loans sold to third parties.  This termination clause allowed the originating institution to repurchase the loans sold to third parties, which failed certain tests to qualify for sale accounting treatment under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125.  The Company had previously not reflected the participated balances of loans subject to these agreements on its balance sheet, which amounted to $12.5 million at December 31, 2005.



In September 2006, the Company amended the loan participation agreements to eliminate the right to repurchase the participated balance and adopted accounting controls to report the loans at issue properly under FASB Statement No. 140 in the future.  As a result, the secured borrowings were eliminated as of September 30, 2006.  In addition, the Company has recruited personnel to our organization and promoted others who have expertise in financial controls and reporting, including experienced financial officers, made other changes in accounting personnel, and retained outside experts to improve the overall quality and level of experience of our organization.



In connection with the restatement identified above, we also identified a significant deficiency in internal control over financial reporting.  A significant deficiency is a control deficiency, or a combination of internal control deficiencies, that adversely affects a company's ability to initiate, authorize, record, process or report external financial data reliably in accordance with generally accepted accounting principles.  The significant deficiency in internal control over financial reporting is as follows:



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·

The Companys methods of accounting and record generation and maintenance for loan origination costs and for amortizing fees are inadequate. In misapplying Statement of Financial Accounting Standards No. 91, Accounting for Non-Refundable Fees and Costs Associated with Originating or Acquiring Loans and Indirect Costs of Leases (FAS 91), the Company has applied an incorrect income recognition method.



The significant deficiency that we have identified does not have a material impact on the Companys financial data and other financial results for any of the years presented in this Form 10-Q.



We have adopted and implemented measures in connection with our ongoing efforts to improve our internal control processes, some of which have been enhanced further or implemented in connection with the restatement process. These measures include the following:



·

We have reviewed and modified certain loan operating policies to provide guidance on daily operations.

·

We have provided additional training to loan personnel.



Additionally, on January 31, 2007, the Board of Directors unanimously approved the consolidation of the four bank charters and centralization of certain operational areas to provide a clearer segregation of responsibilities in connection with origination and monitoring activities.  The Company has hired a consultant to help the Company execute this reorganization.



As a part of the Companys preparation for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, the Company will continue to evaluate the effectiveness of its internal controls and procedures on an ongoing basis and will take further action as appropriate. Section 404 will require the Companys management to report on the effectiveness of the Companys internal control structure and procedures for financial reporting as of December 31, 2007. Future remedial measures include organizational changes to improve supervision and increased training for operations and accounting personnel. We will continue to develop new policies and procedures and educate and train our employees on our existing policies and procedures in our effort to constantly improve our internal controls and control environment.



We are taking all of these steps in connection with the consolidation of our banks and expect to eliminate the material weakness and significant deficiency when the process is complete.



Other than as described above, there were no changes in the Companys internal control over financial reporting in the quarter ended March 31, 2007 that materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



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PART II OTHER INFORMATION



Item 1.

Legal Proceedings



In the ordinary course of operations, TransCommunity and its subsidiary banks expect to be parties to various legal proceedings.  At present, there are no pending or threatened proceedings against TransCommunity or any of the Banks which, if determined adversely, would have a material effect on the business, results of operations, or financial position of TransCommunity or any of the Banks.



The Companys Annual Report on Form 10-K for the year ended December 31, 2006 included disclosure on pending litigation.  (See also Note 9 above for information on this pending litigation.)  There have been no developments that would change that disclosure.



Item 1A.

Risk Factors



There have been no material changes in the risk factors disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2006.



Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds



None.



Item 3.

Defaults Upon Senior Securities



None.



Item 4.

Submission of Matters to a Vote of Security Holders



None.



Item 5.

Other Information



None.



Item 6.

Exhibits



The following exhibits are filed or incorporated by reference as part of this Form 10-Q:



|            |  |                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibits                                                                                                                                                                        
|31.1        |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith)                                                                                                           
|31.2        |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith)                                                                                                           
|32          |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)





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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





|                   |     |                                             
|------------------ | --- | --------------------------------------------
|                   |     | TRANSCOMMUNITY FINANCIAL CORPORATION        
|                   |     | (Registrant)                                
|                   |     |                                             
|                   |     |                                             
|Date: May 14, 2007 | By: | /s/ Bruce B. Nolte                          
|                   |     | Bruce B. Nolte                              
|                   |     | Chief Executive Officer                     
|                   |     | (principal executive officer)               
|                   |     |                                             
|                   |     |                                             
|Date: May 14, 2007 | By: | /s/ Patrick J. Tewell                       
|                   |     | Patrick J. Tewell                           
|                   |     | Chief Financial Officer                     
|                   |     | (principal financial and accounting officer)





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