Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

| **x**                                                       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|-------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                        |                                                                                                     |
| **For the  Quarterly Period Ended September 30, 2010** |
|                                                        |                                                                                                     |
| **o**                                                       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For theTransition Period from                    to                     **

 

**Commissionfile number 000-53655**

 

**TOUCHMARKBANCSHARES, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Georgia**                   | ** ** | **20-8746061**      |
|-------------------------------|------------|---------------------|
| (State or other  jurisdiction |       | (I.R.S. Employer    |
| of incorporation)             |       | Identification No.) |

 

**3651 OldMilton Parkway**

**Alpharetta,Georgia 30005**

(Address of principal executive offices)

 

**(770)407-6700**

(Registrant’s telephone number)

 

----

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  x  YES  o  NO

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant toRule 405 of Regulation S-T (Section 232.405 of this chapter) duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). o  YES  o  NO

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated filer o                      |   | Accelerated filer o         |
|------------------------------------------------|--------|-----------------------------|
|                                           |   |                        |
| Non-accelerated filer o                        |   | Smaller reporting company x |
| (Do not check if a smaller  reporting company) |   |                        |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). o  YES  x  NO

 

Indicate the number of shares outstanding of each ofthe registrant’s classes of common equity, as of the latest practicable date: **3,465,391** shares of common stock, par value$.01 per share, outstanding as of November 12, 2010.

 

 

 

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Table ofContents

 

INDEX

 
| ** **                         | ** **                                                                                                                                    | ** ** | **Page** |
|------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                               |                                                                                                                                          |       |     |
| Part I. Financial Information |                                                                                                                                          |       |
|                               |                                                                                                                                          |       |     |
|                               | Item 1. Financial Statements (unaudited)                                                                                                      |       | 3        |
|                               |                                                                                                                                          |       |     |
|                               | Condensed Consolidated Balance Sheets as of  September 30, 2010 and December 31, 2009                                               |       | 3        |
|                               |                                                                                                                                          |       |     |
|                               | Condensed Consolidated Statements of Operations and  Comprehensive Loss for the Three and Nine Months Ended September 30,  2010 and 2009 |       | 4        |
|                               |                                                                                                                                          |       |     |
|                               | Condensed Consolidated Statements of Cash Flows For  The Nine Months Ended September 30, 2010 and 2009                                   |       | 5        |
|                               |                                                                                                                                          |       |     |
|                               | Notes to Condensed Consolidated Financial Statements                                                                                          |       | 6        |
|                               |                                                                                                                                          |       |     |
|                               | Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                           |       | 17       |
|                               |                                                                                                                                          |       |     |
|                               | Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                                                           |       | 26       |
|                               |                                                                                                                                          |       |     |
|                               | Item 4 Controls and Procedures                                                                                                                |       | 26       |
|                               |                                                                                                                                          |       |     |
| Part II.  Other Information   |                                                                                                                                          | 26         |
|                               |                                                                                                                                          |       |     |
|                               | Item 6. Exhibits                                                                                                                              |       | 26       |

 

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Table ofContents

 

**PART I— FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

 

**TOUCHMARK BANCSHARES, INC.**

**AND SUBSIDIARY**

 

**Condensed Consolidated BalanceSheets**

**September 30, 2010 and December 31, 2009**

 
| ** **                                                                                    | ** ** | **(Unaudited)**        | ** **  | ** **            | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                                                                    | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
| ** **                                                                                    | ** ** | **2010**               | ** **  | **2009**              | ** ** |
| ASSETS                                                                                        |       |                   |        |                  |       |
|                                                                                          |       |                   |        |                  |       |
| Cash and due from banks                                                                       |       | $                      | 3,329,933   |                  | $          | 1,695,884 |   |
| Federal funds sold                                                                            |       | 1,150,000              |        | —                |       |
| Interest-bearing accounts with other banks                                                    |       | 1,791,487              |        | 3,073,627             |       |
| Investment securities:                                                                        |       |                   |        |                  |       |
| Securities available for sale                                                                 |       | 58,880,959             |        | 43,230,785            |       |
| Securities held to maturity, fair value approximates $0, and  $4,579,310, respectively        |       | —                 |        | 4,619,299             |       |
| Restricted stock                                                                              |       | 1,495,550              |        | 1,365,750             |       |
| Loans held for sale                                                                           |       | 680,437                |        | 1,832,412             |       |
| Loans, less allowance for loan losses of $2,286,342 and $1,445,522,  respectively             |       | 84,113,434             |        | 66,609,313            |       |
| Accrued interest receivable                                                                   |       | 611,182                |        | 543,334               |       |
| Premises and equipment                                                                        |       | 2,833,064              |        | 3,043,646             |       |
| Foreclosed real estate                                                                        |       | 291,377                |        | —                |       |
| Land held for sale                                                                            |       | 2,409,023              |        | 2,409,023             |       |
| Other assets                                                                                  |       | 530,580                |        | 839,402               |       |
| Total assets                                                                                  |       | $                      | 158,117,026 |                  | $          | 129,262,475 |   |
|                                                                                          |       |                   |        |                  |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                     |       |                   |        |                  |       |
|                                                                                          |       |                   |        |                  |       |
| Liabilities:                                                                                  |       |                   |        |                  |       |
| Deposits:                                                                                     |       |                   |        |                  |       |
| Non-interest bearing demand                                                                   |       | $                      | 4,604,914   |                  | $          | 3,489,983 |   |
| Interest-bearing                                                                              |       | 110,847,130            |        | 72,553,691            |       |
| Total deposits                                                                                |       | 115,452,044            |        | 76,043,674            |       |
| Accrued interest payable                                                                      |       | 85,581                 |        | 60,624                |       |
| Federal Home Loan Bank advances                                                               |       | 11,400,000             |        | 11,400,000            |       |
| Secured borrowings                                                                            |       | 3,785,175              |        | —                |       |
| Other borrowings                                                                              |       | —                 |        | 12,525,000            |       |
| Other liabilities                                                                             |       | 634,745                |        | 599,935               |       |
| Total liabilities                                                                             |       | 131,357,545            |        | 100,629,233           |       |
|                                                                                          |       |                   |        |                  |       |
| Shareholders’ Equity                                                                     |       |                   |        |                  |       |
| Preferred stock, no par value, 10,000,000 shares authorized, none  issued                     |       | —                 |        | —                |       |
| Common stock, $.01 par value, 50,000,000 shares authorized, 3,465,391  issued and outstanding |       | 34,654                 |        | 34,654                |       |
| Paid in capital                                                                               |       | 36,051,239             |        | 35,827,141            |       |
| Accumulated deficit                                                                           |       | (9,995,896             | )           | (7,471,431            | )          |
| Accumulated other comprehensive income                                                        |       | 669,484                |        | 242,878               |       |
| Total shareholders’ equity                                                               |       | 26,759,481             |        | 28,633,242            |       |
|                                                                                          |       |                   |        |                  |       |
| Total liabilities and shareholders’ equity                                               |       | $                      | 158,117,026 |                  | $          | 129,262,475 |   |

 

3

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Table ofContents

 

**TOUCHMARK BANCSHARES, INC.**

**AND SUBSIDIARY**

 

**Condensed Consolidated Statements of Operations andComprehensive Loss**

**Three and Nine Months Ended September 30, 2010 and 2009**

**(Unaudited)**

 
| ** **                                                                                                | ** ** | **Three**              | ** ** | **Three**              | ** ** | **Nine**               | ** ** | **Nine**               | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                | ** ** | **Months**             | ** ** | **Months**             | ** ** | **Months**             | ** ** | **Months**             | ** ** |
| ** **                                                                                                | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **                                                                                                | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                                | ** ** | **2010**               | ** ** | **2009**               | ** ** | **2010**               | ** ** | **2009**               | ** ** |
| Interest income:                                                                                          |       |                   |       |                   |       |                   |       |                   |       |
| Loans, including fees                                                                                     |       | $                      | 1,172,804  |                   | $          | 631,846                |       | $                      | 3,437,481  |   | $ | 1,755,787 |   |
| Investment income                                                                                         |       | 586,625                |       | 489,013                |       | 1,767,916              |       | 1,341,103              |       |
| Federal funds sold                                                                                        |       | 561                    |       | 454                    |       | 1,366                  |       | 1,477                  |       |
| Total interest income                                                                                     |       | 1,759,990              |       | 1,121,313              |       | 5,206,763              |       | 3,098,367              |       |
|                                                                                                      |       |                   |       |                   |       |                   |       |                   |       |
| Interest expense:                                                                                         |       |                   |       |                   |       |                   |       |                   |       |
| Deposits                                                                                                  |       | 502,166                |       | 358,763                |       | 1,445,050              |       | 973,475                |       |
| Federal Home Loan Bank advances                                                                           |       | 70,014                 |       | 70,014                 |       | 209,815                |       | 209,815                |       |
| Other borrowings                                                                                          |       | 654                    |       | 2,567                  |       | 10,731                 |       | 3,059                  |       |
| Total interest expense                                                                                    |       | 572,834                |       | 431,344                |       | 1,665,596              |       | 1,186,349              |       |
|                                                                                                      |       |                   |       |                   |       |                   |       |                   |       |
| Net interest income                                                                                       |       | 1,187,156              |       | 689,969                |       | 3,541,167              |       | 1,912,018              |       |
| Provision for loan losses                                                                                 |       | 2,133,614              |       | 819,160                |       | 2,871,624              |       | 1,522,610              |       |
| Net interest income (expense) after provision for loan losses                                             |       | (946,458               | )          | (129,191               | )          | 669,543                |       | 389,408                |       |
|                                                                                                      |       |                   |       |                   |       |                   |       |                   |       |
| Noninterest income:                                                                                       |       |                   |       |                   |       |                   |       |                   |       |
| Service charges on deposit accounts and other fees                                                        |       | 16,479                 |       | 30,002                 |       | 53,247                 |       | 41,139                 |       |
| Gain on sale of securities available for sale                                                             |       | 161,353                |       | 148,091                |       | 543,236                |       | 609,508                |       |
| Gain on sale of securities held to maturity                                                               |       | —                 |       | 129,577                |       | —                 |       | 129,577                |       |
| Gain on sale of loans held for sale                                                                       |       | 26,052                 |       | —                 |       | 444,155                |       | —                 |       |
| Gain on sale of SBA loans                                                                                 |       | 182,819                |       | —                 |       | 352,159                |       | —                 |       |
| Loss on fair value mark of derivative instrument                                                          |       | (76,071                | )          | (11,074                | )          | (226,477               | )          | (11,074                | )          |
| Loss on sale of premises and equipment                                                                    |       | —                 |       | (11,883                | )          | —                 |       | (11,883                | )          |
| Other noninterest income                                                                                  |       | 13,592                 |       | —                 |       | 39,845                 |       | —                 |       |
| Total noninterest income                                                                                  |       | 324,224                |       | 284,713                |       | 1,206,165              |       | 757,267                |       |
|                                                                                                      |       |                   |       |                   |       |                   |       |                   |       |
| Noninterest expense:                                                                                      |       |                   |       |                   |       |                   |       |                   |       |
| Salaries and employee benefits                                                                            |       | 955,038                |       | 677,698                |       | 2,358,444              |       | 2,044,280              |       |
| Occupancy and equipment                                                                                   |       | 223,577                |       | 170,275                |       | 589,820                |       | 478,081                |       |
| Other operating expense                                                                                   |       | 531,750                |       | 373,385                |       | 1,451,909              |       | 991,210                |       |
| Total noninterest expense                                                                                 |       | 1,710,365              |       | 1,221,358              |       | 4,400,173              |       | 3,513,571              |       |
|                                                                                                      |       |                   |       |                   |       |                   |       |                   |       |
| Net loss                                                                                                  |       | $                      | (2,332,599 | )                      | $          | (1,065,836             | )          | $                      | (2,524,465 | ) | $ | (2,366,896 | ) |
| Other comprehensive income:                                                                               |       |                   |       |                   |       |                   |       |                   |       |
| Unrealized holding gains arising during the period                                                        |       | 317,700                |       | 562,723                |       | 746,293                |       | 730,064                |       |
| Unrealized holding gains arising from transfer of securities from  held to maturity to available for sale |       | 433,668                |       | 349,336                |       | 433,668                |       | 349,336                |       |
| Reclassification adjustment for gain realized in net loss                                                 |       | (161,353               | )          | (148,091               | )          | (543,236               | )          | (609,508               | )          |
| Tax effect                                                                                                |       | (194,705               | )          | (252,109               | )          | (210,119               | )          | (155,064               | )          |
| Other comprehensive income                                                                                |       | 395,310                |       | 511,859                |       | 426,606                |       | 314,828                |       |
| Comprehensive loss                                                                                        |       | $                      | (1,937,289 | )                      | $          | (553,977               | )          | $                      | (2,097,859 | ) | $ | (2,052,068 | ) |
| Basic loss per share                                                                                      |       | $                      | (0.67      | )                      | $          | (0.31                  | )          | $                      | (0.73      | ) | $ | (0.68 | ) |
| Diluted loss per share                                                                                    |       | $                      | (0.67      | )                      | $          | (0.31                  | )          | $                      | (0.73      | ) | $ | (0.68 | ) |
| Dividends per share                                                                                       |       | $                      | —     |                   | $          | —                 |       | $                      | —     |   | $ | — |   |

 

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**TOUCHMARK BANCSHARES, INC.**

**AND SUBSIDIARY**

 

**Condensed Consolidated Statement of Cash Flows**

**Nine Months Ended September 30, 2010 and 2009**

**(Unaudited)**

 
| ** **                                                                             | ** ** | **Nine**               | ** ** | **Nine**               | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                             | ** ** | **Months**             | ** ** | **Months**             | ** ** |
| ** **                                                                             | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **                                                                             | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                             | ** ** | **2010**               | ** ** | **2009**               | ** ** |
| Cash flow from operating activities:                                                   |       |                   |       |                   |       |
| Net loss                                                                               |       | $                      | (2,524,465 | )                      | $          | (2,366,896 | ) |
| Adjustments to reconcile net loss to net cash provided (used) by  operating activities |       |                   |       |                   |       |
| Depreciation                                                                           |       | 220,547                |       | 177,047                |       |
| Amortization of premium                                                                |       | 33,610                 |       | 1,159                  |       |
| Provision for loan losses                                                              |       | 2,871,624              |       | 1,522,610              |       |
| Gain on sale of securities available for sale                                          |       | (543,236               | )          | (609,508               | )          |
| Gain on sale of securities held to maturity                                            |       | —                 |       | (129,577               | )          |
| Gain on sale of loans held for sale                                                    |       | (444,155               | )          | —                 |       |
| Proceeds from sale of loans held for sale                                              |       | 1,304,753              |       | —                 |       |
| Loss on sale of premise and equipment                                                  |       | —                 |       | 11,883                 |       |
| Stock compensation expense                                                             |       | 224,098                |       | 133,142                |       |
| Increase in interest receivable                                                        |       | (67,848                | )          | (16,899                | )          |
| Increase in interest payable                                                           |       | 24,957                 |       | 28,022                 |       |
| Decrease (increase) in other assets                                                    |       | 535,299                |       | (450,260               | )          |
| Decrease in other liabilities                                                          |       | (175,309               | )          | (82,896                | )          |
|                                                                                   |       |                   |       |                   |       |
| Net cash provided (used) by operating activities                                       |       | 1,459,875              |       | (1,782,173             | )          |
|                                                                                   |       |                   |       |                   |       |
| Cash flow from investing activities:                                                   |       |                   |       |                   |       |
| Sale (purchase) of federal funds sold                                                  |       | (1,150,000             | )          | 126,000                |       |
| Decrease (increase) in interest bearing deposits                                       |       | 1,282,140              |       | (823,309               | )          |
| Purchase of securities held to maturity                                                |       | (6,023,415             | )          | (7,351,444             | )          |
| Purchase of securities available for sale                                              |       | (55,907,817            | )          | (36,266,694            | )          |
| Proceeds from maturities of securities held to maturity                                |       | —                 |       | 500,000                |       |
| Proceeds from paydowns, calls and maturities of securities available  for sale         |       | 25,644,522             |       | 6,824,921              |       |
| Proceeds from sales of securities held to maturity                                     |       | —                 |       | 2,049,497              |       |
| Proceeds from sales of securities available for sale                                   |       | 26,175,709             |       | 17,319,800             |       |
| Purchase of restricted stock                                                           |       | (129,800               | )          | (37,300                | )          |
| Net increase in loans                                                                  |       | (20,375,745            | )          | (23,235,595            | )          |
| Purchase of premises and equipment                                                     |       | (9,965                 | )          | (1,838,741             | )          |
| Proceeds from sale of premises and equipment                                           |       | —                 |       | 25,465                 |       |
|                                                                                   |       |                   |       |                   |       |
| Net cash used by investing activities                                                  |       | (30,494,371            | )          | (42,707,400            | )          |
|                                                                                   |       |                   |       |                   |       |
| Cash flow from financing activities:                                                   |       |                   |       |                   |       |
| Net increase in deposits                                                               |       | 39,408,370             |       | 39,966,283             |       |
| Proceeds from secured borrowings                                                       |       | 3,785,175              |       | —                 |       |
| Proceeds from other borrowings                                                         |       | —                 |       | 5,000,000              |       |
| Repayment of other borrowings                                                          |       | (12,525,000            | )          | —                 |       |
| Purchase and retirement of common stock                                                |       | —                 |       | (50,000                | )          |
|                                                                                   |       | .                      |       |                   |       |
| Net cash provided by financing activities                                              |       | 30,668,545             |       | 44,916,283             |       |
|                                                                                   |       |                   |       |                   |       |
| Net change in cash                                                                     |       | 1,634,049              |       | 426,710                |       |
|                                                                                   |       |                   |       |                   |       |
| Cash at the beginning of the period                                                    |       | 1,695,884              |       | 1,029,163              |       |
|                                                                                   |       |                   |       |                   |       |
| Cash at the end of the period                                                          |       | $                      | 3,329,933  |                   | $          | 1,455,873 |   |
|                                                                                   |       |                   |       |                   |       |
| Supplemental disclosures of cash flow information -                                    |       |                   |       |                   |       |
| Interest paid                                                                          |       | $                      | 1,640,639  |                   | $          | 1,158,327 |   |
| Transfer of loan held for sale principal to foreclosed real estate                     |       | $                      | (291,377   | )                      | $          | — |   |
|                                                                                   |       |                   |       |                   |       |
| Non cash investing activities -                                                        |       |                   |       |                   |       |
| Transfer of securities from held to maturity to available for sale                     |       | $                      | 11,067,567 |                   | $          | 7,447,029 |   |
| Transfer of land from premise and equipment to land held for sale                      |       | $                      | —     |                   | $          | 2,409,023 |   |

 

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**TOUCHMARK BANCSHARES, INC.**

**AND SUBSIDIARY**

 

**Notes to Condensed ConsolidatedFinancial Statements**

**September 30, 2010**

**(unaudited)**

 

1.             BASIS OF PRESENTATION

 

Theconsolidated financial information included for Touchmark Bancshares, Inc.herein is unaudited; however, such information reflects all adjustments(consisting solely of normal recurring adjustments) which are, in the opinionof management, necessary for a fair statement of results for the interimperiods.  These statements should be readin conjunction with the financial statements and related notes included in theCompany’s Annual Report on Form 10-K for the year ended December 31,2009.

 

Theresults of operations for the three and nine month periods ended September 30,2010 are not necessarily indicative of the results to be expected for the fullyear.

 

2.             ORGANIZATION AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

 

TouchmarkBancshares, Inc. (the “Company”, “we”, “us” or “ours”), a Georgiacorporation, was established on April 3, 2007 for the purpose oforganizing and managing Touchmark National Bank (the “Bank”). The Company is aone-bank holding company with respect to its subsidiary, Touchmark NationalBank.  The Bank is a national bank, whichbegan operations on January 28, 2008, headquartered in Fulton County,Georgia with the purpose of providing community banking services to Gwinnett,Dekalb, north Fulton and south Forsyth counties and surrounding areas inGeorgia.

 

*Basis of Accounting:*The accounting and reportingpolicies of the Company conform to accounting principles generally accepted inthe United States of America. In preparing the financial statements, managementis required to make estimates and assumptions that affect the reported amountsof assets, liabilities, shareholders’ equity and net loss. Actual results maydiffer significantly from those estimates. The Company uses the accrual basisof accounting by recognizing revenues when they are earned and expenses in theperiod incurred, without regard to the time of receipt or payment of cash.

 

*Allowance for Loan Losses*: Arriving at an appropriatelevel of allowance for loan losses involves a high degree of judgment. TheCompany’s allowance for loan losses provides for probable losses based uponevaluations of known and inherent risks in the loan portfolio. Due to ourlimited operating history, the loans in our loan portfolio and our lendingrelationships are of recent origin. In general, loans do not begin to showsigns of credit deterioration or default until they have been outstanding forsome period of time, a process known as seasoning. As a result, a portfolio ofolder loans will usually behave more predictably than a newer portfolio.Because our loan portfolio is new, the current level of delinquencies anddefaults may not be representative of the level that will prevail when theportfolio becomes more seasoned, which may be higher than current levels. Ifdelinquencies and defaults increase, we may be required to increase ourprovision for loan losses, which would adversely affect our results ofoperations and financial condition. The allowance for loan losses is increasedby provisions for loan losses and by recoveries of loans previously charged-offand reduced by loans charged-off.

 

Theprocess of reviewing the adequacy of the allowance for loan losses requiresmanagement to make numerous judgments and assumptions about current events andsubjective judgments, including the likelihood of loan repayment, riskevaluation, extrapolation of historical losses of similar banks, and similarjudgments and assumptions. If these assumptions prove to be incorrect,charge-offs in future periods could exceed the allowance for loan losses.

 

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*Stock Based Compensation:* The Company has adopted thefair value recognition provisions of Financial Accounting Standards BoardAccounting Standards Codification (FASB ASC) 718, *StockCompensation*. Upon issuance of the Director and Organizer warrants,compensation cost was recognized in the consolidated financial statements ofthe Company for all share-based payments granted, based on the grant date fairvalue as estimated in accordance with the provisions of FASB ASC 718, whichrequires recognition of expense equal to the fair value of the warrant over thevesting period of the warrant.

 

Thefair value of each warrant grant is estimated on the date of grant using theBlack-Scholes option-pricing model with the assumptions listed in the tablebelow. Expected volatility for the period has been determined based onexpected volatility of similar entities. The expected term of warrantsgranted is based on the short-cut method and represents the period of time thatthe warrants granted are expected to be outstanding. Expected dividendsare based on dividend trends and the market price of the Company’s stock atgrant date. The risk-free rate for periods within the contractual life ofthe option is based on the U.S. Treasury yield curve in effect at the time ofgrant.

 

The Company recorded compensation expense related tothe warrants of $16,152 and $26,700 for the nine months ended September 30,2010 and 2009, respectively.

 

AtSeptember 30, 2010, there was $10,548 of unrecognized compensation costrelated to warrants, which is expected to be recognized over a weighted-averageperiod of 0.3 years. The weighted average remaining contractual life of thewarrants outstanding as of September 30, 2010 was approximately 7.25years. The Company had 462,500 warrants exercisable as of September 30,2010.

 

ThroughDecember 31, 2009, the Company issued 149,822 options to purchase commonstock to employees of the Company or the Bank and the Company issued 10,000options to purchase common stock to a new director.  55,000 options were issued during the firstnine months of 2010. Upon issuance of options, compensation cost is recognizedin the consolidated financial statements of the Company for all optionsgranted, based on the grant date fair value as estimated in accordance with theprovisions of FASB ASC 718, which requires recognition of expense equal to thefair value of the options over the vesting period of the options.

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model with the assumptions listed in the tablebelow. Expected volatility for the period has been determined based onexpected volatility of similar entities. The expected term of optionsgranted is based on the short-cut method and represents the period of time thatthe options granted are expected to be outstanding. Expected dividends arebased on dividend trends and the market price of the Company’s stock at grantdate. The risk-free rate for periods within the contractual life of theoption is based on the U.S. Treasury yield curve in effect at the time ofgrant.

 
| ** **                                     | ** ** | **For Options Issued  Thru Nine Months Ended  September 30, 2010** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| Risk-free interest rate                        |       | 1.01                                                                                                  | %          |
| Expected life (years)                          |       | 5.00                                                                                                  |       |
| Expected annual volatility                     |       | 56.10                                                                                                 | %          |
| Expected dividends                             |       | 0.00                                                                                                  | %          |
| Expected forfeiture rate                       |       | 29.02                                                                                                 | %          |
| Weighted average fair value of options granted |       | $                                                                                                     | 4.05       |   |
|                                                |            |                                                                                                       |            |  |

 

TheCompany recorded stock-based compensation expense related to the options of$207,946 and $106,442 during the nine months ended September 30, 2010 and2009, respectively.

 

AtSeptember 30, 2010, there was $142,239 of unrecognized compensation costrelated to options outstanding, which is expected to be recognized over aweighted-average period of 1.2 years. The weighted average remainingcontractual life of the options outstanding as of September 30, 2010 wasapproximately 8.2 years. The Company had 88,078 options exercisable as of September 30,2010.

 

*Income Taxes:*Deferredincome tax assets and liabilities are determined using the liability (orbalance sheet) method.  Under thismethod, the net deferred tax asset or liability is determined based on the taxeffects of the 

 

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differences between the book and tax bases of thevarious balance sheet assets and liabilities, and gives current recognition tochanges in tax rates and laws.  Avaluation allowance for deferred tax assets is required when it is more likelythan not that some portion or all of the deferred tax asset will not berealized.  In assessing the realizationof the deferred tax assets, management considers the scheduled reversals ofdeferred tax liabilities, projected future taxable income (in the near-termbased on current projections), and tax planning strategies.

 

The following summarizes the components of deferred taxes at September 30,2010 and December 31, 2009.

 
| ** **                                | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Deferred income tax assets (liabilities): |       |                             |       |                            |       |
|                                      |       |                             |       |                            |       |
| Allowance for loan losses                 |       | $                                | 461,327    |                            | $          | 363,245 |   |
| Pre-opening expenses                      |       | 425,145                          |       | 450,998                         |       |
| Net operating loss carryforward           |       | 2,282,719                        |       | 1,482,913                       |       |
| Depreciation                              |       | (177,358                         | )          | (202,035                        | )          |
| Stock options                             |       | 488,415                          |       | 488,415                         |       |
| Deferred loan fees                        |       | 91,415                           |       | 78,897                          |       |
| Other                                     |       | —                           |       | 1,505                           |       |
| Securities available for sale             |       | (329,745                         | )          | (119,626                        | )          |
|                                      |       | 3,241,918                        |       | 2,544,312                       |       |
| Less valuation allowance                  |       | (3,571,663                       | )          | (2,663,938                      | )          |
| Deferred tax asset, net                   |       | $                                | (329,745   | )                               | $          | (119,626 | ) |

 

*Statement of Cash Flows:*The statement of cash flowswas prepared using the indirect method. Under this method, net loss wasreconciled to net cash flows used by operating activities by adjusting for theeffects of operating activities.

 

*Cash and Cash Equivalents:*For purposes of presentationin the statement of cash flows, cash and cash equivalents are defined as thoseamounts included in the balance sheet caption “cash and due from banks.” Cashflows from deposits, federal funds purchased and sold, and originations,renewals and extensions of loans are reported net.

 

3.             SECURITIES

 

The amortized cost, gross unrealized gains and losses, and estimatedfair value of securities at September 30, 2010, are summarized as follows:

 
| ** **                                                                 | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|----------------------------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                                                                 | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| ** **                                                                 | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**     | ** ** |
|                                                                       |       |          |       |           |       |           |       |          |       |
| Securities available for sale U.S  Government-sponsored enterprises (GSEs) |       | $             | 13,489,003 |           | $          | 139,828        |       | $             | —     |   | $ | 13,628,831 |   |
| Corporate bonds                                                            |       | 9,680,341     |       | 379,344        |       | (86,250        | )          | 9,973,435     |       |
| Municipal bonds                                                            |       | 14,259,063    |       | 415,369        |       | (13,848        | )          | 14,660,584    |       |
| Mortgage-backed GSE residential                                            |       | 20,453,259    |       | 192,451        |       | (27,601        | )          | 20,618,109    |       |
|                                                                       |       | $             | 57,881,666 |           | $          | 1,126,992      |       | $             | (127,699   | ) | $ | 58,880,959 |   |

 

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The amortized cost, gross unrealized gains and losses, and estimatedfair value of securities at December 31, 2009, are summarized as follows:

 
| ** **                                                                  | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                                                                  | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| ** **                                                                  | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**     | ** ** |
|                                                                        |       |          |       |           |       |           |       |          |       |
| Securities available for sale U.S.  Government-sponsored enterprises (GSEs) |       | $             | 13,740,026 |           | $          | 3,451          |       | $             | (169,114   | ) | $ | 13,574,363 |   |
| Corporate bonds                                                             |       | 11,471,708    |       | 529,381        |       | —         |       | 12,001,089    |       |
| Mortgage-backed GSE residential                                             |       | 17,656,547    |       | 55,162         |       | (56,376        | )          | 17,655,333    |       |
|                                                                        |       | $             | 42,868,281 |           | $          | 587,994        |       | $             | (225,490   | ) | $ | 43,230,785 |   |
|                                                                        |       |          |       |           |       |           |       |          |       |
| Held to maturity securities Municipal bonds                                 |       | $             | 4,619,299  |           | $          | 2,637          |       | $             | (42,626    | ) | $ | 4,579,310 |   |

 

Allheld to maturity securities were transferred to available for sale in the thirdquarter to allow for more flexibility in selling the bonds if the need arisesin the future. By transferring the securities to available for sale, theCompany will be prohibited from classifying securities as held to maturity forthe foreseeable future.

 

Theamortized cost and estimated fair value of investment securities available forsale and held to maturity at September 30, 2010, by contractual maturityare shown below.  Expected maturitieswill differ from contractual maturities because borrowers may have the right tocall or prepay obligations with or without call or prepayment penalties.

 
| ** **                                   | ** ** | **Securities Available** | ** ** | ** **    | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|-------------------------------|------------|---------------|------------|------------|------------|
| ** **                                   | ** ** | **For Sale**             | ** ** | ** **    | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | ** **                    | ** ** | **Estimated** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **Amortized**                 | ** ** | **Fair**      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **Cost**                      | ** ** | **Value**     | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                         |       |                          |       |          |       |       |       |   |   |
| Due in one year or less                      |       | $                             | 3,282,947  |          | $          | 3,316,010  |       |   |   |   |   |
| Due after one year but less than five years  |       | 22,826,624                    |       | 23,170,768    |       |       |       |   |   |
| Due after five years but less than ten years |       | 20,203,035                    |       | 20,665,331    |       |       |       |   |   |
| Due after ten years                          |       | 11,569,060                    |       | 11,728,850    |       |       |       |   |   |
|                                         |       | $                             | 57,881,666 |          | $          | 58,880,959 |       |   |   |   |   |

 

For the purpose of the maturity table, mortgage-backed securities,which are not due at a single maturity date, have been allocated over maturitygroupings based on the weighted-average contractual maturities of underlyingcollateral.  The mortgage-backedsecurities may mature earlier than their weighted-average contractualmaturities because of principal prepayments.

 

Information pertaining to securities with gross unrealized losses at September 30,2010 aggregated by investment category and length of time that individualsecurities have been in a continuous loss position, follows:

 

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| ** **                                    | ** ** | **Less than**     | ** ** | **More than**     | ** ** |
|-----------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **Twelve Months** | ** ** | **Twelve Months** | ** ** |
| ** **                                    | ** ** | **Gross**              | ** ** | **Estimated**          | ** ** | **Gross** | ** ** | **Estimated** | ** ** |
| ** **                                    | ** ** | **Unrealized**         | ** ** | **Fair**               | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                    | ** ** | **Losses**             | ** ** | **Value**              | ** ** | **Losses** | ** ** | **Value** | ** ** |
|                                          |       |                   |       |                   |       |   |   |   |   |
| Securities available for sale Municipal bonds |       | $                      | (13,848    | )                      | $          | 1,034,340 |   | $ | — |   | $ | — |   |
| Mortgage-backed                               |       |                   |       |                   |       |   |   |   |   |
| GSE residential                               |       | (27,601                | )          | 3,931,263              |       | — |   | — |   |
| Corporate bonds                               |       | (86,250                | )          | 913,750                |       | — |   | — |   |
|                                          |       | $                      | (127,699   | )                      | $          | 5,879,353 |   | $ | — |   | $ | — |   |

 

Information pertaining to securities with gross unrealized losses at December 31,2009 aggregated by investment category and length of time that individualsecurities have been in a continuous loss position, follows:

 
| ** **                                  | ** ** | **Less than**     | ** ** | **More than**     | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **Twelve Months** | ** ** | **Twelve Months** | ** ** |
| ** **                                  | ** ** | **Gross**              | ** ** | **Estimated**          | ** ** | **Gross** | ** ** | **Estimated** | ** ** |
| ** **                                  | ** ** | **Unrealized**         | ** ** | **Fair**               | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                  | ** ** | **Losses**             | ** ** | **Value**              | ** ** | **Losses** | ** ** | **Value** | ** ** |
|                                        |       |                   |       |                   |       |   |   |   |   |
| Securities available for sale GSEs          |       | $                      | (169,114   | )                      | $          | 10,572,409 |   | $ | — |   | $ | — |   |
| Mortgage-backed                             |       |                   |       | —                 |       | — |   | — |   |
| GSE residential                             |       | (56,376                | )          | 12,083,366             |       | — |   | — |   |
|                                        |       | $                      | (225,490   | )                      | $          | 22,655,775 |   | $ | — |   | $ | — |   |
|                                        |       |                   |       |                   |       |   |   |   |   |
| Securities held to maturity Municipal bonds |       | $                      | (42,626    | )                      | $          | 3,748,851 |   | $ | — |   | $ | — |   |

 

Managementevaluates securities for other-than-temporary impairment at least on aquarterly basis, and more frequently when economic or market concerns warrantsuch evaluation.

 

AtSeptember 30, 2010, ten debt securities have unrealized losses withaggregate depreciation of 2.13% from the Company’s amortized cost basis. Inanalyzing an issuer’s financial condition, management considers whether thesecurities are issued by the federal government or its agencies, whetherdowngrades by bond rating agencies have occurred, and industry analysts’reports. Although some of the issuers have shown declines in earnings and/or aweakened financial condition as a result of the weakened economy, no creditissues have been identified that cause management to believe the declines inmarket value are other than temporary. As management has the ability to holddebt securities until maturity, or for the foreseeable future, no declines aredeemed to be other than temporary.

 

*Municipal bonds.*    TheCompany’s unrealized loss on two investments in municipal bonds relates to interest rate increases. Management currentlydoes not believe it is probable that it will be unable to collect all amountsdue according to the contractual terms of the investments. Because the Companydoes not plan to sell the investments, and because it is not more likely thannot that the Company will be required to sell the investments before recoveryof their par value, which may be maturity, management does not consider theseinvestments to be other-than-temporarily impaired at September 30, 2010.

 

*Mortgage-backed GSE residential.*    Theunrealized losses on the Company’s investment in seven residential GSEmortgage-backed securities were caused by interest rate increases. Thecontractual cash flows of those investments are guaranteed by an agency of theU.S. Government. Accordingly, it is expected that the securities would not besettled at a price less than the amortized cost bases of the Company’sinvestments. Because the decline in market value is attributable to changes ininterest rates and not credit quality, and 

 

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becausethe Company has no immediate plans to sell the investments, and because it isnot more likely than not that the Company will be required to sell theinvestments before recovery of their amortized cost bases, which may bematurity, management does not consider those investments to beother-than-temporarily impaired at September 30, 2010.

 

*Corporate bonds*.    TheCompany’s unrealized loss on one corporate bond relates to interest rateincreases. Management currently does not believe it is probable that theCompany will be unable to collect all amounts due according to the contractualterms of the investment. Because the Company does not plan to sell theinvestment, and because it is not more likely than not that the Company will berequired to sell the investment before recovery of its par value, which may bematurity, it does not consider this investment to be other-than-temporarilyimpaired at September 30, 2010.

 

4.             FAIR VALUE MEASUREMENTS

 

ASCTopic 820, *Fair Value Measurements,*defines fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurements. FASB ASC 820-10 appliesto reported balances that are required or permitted to be measured at fairvalue under existing accounting pronouncements; accordingly, the standard doesnot require any new fair value measurements of reported balances.

 

FASBASC 820-10 emphasizes that fair value is a market-based measurement, not anentity-specific measurement. Therefore, a fair value measurement should bedetermined based on the assumptions that market participants would use inpricing the asset or liability. As a basis for considering marketparticipant assumptions in fair value measurements, GAAP establishes a fairvalue hierarchy that distinguishes between market participant assumptions basedon market data obtained from sources independent of the reporting entity(observable inputs that are classified within Levels 1 and 2 of the hierarchy)and the reporting entity’s own assumptions about market participant assumptions(unobservable inputs classified within Level 3 of the hierarchy).

 

Level1 inputs utilize quoted prices (unadjusted) in active markets for identicalassets or liabilities that the Company has the ability to access. Level 2inputs are inputs other than quoted prices included in Level 1 that areobservable for the asset or liability, either directly or indirectly. Level 2inputs may include quoted prices for similar assets and liabilities in activemarkets, as well as inputs that are observable for the asset or liability(other than quoted prices), such as interest rates, foreign exchange rates andyield curves that are observable at commonly quoted intervals. Level 3 inputsare unobservable inputs for the asset or liability, which are typically basedon an entity’s own assumptions, as there is little, if any, related marketactivity. In instances where the determination of the fair value measurement isbased on inputs from different levels of the fair value hierarchy, the level inthe fair value hierarchy within which the entire fair value measurement fallsis based on the lowest level input that is significant to the fair valuemeasurement in its entirety. The Company’s assessment of the significance of aparticular input to the fair value measurement in its entirety requiresjudgment, and considers factors specific to the asset or liability.

 

Thetable below presents the Company’s assets and liabilities measured at fairvalue on a recurring basis as of September 30, 2010 and December 31,2009, aggregated by the level in the fair value hierarchy within which thosemeasurements fall.

 
| **Assets as of**               | ** ** | **Quoted Prices in  Active Markets for  Identical Assets** | ** ** | **Significant Other  Observable Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------|------------|------------|------------|
| **September 30, 2010**         | ** ** | **(Level 1)**                                                                  | ** ** | **(Level 2)**                                 | ** ** | **(Level 3)**                    | ** ** | **Total**  | ** ** |
| Investment securities available-for-sale |       | $                                                                                   | —     |                                               | $          | 58,880,959                            |       | $          | —     |   | $ | 58,880,959 |   |
| Derivative instruments                   |       | —                                                                              |       | —                                             |       | 55,122                                |       | 55,122     |       |
| Loans held for sale                      |       | —                                                                              |       | —                                             |       | 680,437                               |       | 680,437    |       |
| Total assets at fair value               |       | $                                                                                   | —     |                                               | $          | 58,880,959                            |       | $          | 735,559    |   | $ | 59,616,518 |   |

 

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| **Assets as of  **   | ** ** | **Quoted Prices in  Active Markets for  Identical Assets** | ** **   | **Significant Other  Observable Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** | ** ** | ** **      |
|------------------------------------------|------------|-------------------------------------------------------------------------------------|--------------|----------------------------------------------------|------------|---------------------------------------|------------|------------|-----------------|
| **December 31, 2009**          | ** ** | **(Level 1)**                                                                  | ** **   | **(Level 2)**                                 | ** ** | **(Level 3)**                    | ** ** | **Total**  | ** **      |
| Investment securities available-for-sale |       | $                                                                                   |  — |                                               | $          |  43,230,785                      |       | $          |  —    |   | $ |  43,230,785 |   |
| Derivative instruments                   |       | —                                                                              |         | —                                             |       | 281,599                               |       | 281,599    |            |
| Loans held for sale                      |       | —                                                                              |         | —                                             |       | 1,832,412                             |       | 1,832,412  |            |
| Total assets at fair value               |       | $                                                                                   |  — |                                               | $          |  43,230,785                      |       | $          |  2,114,011 |   | $ |  45,344,796 |   |

 

Securitiesclassified as available-for-sale are reported at fair value utilizing Level 2inputs. For these securities, the Company obtains fair value measurements froman independent pricing service. The fair value measurements consider observabledata that may include dealer quotes, market spreads, cash flows, the U.S.Treasury yield curve, live trading levels, trade execution data, marketconsensus prepayment speeds, credit information and the bond’s terms andconditions, among other things. The investments in the Company’s portfolio aregenerally not quoted on an exchange but are actively traded in the secondaryinstitutional markets.

 

Thederivative instrument held by the Company is reported at fair value utilizingLevel 3 inputs. The valuation of this instrument is determined usingwidely accepted valuation techniques including discounted cash flow analysis onthe expected cash flows of each derivative. This analysis reflects thecontractual term of the derivative, including the period to maturity, and usesobservable market-based inputs, including interest rate curves and impliedvolatilities. The fair values of interest rate options are determined using themarket standard methodology of discounting the future expected cash receiptsthat would occur if variable interest rates fell below (rise above) the strikerate of the floors (caps). The variable interest rates used in the calculationof projected receipts on the floor (cap) are based on an expectation of futureinterest rates derived from observable market interest rate curves andvolatilities. To comply with the provisions of ASC 820, the Companyincorporates credit valuation adjustments to reflect appropriately both its ownnonperformance risk and the respective counterparty’s nonperformance risk inthe fair value measurements. In adjusting the fair value of its derivativecontracts for the effect of nonperformance risk, the Company has considered theimpact of netting any applicable credit enhancements, such as collateralpostings, thresholds, mutual puts, and guarantees.

 

Loansheld-for-sale are measured at the lower of cost or fair value. Fair value iscurrently based on the purchase price of the loan held for sale. On loans heldfor sale, collateral includes commercial real estate. The fair value of loansheld for sale are evaluated on an on-going basis by monitoring what secondarymarkets are offering for loans and portfolios with similar characteristics.

 

Thefollowing is a reconciliation of the beginning and ending balances of recurringfair value measurements recognized in the accompanying balance sheet usingsignificant unobservable (Level 3) inputs.

 
| ** **                   | ** ** | **Loans Held** | ** ** | **Derivative**  | ** ** |
|------------------------------|------------|---------------------|------------|-----------------|------------|
| ** **                   | ** ** | **For Sale**   | ** ** | **Instruments** | ** ** |
| Balance, January 1, 2010     |       | 1,832,412           |       | 281,599         |       |
| Sales of loans held for sale |       | (860,598            | )          | —          |       |
| Loan foreclosure             |       | (291,377            | )          | —          |       |
| Mark to market gain          |       | —              |       | (226,477        | )          |
| Balance, September 30, 2010  |       | 680,437             |       | 55,122          |       |

 

Thefollowing table presents the assets that are measured at fair value on anon-recurring basis by level within the fair value hierarchy as reported in theconsolidated statements of financial position at September 30, 2010 andDecember 31, 2009.

 

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| **As of September 30, 2010** | ** ** | **Quoted Prices in Active  Markets for Identical  Securities Level 1** | ** ** | **Significant Other  Observable Inputs  Level 2** | ** ** | **Significant  Unobservable   Inputs  Level 3** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------|------------|
| Impaired loans                                   |       | $                                                                                                         | —     |                                                             | $          | —                                                    |       | $         | 5,958,608  |   | $ | 5,958,608 |   |
|                                                  |            |                                                                                                           |            |                                                                  |            |                                                           |            |           |            |  |  |  |  |

 
| **As of December 31, 2009** | ** ** | **Quoted Prices in Active  Markets for Identical  Securities Level 1** | ** ** | **Significant Other  Observable Inputs  Level 2** | ** ** | **Significant  Unobservable  Inputs  Level 3** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------|------------|
| Impaired loans                                  |       | $                                                                                                         | —     |                                                             | $          | —                                              |       | $         | 5,897,235  |   | $ | 5,897,235 |   |
|                                                 |            |                                                                                                           |            |                                                                  |            |                                                     |            |           |            |  |  |  |  |

 

AtSeptember 30, 2010 and December 31, 2009, in accordance with the provisions ofthe loan impairment guidance (FASB ASC 310-10-35), individual loans with acarrying amount of $5,958,608 and 5,897,235, after partial charge-offs of $2,683,000and $2,744,000, respectively,  wereconsidered impaired. Impaired loans are evaluated and valued at the time theloan is identified as impaired, at the lower of cost or fair value. Fair valueis measured based on the value of the collateral securing these loans and isclassified as Level 3 in the fair value hierarchy. Collateral may include realestate, or business assets including equipment, inventory and accountsreceivable. The value of real estate collateral is determined based on anappraisal by qualified licensed appraisers hired by the Company. The value ofbusiness equipment is based on an appraisal by qualified licensed appraisershired by the Company if significant, or the equipment’s net book value on thebusiness’ financial statements. Inventory and accounts receivable collateralare valued based on independent field examiner review or aging reports.Appraised and reported values may be discounted based on management’shistorical knowledge, changes in market conditions from the time of the valuation,and management’s expertise and knowledge of the client and client’s business.Impaired loans are evaluated on at least a quarterly basis for additionalimpairment and adjusted accordingly.

 

Fair Value of Financial Instruments

 

The following methods and assumptions that were used bythe Company in estimating fair values of financial instruments are disclosedherein:

 

*Cash, federal funds sold, and interest bearing deposits with otherbanks.*  The carrying amounts of cashand short-term instruments approximate their fair value due to the relativelyshort period to maturity of the instruments.

 

*Investment securities available-for-sale and held-to-maturity*.  Fair values for securities, excludingrestricted equity securities, are based predominately on quoted market prices.If quoted market prices are not available, fair values are based on quotedmarket prices of similar instruments.

 

*Restricted stock.* The carrying values of restricted equitysecurities approximate fair values.

 

*Loans Held for Sale.*    Loansheld for sale are carried at the lower of cost or fair value. Fair value iscurrently based on what secondary markets are offering for loans and portfolioswith similar characteristics.

 

*Loans receivable.*  Forvariable-rate loans that reprice frequently and have no significant change incredit risk, fair values are based on carrying values. Fair values for fixedrate loans are estimated using discounted cash flow analyses and using interestrates currently being offered for loans with similar terms to borrowers ofsimilar credit quality. Fair values for impaired loans are estimated usingdiscounted cash flow analyses or underlying collateral values, whereapplicable.

 

*Deposit liabilities.*  The fair values disclosed for demand depositsare, by definition, equal to the amount payable on demand at the reporting date(that is, their carrying amounts). The carrying amounts of variable-rate,fixed-term money market accounts and certificates of deposit approximate theirfair values at the reporting date.  Fairvalues for fixed-rate certificates of deposit are estimated using a discountedcash flow 

 

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calculation that applies interest rates currently being offered oncertificates to a schedule of aggregated expected monthly maturities on timedeposits.

 

*Federal Home Loan Bank (“FHLB”) advances, secured borrowings and otherborrowings.* Fair values of fixed rate FHLB advances and otherborrowings are estimated using discounted cash flow analyses based on the Bank’scurrent incremental borrowing rates for similar types of borrowingarrangements. The carrying values of variable rate FHLB advances, securedborrowings and other borrowings approximate fair value.

 

*Accrued interest.*  Thecarrying amounts of accrued interest approximate their fair values.

 

*Derivative instruments.*    Thefair values of these instruments are determined using widely accepted valuationtechniques including discounted cash flow analysis on the expected cash flowsof each derivative. This analysis reflects the contractual terms of thederivatives, including the period to maturity, and uses observable market-basedinputs, including interest rate curves and implied volatilities.

 

*Off-balance-sheet instruments.*    Fairvalues for off-balance-sheet lending commitments are based on the currentcarrying value and adjusted, if appropriate, for material changes in pricingcurrently charged to enter into similar agreements. Remaining terms of theagreements and counter parties’ credit standings are taken into account whenmaking this evaluation.

 

TheCompany’s carrying amounts and estimated fair values of financial instrumentsas of September 30, 2010 and December 31, 2009 (in thousands) were as follows:

 
| ** **                                  | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **2010**              | ** ** | **2009**             | ** ** |
| ** **                                  | ** ** | **Carrying**          | ** ** | **Estimated**        | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                                  | ** ** | **Amount**            | ** ** | **Fair Value**  | ** ** | **Amount** | ** ** | **Fair Value** | ** ** |
| Assets:                                     |       |                  |       |                 |       |   |   |   |   |
| Cash and due from banks                     |       | $                     | 3,329      |                 | $          | 3,329 |   | $ | 1,696 |   | $ | 1,696 |   |
| Federal funds sold                          |       | 1,150                 |       | 1,150                |       | — |   | — |   |
| Interest-bearing  accounts with other banks |       | 1,791                 |       | 1,791                |       | 3,074 |   | 3,074 |   |
| Securities available for  sale              |       | 58,881                |       | 58,881               |       | 43,231 |   | 43,231 |   |
| Securities held to  maturity                |       | —                |       | —               |       | 4,619 |   | 4,579 |   |
| Restricted stock                            |       | 1,495                 |       | 1,495                |       | 1,366 |   | 1,366 |   |
| Loan held for sale                          |       | 680                   |       | 680                  |       | 1,832 |   | 1,832 |   |
| Loans receivable                            |       | 84,113                |       | 84,289               |       | 66,609 |   | 67,196 |   |
| Accrued interest  receivable                |       | 611                   |       | 611                  |       | 543 |   | 543 |   |
| Derivative instruments                      |       | 55                    |       | 55                   |       | 282 |   | 282 |   |
|                                        |       |                  |       |                 |       |   |   |   |   |
| Liabilities:                                |       |                  |       |                 |       |   |   |   |   |
| Deposits                                    |       | 115,452               |       | 115,767              |       | 76,044 |   | 76,139 |   |
| Accrued interest payable                    |       | 85                    |       | 85                   |       | 61 |   | 61 |   |
| FHLB advances                               |       | 11,400                |       | 11,702               |       | 11,400 |   | 11,823 |   |
| Secured borrowings                          |       | 3,785                 |       | 3,785                |       | — |   | — |   |
| Other borrowing                             |       | —                |       | —               |       | 12,525 |   | 12,525 |   |
|                                             |            |                       |            |                      |            |  |  |  |  |  |  |  |  |

 

5.             EARNINGS (LOSS) PER SHARE

 

Basicloss per share is computed by dividing net loss by the weighted average numberof shares of common stock outstanding. Diluted loss per share is computed bydividing net loss by the sum of the weighted average number of shares of commonstock outstanding and potential common shares. Potential common shares consistof stock options and warrants. Weighted average shares outstanding for thethree months ended September 30, 2010 and 2009 were 3,465,391 and 3,470,337,respectively. Basic  loss per share forthe three months ended September 30, 2010 and 2009 was $(0.67) and $(0.31),respectively. Weighted average shares outstanding for the nine months endedSeptember 30, 2010 and 2009 were 3,465,391 and 3,470,373, 

 

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respectively.Basic  loss per share for the nine monthsended September 30, 2010 and 2009 was $(0.73) and $(0.68). Diluted loss pershare is not presented for September 30, 2010 and 2009, as the net loss wouldresult in an anti-dilutive calculation.

 

6.             DERIVATIVE INSTRUMENT

 

In September 2009, theCompany entered into an interest rate corridor transaction. An interest ratecorridor is composed of a long interest rate cap position and a short interestrate cap position. The buyer of the corridor purchases a cap with a lowerstrike while selling a second cap with a higher strike. The premium earned onthe second cap then reduces the cost of the structure as a whole. The buyer ofthe corridor is then protected from rates rising above the first cap’s strike,but exposed again if they rise past the second cap’s strike.

 

In this transaction, the Company purchased an interest rate cap at0.75% based on the 1 month LIBOR rate. Additionally, the Company sold an interest rate cap with the strike at2.50% based on the 1 month LIBOR rate. Each of these transactions are forwardstart transactions with an effective date of July 1, 2010 and a terminationdate of July 1, 2013.  The notionalamount for each is $10,000,000.  Theinterest rate corridor transaction is considered a stand alone derivativeinstrument, and as such will be recorded in the financial statements at fairvalue, with changes in fair value included in net income.  Additionally, this transaction has a netsettlement feature, and the effects of the net settlement will be included ininterest income or expense as appropriate. The fair values as of September 30, 2010 and December 31, 2009 were $55,122and $281,599, respectively, and were included in other assets.

 

7.             ACCOUNTING STANDARDS UPDATES

 

InFebruary 2010, the FASB issued Accounting Standards UpdateNo. 2010-09, *Subsequent Events:Amendments to Certain Recognition and Disclosure Requirements*(“ASCNo. 2010-09”). ASU No. 2010-09 removes some contradictions betweenthe requirements of GAAP and the filing rules of the Securities and ExchangeCommission (“SEC”). SEC filers are required to evaluate subsequent eventsthrough the date the financial statements are issued, and they are no longerrequired to disclose the date through which subsequent events have beenevaluated. This guidance was effective upon issuance except for the use of theissued date for conduit debt obligors, and it is not expected to have amaterial impact on the Company’s results of operations, financial position ordisclosures.

 

InMarch 2010, the FASB issued Accounting Standards Update No. 2010-11, *Derivatives and Hedging: Scope Exception Related toEmbedded Credit Derivatives*(“ASU No. 2010-11”)*.*ASU No. 2010-11 clarifies the typeof embedded credit derivative that is exempt from embedded derivativebifurcation requirements, by resolving a potential ambiguity about the breadthof the embedded credit derivative scope exception with regard to some types ofcontracts, such as collateralized debt obligations (“CDO’s”) and synthetic CDO’s.The scope exception will no longer apply to some contracts that contain anembedded credit derivative feature that transfers credit risk. The ASU waseffective for fiscal quarters beginning after June 15, 2010, and is notexpected to have a material impact on the Company’s results of operations,financial position or disclosures.

 

InApril 2010, the FASB issued Accounting Standards Update No. 2010-13, *Effect of Denominating the Exercise Price of aShare-based Payment Award in the Currency of the Market in Which the UnderlyingEquity Security Trades*(“ASU No. 2010-13”). ASUNo. 2010-13 clarifies that an employee share-based payment award with anexercise price denominated in the currency of a market in which a substantialportion of an entity’s equity securities trades should not be considered tocontain a condition that is not a market, performance, or service condition.Therefore, an entity would not classify such an award as a liability if itotherwise qualifies as equity. This guidance is effective for fiscal years andinterim periods within those fiscal years, beginning on or afterDecember 15, 2010, and it is not expected to have a material impact on theCompany’s results of operations, financial position or disclosures.

 

InApril 2010, the FASB issued Accounting Standards Update No. 2010-18, *Effect of a Loan Modification When the Loan Is Partof a Pool That Is Accounted for as a Single Asset*(“ASU No. 2010-18”).ASU No. 2010-18 provides guidance on the accounting for loan modificationswhen the loan is part of a pool of loans accounted for as a single asset suchas acquired loans that have evidence of credit deterioration upon 

 

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acquisitionthat are accounted for under the guidance in ASC 310-30. ASU No. 2010-18addresses diversity in practice on whether a loan that is part of a pool ofloans accounted for as a single asset should be removed from that pool upon amodification that would constitute a troubled debt restructuring or remain inthe pool after modification. ASU No. 2010-18 clarifies that modifications ofloans that are accounted for within a pool under ASC 310-30 do not result inthe removal of those loans from the pool even if the modification of thoseloans would otherwise be considered a troubled debt restructuring. An entitywill continue to be required to consider whether the pool of assets in whichthe loan is included is impaired if the expected cash flows for the poolchange. The amendments in this update do not require any additional disclosuresand were effective for modifications of loans accounted for within pools underASC 310-30 occurring in the first interim or annual period ending on or afterJuly 15, 2010. ASU 2010-18 is not expected to have a material impact onthe Company’s results of operations, financial position or disclosures.

 

InJuly 2010, the FASB issued Accounting Standards Update No. 2010-20, *Disclosures about the Credit Quality of FinancingReceivables and the Allowance for Credit Losses*(“ASUNo. 2010-20”). ASU No. 2010-20 requires disclosures regarding loansand the allowance for loan losses that are disaggregated by portfolio segmentand class of financing receivable. Existing disclosures were amended to requirea roll forward of the allowance for loan losses by portfolio segment, with theending balance broken out by basis of impairment method, as well as therecorded investment in the respective loans. Nonaccrual and impaired loans byclass must also be shown. ASU No. 2010-20 also requires disclosuresregarding: 1) credit quality indicators by class, 2) aging of past due loans byclass, 3) troubled debt restructurings (“TDRs”) by class and their effect onthe allowance for loan losses, 4) defaults on TDRs by class and their effect onthe allowance for loan losses, and 5) significant purchases and sales of loansdisaggregated by portfolio segment. This guidance is effective for interim andannual reporting periods ending on or after December 15, 2010, for end ofperiod type disclosures. Activity related disclosures are effective for interimand annual reporting periods beginning on or after December 15, 2010. ASUNo. 2010-20 will have an impact on the Company’s disclosures, but not itsfinancial position or results of operations.

 

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** **

**Item 2.**         **Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

Thefollowing discussion reviews our results of operations and assesses ourfinancial condition. You should read the following discussion and analysis inconjunction with the accompanying condensed consolidated financial statements.The commentary should be read in conjunction with the discussion offorward-looking statements, the consolidated financial statements, and therelated notes and the other statistical information included in this report.

 

**DISCUSSION OF FORWARD-LOOKING STATEMENTS**

 

Thisreport contains “forward-looking statements” relating to, without limitation,future economic performance, plans and objectives of management for futureoperations, and projections of revenues and other financial items that arebased on the beliefs of our management, as well as assumptions made by andinformation currently available to management. The words “expect,” “estimate,” “anticipate,”and “believe,” as well as similar expressions, are intended to identifyforward-looking statements. Our actual results may differ materially from theresults discussed in the forward-looking statements, and our operatingperformance each quarter is subject to various risks and uncertainties that arediscussed in detail in our filings with the Securities and Exchange Commission(the “SEC”), including, without limitation:

 

·      significant increases in competitive pressure in thebanking and financial services industries;

·      changes in the interest rate environment which couldreduce anticipated or actual margins;

·      changes in political conditions or the legislativeor regulatory environment;

·      general economic conditions, either nationally orregionally and especially in our primary service area, becoming less favorablethan expected, resulting in, among other things, a deterioration in creditquality;

·      changes occurring in business conditions andinflation;

·      changes in technology;

·      the level of our allowance for loan losses and thelack of seasoning of our loan portfolio;

·      the rate of delinquencies and amounts ofcharge-offs;

·      the rates of loan growth;

·      adverse changes in asset quality and resultingcredit risk-related losses and expenses;

·      changes in monetary and tax policies;

·      loss of consumer confidence and economic disruptionsresulting from terrorist activities;

·      changes in the securities markets; and

·      other risks and uncertainties detailed from time totime in our filings with the SEC. 

 

**Company Overview**

 

Thefollowing report describes our results of operations for the three and ninemonths ended September 30, 2010 and 2009 and also analyzes our financialcondition as of September 30, 2010 and December 31, 2009.  Like mostcommunity banks, we expect to derive most of our income from interest that wereceive on our loans and investments. As we grow, our primary source of fundsfor making these loans and investments is our deposits, on the majority ofwhich we pay interest. Consequently, one of the key measures of our success isour level of net interest income, which is the difference between the income onour interest-earning assets, such as loans and investments, and the expense onour interest-bearing liabilities, such as deposits and borrowings. Another keymeasure is the spread between the yield we earn on interest-earning assets andthe rate we pay on interest-bearing liabilities. As we increase the size of ourbalance sheet, our net interest income will increase until revenue exceeds cashand non-cash expenses. At that point the bank will operate profitably.

 

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Thereare risks inherent in all loans, so we maintain an allowance for loan losses toabsorb probable losses on existing loans that may become uncollectible. Weestablish and maintain this allowance by charging a provision for loan lossesagainst our earnings. We have included a detailed discussion of this process.

 

Inaddition to earning interest on our loans and investments, we earn incomethrough fees and other charges to our customers.  We have alsoincluded a discussion of the various components of this noninterest income, aswell as of our noninterest expense.

 

**Industry Overview**

 

Thefirst nine months of 2010 continued to reflect the tumultuous economicconditions which have negatively impacted liquidity and credit quality.Concerns regarding increased credit losses from the weakening economy havenegatively affected capital and earnings of most financial institutions.Financial institutions have experienced significant declines in the value ofcollateral for real estate loans and serious deterioration in the creditquality of their loan portfolios.  These factors have resulted inrecord levels of non-performing assets, charge-offs andforeclosures.  The State of Georgia and the Atlanta metropolitan areain particular have gained the unfortunate distinction of experiencing among thehighest incidences of bank closures nationwide since the onset of the 2007financial crisis.

 

Dueto credit quality concerns, liquidity in the debt markets remains low in spiteof enormous efforts by the U.S. Department of the Treasury (“Treasury”) and theFederal Reserve Bank (“Federal Reserve”) to inject capital into financialinstitutions. The federal funds rate set by the Federal Reserve has remained athistorically low levels since December 2008, following a decline from 4.25% to0.25% during 2008 through a series of seven rate reductions.

 

Treasury,the FDIC and other governmental agencies continue to evolve rules andregulations to implement the Emergency Economic Stabilization Act of 2008 (“EESA”),the Troubled Asset Relief Program (“TARP”), the Financial Stability Plan, theAmerican Recovery and Reinvestment Act (“ARRA”) and related economic recoveryprograms, many of which curtail the activities of financialinstitutions.  Earlier this year, we declined to participate in theTARP Capital Purchase Program.  While TARP has been a valuableelement in the efforts to stabilize the banking system, we felt that ourcapital levels were substantial and precluded the need for us to expose ourselvesto additional regulatory controls.  While we are grateful for thesupport provided to troubled financial institutions and hopeful that theoutcome of these efforts will be favorable, we are even more grateful that wehave no need of such support and the ensuing regulation that accompanies it.

 

Difficulteconomic conditions are expected to prevail through the remainder of 2010 andinto 2011. Reduced levels of commercial activity will continue to challengeprospects for stable balance sheet growth and earning asset yields at a timewhen the market for profitable commercial banking relationships is intenselycompetitive. As a result, financial institutions in general will continue toexperience pressure on earning asset yields, funding costs, operating expenses,liquidity and capital.

 

**Results of Operations for the Three Months Ended September30, 2010 and 2009**

 

Weincurred a net  loss of $2,332,599 and$1,065,836 for the three months ended September 30, 2010 and 2009,respectively. For the three months ended September 30, 2010, we realized$1,759,990 in interest income, consisting primarily of $1,172,804 from loanrevenue and $586,625 from investment revenue. For the three months endedSeptember 30, 2009, we realized $1,121,313 in interest income, consistingprimarily of $631,846 from loan activities and $489,013 from investmentactivities. The provision for loan loss was $2,133,614 for the quarter endedSeptember 30, 2010, and $819,160 for the quarter ended September 30, 2009. Weanticipate the growth in loans in future quarters will drive the growth inassets and the growth in interest income. The primary sources of funding forour loan portfolio are deposits and Federal Home Loan Bank advances. Weincurred interest expense of $502,166 related to deposit accounts and $78,370related to Federal Home Loan Bank advances during the three months endedSeptember 30, 2010. For the three months ended September 30, 2009, we incurredinterest expense of $358,763 related to deposit accounts and $70,014 ofinterest expense related to Federal Home Loan Bank advances.

 

Weincurred noninterest expense of $1,710,365 and $1,221,358 during the threemonths ended September 30, 2010 and 2009, respectively. Included in noninterestexpense for the three months ended September 30, 2010 is $955,038 in 

 

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salariesand employee benefits, $223,577 of occupancy and equipment expenses, and $531,750in other expense. The primary components in the other operating expensecategory for the three months ended September 30, 2010 were $178,518 inprofessional fees, $78,838 in data processing and IT related services, and$42,836 in loan collection expenses. The increase in noninterest expense isdirectly related to changes in executive management and the relatedcompensation.

 

Thenoninterest expense incurred during the three months ended September 30, 2009was $1,221,358. Included in non-interest expense was $677,698 in salaries andemployee benefits, $170,275 of occupancy and equipment expenses, and $373,385in other operating expenses.

 

Thefollowing tables calculate the net yield on earning assets as of September 30,2010 and 2009. Net yield on earning assets, defined as net interest incomeannualized, divided by average interest earning assets, was at 3.35% for thethree months ended September 30, 2010, an increase of 50 basis points from2.85% at September 30, 2009.

 

Forthe three months ended September 30, 2010

(Dollarsin thousands)

 
| **Description**                  | ** ** | **Average  Assets/Liabilities** | ** ** | **Interest  Income/Expense** | ** ** | **Yield/Cost** | ** ** |
|----------------------------------|------------|---------------------------------|------------|------------------------------|------------|----------------|------------|
| Interest Earning Assets          |       |                            |       |                         |       |           |       |
| Federal Funds Sold               |       | $                               | 1,552      |                         | $          | 1              |       | 0.25 | % |
| Securities                       |       | 65,529                          |       | 587                          |       | 3.58           | %          |
| Loans (1)                        |       | 74,636                          |       | 1,172                        |       | 6.28           | %          |
| Total                            |       | $                               | 141,717    |                         | 1,760      |           | 4.97       | % |
|                             |       |                            |       |                         |       |           |       |
| Interest Bearing Liabilities     |       |                            |       |                         |       |           |       |
| Interest Bearing Demand Deposits |       | $                               | 42,334     |                         | 179        |           | 1.69       | % |
| Time Deposits                    |       | 68,694                          |       | 323                          |       | 1.88           | %          |
| Other Borrowings                 |       | 11,487                          |       | 71                           |       | 2.47           | %          |
| Total                            |       | $                               | 122,515    |                         | 573        |           | 1.87       | % |
| Net interest income              |       |                            |       | $                            | 1,187      |           |       |   |
| Net yield on earning assets      |       |                            |       |                         |       | 3.35           | %          |

 

----

(1)Average nonaccrual loans of $6,415,427 were deducted from average loans

 

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Forthe three months ended September 30, 2009

(Dollarsin thousands)

 
| **Description**                  | ** ** | **Average  Assets/Liabilities** | ** ** | **Interest  Income/Expense** | ** ** | **Yield/Cost** | ** ** |
|----------------------------------|------------|---------------------------------|------------|------------------------------|------------|----------------|------------|
| Interest Earning Assets          |       |                            |       |                         |       |           |       |
| Federal Funds Sold               |       | $                               | 1,057      |                         | $          | —         |       | 0.00 | % |
| Securities                       |       | 39,309                          |       | 472                          |       | 4.80           | %          |
| Loans                            |       | 49,088                          |       | 632                          |       | 5.15           | %          |
| Other                            |       | 7,225                           |       | 17                           |       | 0.94           | %          |
| Total                            |       | $                               | 96,679     |                         | 1,121      |           | 4.64       | % |
| Interest Bearing Liabilities     |       |                            |       |                         |       |           |       |
| Interest Bearing Demand Deposits |       | $                               | 26,744     |                         | 166        |           | 2.19       | % |
| Time Deposits                    |       | 28,273                          |       | 193                          |       | 2.73           | %          |
| Other Borrowings                 |       | 14,669                          |       | 72                           |       | 1.96           | %          |
| Total                            |       | $                               | 69,686     |                         | 431        |           | 2.47       | % |
| Net interest income              |       |                            |       | $                            | 690        |           |       |   |
| Net yield on earning assets      |       |                            |       |                         |       | 2.85           | %          |

 

**Results of Operations for the Nine Months EndedSeptember 30, 2010 and 2009**

 

Weincurred a net loss of $2,524,465 and $2,366,896 for the nine months endedSeptember 30, 2010 and 2009, respectively. For the nine months endedSeptember 30, 2010, we realized $5,206,763 in interest income, consistingprimarily of $3,437,481 from loan revenue and $1,767,916 from investmentrevenue. Additionally, during the nine months ended September 30, 2010,$543,236 of non-interest income was recognized from the gain on sale ofinvestment securities, $444,155 was recognized from the sale of loans held forsale, and $352,159 was recognized from the gain on sale of SBA loans. For thenine months ended September 30, 2009, we realized $3,098,367 in interestincome consisting primarily of $1,755,787 from loan revenue and $1,341,103 frominvestment revenue. Over time, we anticipate that loan revenue will comprise anincreasing share of total revenue. Since we commenced business in January 2008,the agency and investment grade debt markets have provided opportunities forsuperior risk-adjusted returns. As such, we have invested in these marketsalong with our primary mission of investing in commercial-grade loans. Ourability to develop an income stream and recognize securities gains in recentperiods has served to offset overhead costs associated with being a de novofinancial institution, while we build our balance sheet to a level ofprofitability.

 

Weanticipate the growth in loans in future quarters will drive the growth inassets and the growth in interest income. Our provision for loan loss amountedto $2,871,624 for the nine months ended September 30, 2010, and $1,522,610for the nine months ended September 30, 2009. The Company increased itsallowance levels during the third quarter in conjunction with certainclassified loans identified in the portfolio and the volume of net charge-offs.The allowance for loan losses is increased by provisions for loan losses and byrecoveries of loans previously charged-off and reduced by loans charged-off.Year to date, the Company recognized approximately $2,031,000 in netcharge-offs.

 

Theprimary sources of funding for our loan portfolio are deposits and Federal HomeLoan Bank advances. We incurred interest expense of $1,445,050 related todeposit accounts and $220,546 related to Federal Home Loan Bank advances andother borrowings during the nine months ended September 30, 2010. For thenine months ended September 30, 2009, we incurred interest expense of$973,475 related to deposit accounts, and $212,874 of interest expense relatedto Federal Home Loan Bank advances and other borrowings.

 

Weincurred noninterest expense of $4,400,173 and $3,513,571 during the ninemonths ended September 30, 2010 and 2009, respectively. Included innoninterest expense for the nine months ended September 30, 2010 is $2,358,444in salaries and employee benefits, $589,820 of occupancy and equipmentexpenses, and $1,451,909 in other operating expense. The primary components inthe other operating expense category for the nine months endedSeptember 30, 

 

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2010 were $376,892 in professional fees,$233,932 in data processing and IT related services, and $143,205 in loancollection expenses. The increase in noninterest expense is due to changes inexecutive management combined with an increase in loan collection expenses andprofessional fees.

 

Thenoninterest expense incurred in the nine months ended September 30, 2009was $3,513,571. Included in non-interest expense was $2,044,280 in salaries andemployee benefits, $478,081 of occupancy and equipment expenses, and $991,210in other operating expenses. The primary components of other operating expensesincluded $106,243 in legal fees, $177,857 in data processing and IT relatedservices, and $130,579 in advertising and marketing expense.

 

Thefollowing tables calculate the net yield on earning assets for the nine monthsended September 30, 2010 and 2009, respectively. Net yield on earningassets amounted to 3.52% for the nine months ended September 30, 2010,which represents an increase of 54 basis points from the first nine months2009. The increase is due primarily to the Bank’s ability to grow the balancesheet while driving down its cost of funds.

 

Forthe nine months ended September 30, 2010

(Dollarsin thousands)

 
| ** **                       | ** ** | **Average**            | ** ** | **Interest**       | ** ** | ** **     | ** ** |
|----------------------------------|------------|------------------------|------------|--------------------|------------|----------------|------------|
| **Description**                  | ** ** | **Assets/Liabilities** | ** ** | **Income/Expense** | ** ** | **Yield/Cost** | ** ** |
| Interest Earning Assets          |       |                   |       |               |       |           |       |
| Federal Funds Sold               |       | $                      | 1,168      |               | $          | 1              |       | 0.17 | % |
| Securities                       |       | 61,904                 |       | 1,768              |       | 3.81           | %          |
| Loans (1)                        |       | 71,076                 |       | 3,438              |       | 6.45           | %          |
| Total                            |       | $                      | 134,148    |               | 5,207      |           | 5.17       | % |
| Interest Bearing Liabilities     |       |                   |       |               |       |           |       |
| Interest Bearing Demand Deposits |       | $                      | 38,243     |               | 524        |           | 1.83       | % |
| Time Deposits                    |       | 61,187                 |       | 921                |       | 2.01           | %          |
| Other Borrowings                 |       | 15,203                 |       | 221                |       | 1.94           | %          |
| Total                            |       | $                      | 114,633    |               | 1,666      |           | 1.94       | % |
| Net interest income              |       |                   |       | $                  | 3,541      |           |       |   |
| Net yield on earning assets      |       |                   |       |               |       | 3.52           | %          |

 

----

(1) Averagenonaccrual loans of $6,607,815 were deducted from average loans.

 

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Forthe nine months ended September 30, 2009

(Dollarsin thousands)

 
| **Description**                  | ** ** | **Average  Assets/Liabilities** | ** ** | **Interest  Income/Expense** | ** ** | **Yield/Cost** | ** ** |
|----------------------------------|------------|---------------------------------|------------|------------------------------|------------|----------------|------------|
| Interest Earning Assets          |       |                            |       |                         |       |           |       |
| Federal Funds Sold               |       | $                               | 858        |                         | $          | 1              |       | 0.16 | % |
| Securities                       |       | 33,494                          |       | 1,264                        |       | 5.03           | %          |
| Loans                            |       | 43,376                          |       | 1,756                        |       | 5.40           | %          |
| Other                            |       | 7,918                           |       | 77                           |       | 1.30           | %          |
| Total                            |       | $                               | 85,646     |                         | 3,098      |           | 4.82       | % |
| Interest Bearing Liabilities     |       |                            |       |                         |       |           |       |
| Interest Bearing Demand Deposits |       | $                               | 23,436     |                         | 472        |           | 2.69       | % |
| Time Deposits                    |       | 22,609                          |       | 501                          |       | 2.95           | %          |
| Other Borrowings                 |       | 12,577                          |       | 213                          |       | 2.26           | %          |
| Total                            |       | $                               | 58,622     |                         | 1,186      |           | 2.70       | % |
| Net interest income              |       |                            |       | $                            | 1,912      |           |       |   |
| Net yield on earning assets      |       |                            |       |                         |       | 2.98           | %          |

 

**Assets and Liabilities**

 

*General*

 

AtSeptember 30, 2010, we had total assets of $158,117,026, consistingprincipally of $84,113,434 in net loans, $58,880,959 in securities availablefor sale, $1,791,487 in interest-bearing accounts with other banks, and$2,833,064 in premises and equipment. Total assets have increased $28,854,551since December 31, 2009, when we had total assets of $129,262,475. Theseassets consisted of cash and deposits due from banks of $1,695,884,interest-bearing accounts with other banks of $3,073,627, securities availablefor sale of $43,230,785, securities held to maturity of $4,619,299, premisesand equipment of $3,043,646, net loans of $66,609,313 and accrued interestreceivable of $543,334, restricted stock of $1,365,750 and other assets of$839,402. Liabilities at September 30, 2010 totaled $131,357,545,consisting principally of $115,452,044 in deposits, $11,400,000 in Federal HomeLoan Bank advances, and $3,785,175 in secured borrowings. Liabilities increased$30,728,312 from December 31, 2009. Our liabilities at December 31,2009 were $100,629,233 and consisted of deposits of $76,043,674, FHLB advancesof $11,400,000 and other borrowings of $12,525,000. At September 30, 2010,shareholders’ equity was $26,759,481. Shareholders’ equity at December 31, 2009 was $28,633,242.

 

*Investments*

 

AtSeptember 30, 2010, the carrying value of our securities and restrictedstock amounted to $60,376,509. This included $20,618,109 in mortgage-backedsecurities, $9,973,435 in corporate bonds, $13,628,831 in government agencies,$14,660,584 in municipals and $1,495,550 in restricted equity securities. Therestricted equity securities are comprised of stock in the Federal Reserve Bankof Atlanta, the Federal Home Loan Bank of Atlanta, and the Independent BankersBank of Florida. The carrying value of securities and restricted stockincreased by $11,160,675 from December 31, 2009 to September 30,2010. As of December 31, 2009, the carrying value of our securities andrestricted stock amounted to $49,215,834.

 

*Loans*

 

Sinceloans typically provide higher interest yields than other types of interestearning assets, we intend to invest a substantial percentage of our earningassets in our loan portfolio. At September 30, 2010, our loan portfolioconsisted of $17,772,000 in construction and land development loans,$58,973,000 in other real estate loans, $397,000 in consumer loans, $5,826,000in commercial and industrial loans, and $167,000 in other loans. The Bank had

 

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$5,958,608in nonaccrual loans at September 30, 2010. Additionally, the Bank has hadnet charge-offs of $2,030,804 during the nine months ended September 30,2010.

 

Totalloans less allowance for loan losses increased during the nine months ended September 30,2010 by $17,504,121 or 26.3%, to $84,113,434 from $66,609,313 atDecember 31, 2009.  We had no loans more than 90 days past due thatwere still accruing interest and we had no troubled debt restructurings at September 30,2010. Total non-performing loans at September 30, 2010 amounted to$6,639,045, of which $680,437 are loans purchased with intent to sell and arecharacterized as loans held for sale on our balance sheet.  Included innon-performing loans at September 30, 2010 are $5,958,608 of impairedloans, which are comprised of six loans.  Total non-performing loans at December 31,2009 amounted to $6,981,410, of which $1,084,175 were loans purchased withintent to sell.

 

Thefollowing table summarizes average loan balances for the nine months ended September 30,2010 and 2009 determined using the daily average balance, changes in theallowance for loan losses and the ratio of net charge-offs to period averageloans.

 
| ** **                                                                     | ** ** | **Three Months  Ended  September  30, 2010** | ** ** | **Three Months  Ended  September  30, 2009** | ** ** | **Nine Months  Ended  September  30, 2010** | ** ** | **Nine Months  Ended  September  30, 2009** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
|                                                                           |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Average amount of loans outstanding                                            |       | $                                                      | 80,261,728 |                                                   | $          | 49,088,344                                            |       | $                                                     | 76,891,467 |   | $ | 43,375,287 |   |
| Balance of allowance for loan losses at beginning  of period                   |       | 2,083,603                                              |       | 1,105,340                                              |       | 1,445,522                                             |       | 401,890                                               |       |
| Loans recovered                                                                |       | —                                                 |       | —                                                 |       | —                                                |       | —                                                |       |
| Consumer Loan charged-off                                                      |       |                                                   |       |                                                   |       | (99,929                                               | )          |                                                  |       |
| Commercial Loan charged-off                                                    |       |                                                   |       | (448,141                                               | )          |                                                  |       | (448,141                                              | )          |
| Real Estate Loans charged-off                                                  |       | (1,930,875                                             | )          |                                                   |       | (1,930,875                                            | )          |                                                  |       |
| Additions to the allowance during the period                                   |       | 2,133,614                                              |       | 819,160                                                |       | 2,871,624                                             |       | 1,522,610                                             |       |
| Balance of allowance for loan losses at the end of  the period                 |       | 2,286,342                                              |       | 1,476,359                                              |       | 2,286,342                                             |       | $                                                     | 1,476,359  |   |
|                                                                           |       |                                                   |       |                                                   |       |                                                  |       |                                                  |       |
| Ratio of net loans charged off during the period  to average loans outstanding |       | 2.41                                                   | %          | 0.91                                                   | %          | 2.64                                                  | %          | 1.03                                                  | %          |
|                                                                                |            |                                                        |            |                                                        |            |                                                       |            |                                                       |            |  |  |  |  |

 

*Provision and Allowance for Loan Losses*

 

Wehave established an allowance for loan losses through a provision for loanlosses charged to expense in our consolidated statement of operations. Theallowance for loan losses was $2,286,342 as of September 30, 2010, anincrease of $840,820 from December 31, 2009 when the allowance for loanlosses was $1,445,522.  Our allowance for loan loss amounted to 2.65% ofour loan portfolio at September 30, 2010 and 2.08% of the loan portfolioat December 31, 2009.  Our allowance for loan loss as a percentage ofthe total portfolio has risen due to increased reserve levels across variousloan types in our portfolio.  As a result of our analysis of credit andlending conditions during the first nine months of 2010, we increased reservelevels across several categories of our loan portfolio, due to furtherdeterioration in existing problem loans related to declining appraised valuescoupled with the identification of additional problem credits .  Theallowance for loan losses represents an amount which we believe will beadequate to absorb probable losses on existing loans that management hasidentified and may become uncollectible. Our judgment as to the adequacy of theallowance for loan losses is based on a number of assumptions regarding currentportfolio and economic conditions, which we believe to be reasonable, but whichmay or may not prove to be accurate. We periodically determine the amount of theallowance based on our consideration of several factors, including an ongoingreview of the quality, mix and size of our overall loan portfolio, ourhistorical loan loss experience, evaluation of economic conditions and otherqualitative factors, specific problem loans and commitments that may affect theborrower’s ability to pay.

 

Intereston loans is discontinued when, in management’s opinion, the borrower may beunable to meet payments as they become due. When interest accrual isdiscontinued, all unpaid accrued interest is reversed. Interest income issubsequently recognized only to the extent cash payments are received. Loansare returned to accrual status when all principal and interest amountscontractually due are reasonably assured of repayment within a reasonable timeframe.

 

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Followingis a category detail of our allowance percentage and reserve balance by loantype at September 30, 2010 and December 31, 2009.

 
| ** **                                | ** ** | **September 30, 2010** | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **Calculated**                   | ** ** | **Reserve**                      | ** ** | **Calculated**                  | ** ** | **Reserve**                     | ** ** |
| **Loan Group Description**      | ** ** | **Reserves**                     | ** ** | **%**                            | ** ** | **Reserves**                    | ** ** | **%**                           | ** ** |
| 1-4 Family Construction                   |       | 25,369                           |       | 3.67                             | %          | 4,815                           |       | 1.45                            | %          |
| Other Const., Land & Development |       | 653,670                          |       | 4.53                             | %          | 188,424                         |       | 1.80                            | %          |
| HELOCs                                    |       | 19,227                           |       | 0.83                             | %          | 16,499                          |       | 1.00                            | %          |
| 1-4 Fam Non-rev.+Multi-Fam Res.           |       | 42,527                           |       | 0.91                             | %          | 55,376                          |       | 1.00                            | %          |
| Owner Occupied Non Family Non Residential |       | 93,023                           |       | 1.05                             | %          | 87,342                          |       | 1.20                            | %          |
| Other Non Family/Non Residential          |       | 376,062                          |       | 1.37                             | %          | 305,856                         |       | 1.30                            | %          |
| Commercial and Industrial                 |       | 74,707                           |       | 1.28                             | %          | 61,947                          |       | 1.25                            | %          |
| Consumer                                  |       | 4,728                            |       | 1.19                             | %          | 21,556                          |       | 1.20                            | %          |
| Other                                     |       | 1,237                            |       | 0.74                             | %          | 1,769                           |       | 1.25                            | %          |
| Convenience Store Loans                   |       | 535,378                          |       | 9.75                             | %          | 465,979                         |       | 8.40                            | %          |
| SBA Loans                                 |       | 113,141                          |       | 5.00                             | %          | —                          |       | —                          |       |
| Classified Credits                        |       | 347,273                          |       | 3.75                             | %          | 235,959                         |       | 9.76                            | %          |
| Total Allowance for Loan Loss             |       | $                                | 2,286,342  |                             | 2.65       | %                               | 1,445,522  |                            | 2.08       | % |
|                                           |            |                                  |            |                                  |            |                                 |            |                                 |            |  |

 

Periodically,we will adjust the amount of the allowance based on changing circumstances. Wewill charge recognized losses to the allowance and add subsequent recoveriesback to the allowance for loan losses. There can be no assurance thatcharge-offs of loans in future periods will not exceed the allowance for loanlosses as estimated at any point in time or that provisions for loan losseswill not be significant to a particular accounting period.

 

*Deposits*

 

Ourprimary source of funds for loans and securities is deposits and Federal HomeLoan Bank advances. At September 30, 2010, we had $115,452,044 indeposits, which consisted primarily of $4,604,914 in non-interest bearingdemand deposit accounts, $67,462,419 in time deposits, and $43,384,711 of otherinterest bearing accounts. Deposits increased $39,408,370 from December 31,2009 when deposits were $76,043,674, consisting primarily of $3,489,983 innon-interest bearing demand deposit accounts, $45,134,483 in time deposits, and$27,419,208 of other interest bearing accounts.

 

*SecuredBorrowings*

 

Securedborrowings are derived from the transfer of financial assets, specificallyloans participated with other financial institutions.  These liabilities present credit risk as theyare related to corresponding loans receivable. At September 30, 2010, the total outstanding balance of loansrelated to these secured borrowings were $3,785,175.

 

**Liquidity**

 

Liquidityrepresents the ability of a company to convert assets into cash or cashequivalents without significant loss, and the ability to raise additional fundsby increasing liabilities. For an operating bank, liquidity represents theability to provide steady sources of funds for loan commitments and investmentactivities, as well as to maintain sufficient funds to cover depositwithdrawals and payment of debt and operating obligations. Liquidity managementinvolves monitoring our sources and uses of funds in order to meet ourday-to-day cash flow requirements, while maximizing profits. Liquiditymanagement is made more complicated because different balance sheet componentsare subject to varying degrees of management control. For example, the timingof maturities of our investment portfolio is fairly predictable and subject toa high degree of control at the time investment decisions are made. However,net deposit inflows and outflows are far less predictable and are not subjectto the same degree of control.

 

Ourprimary sources of liquidity are deposits, borrowings, scheduled repayments onour loans, and interest on and maturities of our securities. We plan to meetour future cash needs through the liquidation of temporary investments and thegeneration of deposits. Occasionally, we might sell securities in connectionwith the management of our interest sensitivity gap or to manage cashavailability. We may also utilize our cash and due from banks, securityrepurchase agreements, and federal funds sold to meet liquidity requirements asneeded. In addition, we have the

 

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ability,on a short-term basis, to purchase federal funds from other financialinstitutions. As of September 30, 2010, our primary source of liquidityincluded our securities portfolio, lines of credit available with correspondentbanks totaling $20,600,000, and a line of credit with the Federal Home LoanBank of Atlanta. We believe our liquidity levels are adequate to meet ouroperating needs. Subsequently, after September 30, 2010, our lines ofcredit available with correspondent banks has reduced in total to $19,600,000.

 

**Off-Balance Sheet Risk**

 

Throughthe operations of the Bank, we have made contractual commitments to extendcredit in the ordinary course of our business activities. These commitments arelegally binding agreements to lend money to our customers at predeterminedinterest rates for a specified period of time. At September 30, 2010, wehad issued commitments to extend credit of approximately $12,335,000 throughvarious types of lending arrangements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, ifdeemed necessary by us upon extension of credit, is based on our creditevaluation of the borrower. Collateral varies but may include accountsreceivable, inventory, property, plant and equipment, and commercial andresidential real estate. We manage the credit risk on these commitments bysubjecting them to normal underwriting and risk management processes.

 

**Capital Resources**

 

Totalshareholders’ equity decreased from $28.6 million at December 31, 2009 to$26.8 million at September 30, 2010, primarily as a result of net losses.

 

TheCompany and the Bank are subject to various regulatory capital requirementsadministered by the federal banking agencies. Failure to meet minimum capitalrequirements can initiate certain mandatory and possibly additionaldiscretionary actions by regulators that, if undertaken, could have a directmaterial effect on the Bank’s financial statements. Under capital adequacyguidelines and the regulatory framework for prompt corrective action, the Bankmust meet specific capital guidelines that involve quantitative measures of theBank’s assets, liabilities, and certain off-balance-sheet items as calculatedunder regulatory accounting practices. The Bank’s capital amounts andclassifications are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors. The Bank is “wellcapitalized” under these minimum capital requirements as set per bank regulatoryagencies.

 

Underthe capital adequacy guidelines, regulatory capital is classified into twotiers. These guidelines require an institution to maintain a certain level ofTier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists of commonshareholders’ equity, excluding the unrealized gain or loss on securitiesavailable for sale, minus certain intangible assets. In determining the amountof risk-weighted assets, all assets, including certain off-balance sheetassets, are multiplied by a risk-weight factor of 0% to 100% based on the risksbelieved to be inherent in the type of asset. Tier 2 capital consists of Tier 1capital plus the general reserve for loan losses, subject to certainlimitations. We are also required to maintain capital at a minimum level basedon total average assets, which is known as the Tier 1 leverage ratio.

 

Atthe bank level, we are subject to various regulatory capital requirementsadministered by the federal banking agencies. To be considered “adequately capitalized”under these capital guidelines, we must maintain a minimum total risk-basedcapital of 8%, with at least 4% being Tier 1 capital. In addition, we mustmaintain a minimum Tier 1 leverage ratio of at least 4%. To be considered “well-capitalized,”we must maintain total risk-based capital of at least 10%, Tier 1 capital of atleast 6%, and a leverage ratio of at least 5%. For the first years ofoperation, during the Bank’s “de novo” period, the Bank will be required tomaintain a leverage ratio of at least 8%. The Bank exceeded its minimumregulatory capital ratios as of September 30, 2010, as well as the ratiosto be considered “well capitalized.”

 

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Thefollowing table sets forth the Bank’s various capital ratios at September 30,2010.

 
| ** **                | ** ** | **Bank** | ** ** |
|---------------------------|------------|----------|------------|
| Total risk-based capital  |       | 19.49    | %          |
|                      |       |     |       |
| Tier 1 risk-based capital |       | 18.23    | %          |
|                      |       |     |       |
| Leverage capital          |       | 13.67    | %          |

 

Webelieve that our capital is sufficient to fund the activities of the Bank inits early years of operation and that the rate of asset growth will notnegatively impact the capital base. As of September 30, 2010, there wereno significant firm commitments outstanding for capital expenditures.

 

**Critical Accounting Policies**

 

Wehave adopted various accounting policies, which govern the application ofaccounting principles generally accepted in the United States of America in thepreparation of our financial statements.

 

Certainaccounting policies involve significant judgments and assumptions by us thatmay have a material impact on the carrying value of certain assets andliabilities. We consider such accounting policies to be critical accountingpolicies. The judgments and assumptions we use are based on historicalexperience and other factors, which we believe are reasonable under thecircumstances. Because of the nature of the judgments and assumptions we make,actual results could differ from these judgments and estimates that could havea material impact on the carrying values of our assets and liabilities and ourresults of operations.

 

*Allowance for Loan Losses*. We believe that thedetermination of the allowance for loan losses is the critical accountingpolicy that requires the most significant judgments and estimates used inpreparation of our consolidated financial statements. Refer to section “Allowancefor Loan Losses” in this report on Form 10-Q for a more detaileddescription of the methodology related to the allowance for loan losses.

 

**Item 3. Quantitative and Qualitative Disclosure AboutMarket Risk**

 

Therehave been no material changes in the Company’s quantitative and qualitativedisclosures about market risk as of September 30, 2010 from that presentedunder the heading “Liquidity and Interest Rate Sensitivity” and the Market Riskin Item 7 of the Company’s Annual Report on form 10-K for the year ended December 31,2009.

 

**Item 4. Controls and Procedures**

 

Asof the end of the period covered by this report, we carried out an evaluation,under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof our disclosure controls and procedures as defined in Exchange ActRule 13a-15(e).  Based upon that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer have concluded that our current disclosurecontrols and procedures are effective as of September 30,2010.  There have been no changes in our internal control overfinancial reporting during the fiscal quarter ended September 30, 2010that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

Thedesign of any system of controls and procedures is based in part upon certainassumptions about the likelihood of future events.  There can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions, regardless of how remote.

 

**Part II — Other Information**

 

**Item 6.  Exhibits**

 
| **Exhibit No.** | ** ** | **Description of Exhibits**                                                                                                              |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | Articles  of Incorporation (incorporated by reference to the Registration Statement on  Form SB-2, filed with the SEC on June 18, 2007). |

 

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| 3.2    |   | Articles  of Amendment to Articles of Incorporation (incorporated by reference to the  Post-Effective Amendment No. 1 to the Registration Statement on Form SB-2,  filed with the SEC on February 1, 2008). |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                       |
| 3.3    |   | Bylaws  (incorporated by reference to the Registration Statement on Form SB-2,  filed with the SEC on June 18, 2007).                                                                                            |
|   |   |                                                                                                                                                                                                                       |
| 10.1   |   | Employment  Agreement by and between the Company, the Bank and Pin Pin Chau dated  July 2, 2010 (incorporated by reference to Form 8-K, filed with the  SEC on July 9, 2010).                               |
|   |   |                                                                                                                                                                                                                       |
| 10.2   |   | Employment  Agreement by and between the Company, the Bank and Jorge L. Forment dated  July 8, 2010 (incorporated by reference to Form 8-K, filed with the  SEC on July 9, 2010).                           |
|   |   |                                                                                                                                                                                                                       |
| 31.1   |   | Rule 13a-14(a)/15d  — 14(a) Certification of the Chief Executive Officer.                                                                                                                                   |
|   |   |                                                                                                                                                                                                                       |
| 31.2   |   | Rule 13a-14(a)/15d  — 14(a) Certification of the Chief Financial Officer.                                                                                                                                   |
|   |   |                                                                                                                                                                                                                       |
| 32.1   |   | Section 1350  Certifications.                                                                                                                                                                                         |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                                     | **Touchmark Bancshares, Inc.** |
|------------------------------------------|-------------------------------------|
|                                     |                                |   |
| Date:  November 15,  2010 | By:                                 | /s/  Pin Pin Chau |
|                                     |                                | Pin  Pin Chau |
|                                     |                                | President  and Chief Executive Officer |
|                                     |                                | (Principal  Executive Officer) |
|                                     |                                |   |
| Date:  November 15,  2010 | By:                                 | /s/  Jorge L. Forment |
|                                     |                                | Jorge  L. Forment |
|                                     |                                | Chief  Financial Officer |
|                                     |                                | (Principal  Financial Officer and Principal Accounting Officer) |

 

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