Table of Contents

 

 

 

**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  March 31, 2010** |
|                                                    |                                                                                                    |
| **o**                                                   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the Transition Period from                    to                    **

 

**Commissionfile number 000-53655**

 

**TOUCHMARKBANCSHARES, INC.**

 (Exact name of issuer as specified in itscharter)

 

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

 

**3651Old Milton Parkway**

**Alpharetta,Georgia 30005**

(Addressof principal executive offices)

 

**(770)407-6700**

(Issuer’stelephone number)

 

----

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(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 markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (Section 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  o  YES   o  NO

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller 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 markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  o  YES   x  NO

 

Indicate the number ofshares outstanding of each of the registrant’s classes of common equity, as ofthe latest practicable date: **3,465,391**shares of common stock, par value $.01 per share, outstanding as of April 30,2010.

 

 

 

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INDEX

 
| ** **                         | ** **                                                                                                                      | **Page** |
|------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|----------|
|                               |                                                                                                                            |     |
| Part I. Financial Information |                                                                                                                            |     |
|                               |                                                                                                                            |     |   |
|                               | Item 1. Financial Statements (unaudited)                                                                                        |     | 3 |
|                               |                                                                                                                            |     |   |
|                               | Condensed Consolidated Balance Sheets as of  March 31, 2010 and December 31, 2009                                     |     | 3 |
|                               |                                                                                                                            |     |   |
|                               | Condensed Consolidated Statements of Operations and  Comprehensive Loss for the Three Months Ended March 31, 2010 and 2009 |     | 4 |
|                               |                                                                                                                            |     |   |
|                               | Condensed Consolidated Statements of Cash Flows For  The Three Months Ended March 31, 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 4T.Controls and Procedures                                                                                                 |     | 26 |
|                               |                                                                                                                            |     |
| Part II. Other Information    |                                                                                                                            | 26       |
|                               |                                                                                                                            |     |
|                               | Item 6. Exhibits                                                                                                                |     | 26 |

 

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**PART I — FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

 

TOUCHMARKBANCSHARES, INC.

ANDSUBSIDIARY

 

Condensed Consolidated Balance Sheets

March 31,2010 and December 31, 2009

 
| ** **                                                                                      | ** ** | **unaudited**      | ** **  | ** **            | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
| ** **                                                                                      | ** ** | **2010**           | ** **  | **2009**              | ** ** |
| ASSETS                                                                                          |       |               |        |                  |       |
|                                                                                            |       |               |        |                  |       |
| Cash  and due from banks                                                                        |       | $                  | 1,937,366   |                  | $          | 1,695,884 |   |
| Federal  funds sold                                                                             |       | 2,425,000          |        | —                |       |
| Interest-bearing  accounts with other banks                                                     |       | 3,884,820          |        | 3,073,627             |       |
| Investment  securities:                                                                         |       |               |        |                  |       |
| Securities  available for sale                                                                  |       | 52,270,828         |        | 43,230,785            |       |
| Securities  held to maturity, fair value approximates $6,817,224, and $4,579,310,  respectively |       | 6,818,971          |        | 4,619,299             |       |
| Restricted  stock                                                                               |       | 1,397,350          |        | 1,365,750             |       |
| Loans  held for sale                                                                            |       | 792,797            |        | 1,832,412             |       |
| Loans,  less allowance for loan losses of $1,642,878, and $1,445,522, respectively              |       | 71,805,074         |        | 66,609,313            |       |
| Accrued  interest receivable                                                                    |       | 734,549            |        | 543,334               |       |
| Premises  and equipment                                                                         |       | 2,971,606          |        | 3,043,646             |       |
| Foreclosed  real estate                                                                         |       | 291,377            |        | —                |       |
| Land  held for sale                                                                             |       | 2,409,023          |        | 2,409,023             |       |
| Other  assets                                                                                   |       | 766,183            |        | 839,402               |       |
| Total  assets                                                                                   |       | $                  | 148,504,944 |                  | $          | 129,262,475 |   |
|                                                                                            |       |               |        |                  |       |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                      |       |               |        |                  |       |
|                                                                                            |       |               |        |                  |       |
| Liabilities:                                                                                    |       |               |        |                  |       |
| Deposits:                                                                                       |       |               |        |                  |       |
| Non-interest  bearing demand                                                                    |       | $                  | 5,033,670   |                  | $          | 3,489,983 |   |
| Interest-bearing                                                                                |       | 91,916,047         |        | 72,553,691            |       |
| Total  deposits                                                                                 |       | 96,949,717         |        | 76,043,674            |       |
| Accrued  interest payable                                                                       |       | 88,847             |        | 60,624                |       |
| Federal  Home Loan Bank advances                                                                |       | 11,400,000         |        | 11,400,000            |       |
| Other  borrowings                                                                               |       | 10,000,000         |        | 12,525,000            |       |
| Other  liabilities                                                                              |       | 1,098,828          |        | 599,935               |       |
| Total  liabilities                                                                              |       | 119,537,392        |        | 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                                                                                |       | 35,887,678         |        | 35,827,141            |       |
| Accumulated  deficit                                                                            |       | (7,391,820         | )           | (7,471,431            | )          |
| Accumulated  other comprehensive income                                                         |       | 437,040            |        | 242,878               |       |
| Total  shareholders’ equity                                                                |       | 28,967,552         |        | 28,633,242            |       |
|                                                                                            |       |               |        |                  |       |
| Total  liabilities and shareholders’ equity                                                |       | $                  | 148,504,944 |                  | $          | 129,262,475 |   |

 

Seenotes to the condensed consolidated financial statements.

 

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TOUCHMARKBANCSHARES, INC.

ANDSUBSIDIARY

 

Condensed Consolidated Statements of Operations and ComprehensiveIncome (Loss)

ThreeMonths Ended March 31, 2010 and 2009

(Unaudited)

 
| ** **                                                   | ** ** | **Three**          | ** ** | **Three**          | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                   | ** ** | **Months**         | ** ** | **Months**         | ** ** |
| ** **                                                   | ** ** | **Ended**          | ** ** | **Ended**          | ** ** |
| ** **                                                   | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
| ** **                                                   | ** ** | **2010**           | ** ** | **2009**           | ** ** |
| Interest  income:                                            |       |               |       |               |       |
| Loans,  including fees                                       |       | $                  | 1,126,848  |               | $          | 530,065 |   |
| Investment  income                                           |       | 541,013            |       | 412,754            |       |
| Federal  funds sold                                          |       | 484                |       | 980                |       |
| Total  interest income                                       |       | 1,668,345          |       | 943,799            |       |
|                                                         |       |               |       |               |       |
| Interest  expense:                                           |       |               |       |               |       |
| Deposits                                                     |       | 442,390            |       | 310,475            |       |
| Federal  Home Loan Bank advances                             |       | 69,862             |       | 69,862             |       |
| Other  borrowings                                            |       | 8,101              |       | 249                |       |
| Total  interest expense                                      |       | 520,353            |       | 380,586            |       |
|                                                         |       |               |       |               |       |
| Net  interest income                                         |       | 1,147,992          |       | 563,213            |       |
| Provision  for loan losses                                   |       | 197,356            |       | 103,265            |       |
| Net  interest income after provision for loan losses         |       | 950,636            |       | 459,948            |       |
|                                                         |       |               |       |               |       |
| Noninterest  income:                                         |       |               |       |               |       |
| Service  charges on deposit accounts and other fees          |       | 25,518             |       | 3,859              |       |
| Gain  on sale of securities available for sale               |       | 65,351             |       | 129,644            |       |
| Gain  on sale of loans held for sale                         |       | 414,830            |       | —             |       |
| Other  noninterest income                                    |       | 7,817              |       | —             |       |
| Total  noninterest income                                    |       | 513,516            |       | 133,503            |       |
|                                                         |       |               |       |               |       |
| Noninterest  expense:                                        |       |               |       |               |       |
| Salaries  and employee benefits                              |       | 729,475            |       | 689,272            |       |
| Occupancy  and equipment                                     |       | 185,004            |       | 151,553            |       |
| Other  operating expense                                     |       | 470,062            |       | 291,931            |       |
| Total  noninterest expense                                   |       | 1,384,541          |       | 1,132,756          |       |
|                                                         |       |               |       |               |       |
| Net  income (loss)                                           |       | $                  | 79,611     |               | $          | (539,305 | ) |
| Other  comprehensive income:                                 |       |               |       |               |       |
| Unrealized  holding gains arising during the period          |       | 355,145            |       | 452,564            |       |
| Reclassification  adjustment for gain realized in net income |       | (65,351            | )          | (129,644           | )          |
| Tax  effect                                                  |       | (95,632            | )          | (106,563           | )          |
| Other  comprehensive income                                  |       | 194,162            |       | 216,357            |       |
| Comprehensive  income (loss)                                 |       | $                  | 273,773    |               | $          | (322,948 | ) |
| Basic  earnings (loss) per share                             |       | $                  | 0.02       |               | $          | (0.16 | ) |
| Diluted  earnings per share                                  |       | $                  | 0.02       |               | $          | (0.16 | ) |
| Dividends  per share                                         |       | $                  | —     |               | $          | — |   |

 

Seenotes to the condensed consolidated financial statements.

 

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TOUCHMARKBANCSHARES, INC.

ANDSUBSIDIARY

 

Condensed Consolidated Statements of Cash Flows

ThreeMonths Ended March 31, 2010 and 2009

(Unaudited)

 
| ** **                                                                                       | ** ** | **Three**          | ** ** | **Three**          | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                                       | ** ** | **Months**         | ** ** | **Months**         | ** ** |
| ** **                                                                                       | ** ** | **Ended**          | ** ** | **Ended**          | ** ** |
| ** **                                                                                       | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
| ** **                                                                                       | ** ** | **2010**           | ** ** | **2009**           | ** ** |
| Cash  flow from operating activities:                                                            |       |               |       |               |       |
| Net  income (loss)                                                                               |       | $                  | 79,611     |               | $          | (539,305 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided (used) by operating  activities |       |               |       |               |       |
| Depreciation                                                                                     |       | 73,364             |       | 56,549             |       |
| Accretion  of discount                                                                           |       | (1,042             | )          | (1,284             | )          |
| Provision  for loan losses                                                                       |       | 197,356            |       | 103,265            |       |
| Gain  on sale of securities available for sale                                                   |       | (65,351            | )          | (129,644           | )          |
| Proceeds  from sale of loans held for sale                                                       |       | 1,163,068          |       |               |       |
| Gain  on sale of loans held for sale                                                             |       | (414,830           | )          | —             |       |
| Stock  compensation expense                                                                      |       | 60,537             |       | 44,106             |       |
| Decrease  (increase) in interest receivable                                                      |       | (191,215           | )          | 21,207             |       |
| Increase  in interest payable                                                                    |       | 28,223             |       | 74,159             |       |
| Decrease  (increase) in other assets                                                             |       | 73,219             |       | (31,831            | )          |
| Increase  (decrease) in other liabilities                                                        |       | 403,261            |       | (239,935           | )          |
|                                                                                             |       |               |       |               |       |
| Net  cash provided (used) by operating activities                                                |       | 1,406,201          |       | (642,713           | )          |
|                                                                                             |       |               |       |               |       |
| Cash  flow from investing activities:                                                            |       |               |       |               |       |
| Purchase  of federal funds sold                                                                  |       | (2,425,000         | )          | (629,000           | )          |
| Increase  in interest bearing deposits                                                           |       | (811,193           | )          | (435,813           | )          |
| Purchase  of securities held to maturity                                                         |       | (2,201,465         | )          | (4,031,812         | )          |
| Purchase  of securities available for sale                                                       |       | (12,202,425        | )          | (11,167,885        | )          |
| Proceeds  from maturities of securities held to maturity                                         |       | —             |       | 500,000            |       |
| Proceeds  from paydowns and maturities of securities available for sale                          |       | 982,362            |       | 694,110            |       |
| Proceeds  from sales of securities available for sale                                            |       | 2,538,000          |       | 8,939,983          |       |
| Purchase  of restricted stock                                                                    |       | (31,600            | )          | (73,950            | )          |
| Net  increase in loans                                                                           |       | (5,393,117         | )          | (8,298,845         | )          |
| Purchase  of premises and equipment                                                              |       | (1,324             | )          | (17,394            | )          |
|                                                                                             |       |               |       |               |       |
| Net  cash used by investing activities                                                           |       | (19,545,762        | )          | (14,520,606        | )          |
|                                                                                             |       |               |       |               |       |
| Cash  flow from financing activities:                                                            |       |               |       |               |       |
| Net  increase in deposits                                                                        |       | 20,906,043         |       | 16,220,214         |       |
| Repayment  of line of credit                                                                     |       | (2,525,000         | )          | —             |       |
|                                                                                             |       |               |       |               |       |
| Net  cash provided by financing activities                                                       |       | 18,381,043         |       | 16,220,214         |       |
|                                                                                             |       |               |       |               |       |
| Net  change in cash                                                                              |       | 241,482            |       | 1,056,895          |       |
|                                                                                             |       |               |       |               |       |
| Cash  at the beginning of the period                                                             |       | 1,695,884          |       | 1,029,163          |       |
|                                                                                             |       |               |       |               |       |
| Cash  at the end of the period                                                                   |       | $                  | 1,937,366  |               | $          | 2,086,058 |   |
|                                                                                             |       |               |       |               |       |
| Supplemental  disclosures of cash flow information -                                             |       |               |       |               |       |
| Interest  paid                                                                                   |       | $                  | 492,130    |               | $          | 306,427 |   |
| Transfer  of loan principal to foreclosed real estate                                            |       | $                  | (291,377   | )                  | $          | — |   |

 

Seenotes to the condensed consolidated financial statements.

 

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**TOUCHMARKBANCSHARES, INC.**

**ANDSUBSIDIARY**

 

**Notes to Condensed Consolidated Financial Statements**

**March 31,2010**

**(unaudited)**

 

1.                                       BASIS OFPRESENTATION

 

The consolidated financialinformation included for Touchmark Bancshares, Inc. herein is unaudited;however, such information reflects all adjustments (consisting solely of normalrecurring adjustments) which are, in the opinion of management, necessary for afair statement of results for the interim periods.  These statements should be read inconjunction with the financial statements and related notes included in theCompany’s Annual Report on Form 10-K for the year ended December 31,2009.

 

The results of operationsfor the three month period ended March 31, 2010 are not necessarilyindicative of the results to be expected for the full year.

 

2.                                       ORGANIZATIONAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Touchmark Bancshares, Inc.(the “Company”, “we”, “us”or “ours”), a Georgia corporation, was established onApril 3, 2007 for the purpose of organizing and managing TouchmarkNational Bank (the “Bank”).  The Companyis a one-bank holding company with respect to its subsidiary, TouchmarkNational Bank.  The Bank is a nationalbank which began operations on January 28, 2008, headquartered in FultonCounty, Georgia with the purpose of providing community banking services toGwinnett, DeKalb, north Fulton and south Forsyth counties and surrounding areasin Georgia.

 

*Basis ofAccounting:*The accounting and reporting policies of the Companyconform to accounting principles generally accepted in the United States ofAmerica. In preparing the financial statements, management is required to makeestimates and assumptions that affect the reported amounts of assets,liabilities, shareholders’ equity and net income (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.

 

*Allowancefor Loan Losses*: Arriving at an appropriate level of allowance forloan losses involves a high degree of judgment. The Company’s allowance forloan losses provides for probable losses based upon evaluations of known andinherent risks in the loan portfolio. Due to our limited operating history, theloans in our loan portfolio and our lending relationships are of very recentorigin. In general, loans do not begin to show signs of credit deterioration ordefault until they have been outstanding for some period of time, a processknown as seasoning. As a result, a portfolio of older loans will usually behavemore predictably than a newer portfolio. Because our loan portfolio is new, thecurrent level of delinquencies and defaults may not be representative of thelevel that will prevail when the portfolio becomes more seasoned, which may behigher than current levels. If delinquencies and defaults increase, we may berequired to increase our provision for loan losses, which would adverselyaffect our results of operations and financial condition. The allowance forloan losses is increased by provisions for loan losses and by recoveries ofloans previously charged-off and reduced by loans charged-off.

 

The process of reviewing theadequacy of the allowance for loan losses requires management to make numerousjudgments and assumptions about future events and subjective judgments, 

 

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including the likelihood ofloan repayment, risk evaluation, actual losses and the extrapolation ofhistorical losses of similar banks and other qualitative factors. If theseassumptions prove to be incorrect, charge-offs in future periods could exceedthe allowance for loan losses.

 

*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 by acombination of a calculated value based on expected volatility of similarentities, and on the historical volatility of the Company’s stock. Theexpected term of warrants granted is based on the short-cut method andrepresents the period of time that the warrants granted are expected to beoutstanding. Expected dividends are based on dividend trends and themarket price of the Company’s stock at grant. The risk-free rate forperiods within the contractual life of the option is based on the U.S. Treasuryyield curve in effect at the time of grant.

 

TheCompany recorded compensation expense related to the warrants of $8,900 and$8,900 for the three months ended March 31, 2010 and 2009, respectively.

 

AtMarch 31, 2010, there was $29,667 of unrecognized compensation costrelated to warrants, which is expected to be recognized over a weighted-averageperiod of 2.2 years at December 31, 2009. The weighted average remainingcontractual life of the warrants outstanding as of March 31, 2010 wasapproximately 7.8 years. The Company had 452,500 warrants exercisable as of March 31,2010.

 

ThroughMarch 31, 2010, the Company issued 149,822 options to purchase commonstock to employees of the Company and the Bank and issued 10,000 options topurchase common stock to a new director. No options were issued during first quarter 2010. Upon issuance ofoptions, compensation cost was recognized in the consolidated financialstatements of the Company for all options 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 option over thevesting period of the option.

 

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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 by acombination of a calculated value based on expected volatility of similarentities, and on the historical volatility of the Company’s stock. Theexpected term of options granted is based on the short-cut method andrepresents the period of time that the options granted are expected to beoutstanding. Expected dividends are based on dividend trends and themarket price of the Company’s stock price at grant. The risk-free rate forperiods within the contractual life of the option is based on the U.S. Treasuryyield curve in effect at the time of grant.

 
| ** **                                     | ** ** | **For Options Issued**  | ** ** |
|------------------------------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | **Year Ended**          | ** ** |
| ** **                                     | ** ** | **March 31, 2010** | ** ** |
| Risk-free interest rate                        |       | 1.55                    | %          |
| Expected life (years)                          |       | 6.50                    |       |
| Expected annual volatility                     |       | 47.99                   | %          |
| Expected dividends                             |       | 0.00                    | %          |
| Expected Forfeiture rate                       |       | 5.00                    | %          |
| Weighted average fair value of options granted |       | $                       | 4.86       |   |
|                                                |            |                         |            |  |

 

TheCompany recorded stock-based compensation expense related to the options of$51,637 and $35,206 during the three months ended March 31, 2010 and 2009,respectively.

 

AtMarch 31, 2010, there was $280,809 of unrecognized compensation costrelated to options outstanding, which is expected to be recognized over aweighted-average period of 1.29 years. The weighted average remainingcontractual life of the options outstanding as of March 31, 2010 wasapproximately 8.27 years. The Company had 75,814 options exercisable as of March 31,2010.

 

*IncomeTaxes:*Deferred income tax assets and liabilitiesare determined using the liability (or balance sheet) method.  Under this method, the net deferred tax assetor liability is determined based on the tax effects of the differences betweenthe book and tax bases of the various balance sheet assets and liabilities, andgives current recognition to changes in tax rates and laws.  A valuation allowance for deferred tax assetsis required when it is more likely than not that some portion or all of thedeferred tax asset will not be realized. In assessing the realization of the deferred tax assets, managementconsiders the scheduled reversals of deferred tax liabilities, projected futuretaxable income (in the near-term based on current projections), and taxplanning strategies.

 

The following summarizes the components of deferredtaxes at March 31, 2010 and December 31, 2009.

 
| ** **                                | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Deferred income tax assets (liabilities): |       |                     |       |                        |       |
|                                      |       |                     |       |                        |       |
| Allowance  for loan losses                |       | $                        | 446,708    |                        | $          | 363,245 |   |
| Pre-opening  expenses                     |       | 442,381                  |       | 450,998                     |       |
| Net  operating loss carryforward          |       | 1,389,647                |       | 1,482,913                   |       |
| Depreciation                              |       | (175,108                 | )          | (202,035                    | )          |
| Stock  options                            |       | 488,415                  |       | 488,415                     |       |
| Deferred  loan fees                       |       | 85,253                   |       | 78,897                      |       |
| Other                                     |       | —                   |       | 1,505                       |       |
| Securities  available for sale            |       | (215,258                 | )          | (119,626                    | )          |
|                                      |       | 2,459,038                |       | 2,544,312                   |       |
| Less  valuation allowance                 |       | (2,674,296               | )          | (2,663,938                  | )          |
| Deferred  tax asset, net                  |       | $                        | (215,258   | )                           | $          | (119,626 | ) |

 

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*Statementof Cash Flows:*The statement of cash flows was prepared using theindirect method. Under this method, net income (loss) was reconciled to net cashflows (used) provided by operating activities by adjusting for the effects ofoperating activities.

 

*Cash andCash Equivalents:*For purposes of presentation in the statement ofcash flows, cash and cash equivalents are defined as those amounts included inthe balance sheet caption “cash and due from banks.” Cash flows from deposits,federal funds purchased and sold, and originations, renewals and extensions ofloans are reported net.

 

3.                                       SECURITIES

 

The amortized cost, grossunrealized gains and losses, and estimated fair value of securities at March 31,2010 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)  |       | $             | 20,727,736 |           | $          | 18,539         |       | $             | (40,088    | ) | $ | 20,706,187 |   |
| Corporate  bonds                             |       | 14,257,289    |       | 539,334        |       | (3,750         | )          | 14,792,873    |       |
| Mortgage-backed  GSE residential             |       | 16,633,505    |       | 140,958        |       | (2,695         | )          | 16,771,768    |       |
|                                         |       | $             | 51,618,530 |           | $          | 698,831        |       | $             | (46,533    | ) | $ | 52,270,828 |   |
|                                         |       |          |       |           |       |           |       |          |       |
| Held  to Maturity Securities Municipal bonds |       | $             | 6,818,971  |           | $          | 26,271         |       | $             | (28,018    | ) | $ | 6,817,224 |   |

 

The amortized cost, grossunrealized gains and losses, and estimated fair 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 |   |

 

Theamortized cost and estimated fair value of investment securities available forsale and held to maturity at March 31, 2010, by contractual maturity areshown below.  Expected maturities will differfrom contractual maturities because borrowers may have the right to call orprepay obligations with or without call or prepayment penalties.

 

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| ** **                                   | ** ** | **Securities Available** | ** ** | **Securities Held** | ** ** |
|----------------------------------------------|------------|--------------------------|------------|---------------------|------------|
| ** **                                   | ** ** | **For Sale**             | ** ** | **To Maturity**     | ** ** |
| ** **                                   | ** ** | ** **               | ** ** | **Estimated**       | ** ** | ** ** | ** ** | **Estimated** | ** ** |
| ** **                                   | ** ** | **Amortized**            | ** ** | **Fair**            | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                                   | ** ** | **Cost**                 | ** ** | **Value**           | ** ** | **Cost** | ** ** | **Value** | ** ** |
|                                         |       |                     |       |                |       |   |   |   |   |   |   |   |   |
| Due in one year or less                      |       | $                        | 5,098,160  |                | $          | 5,159,310 |   | $ | — |   | $ | — |   |
| Due after one year but less than five years  |       | 11,838,544               |       | 12,157,309          |       | — |   | — |   |
| Due after five years but less than ten years |       | 10,459,655               |       | 10,738,591          |       | 3,860,515 |   | 3,845,737 |   |
| Due  after ten years                         |       | 24,222,171               |       | 24,215,618          |       | 2,958,456 |   | 2,971,487 |   |
|                                         |       | $                        | 51,618,530 |                | $          | 52,270,828 |   | $ | 6,818,971 |   | $ | 6,817,224 |   |

 

For the purpose of thematurity table, mortgage-backed securities, which are not due at a singlematurity date, have been allocated over maturity groupings based on theweighted-average contractual maturities of underlying collateral.  The mortgage-backed securities may matureearlier than their weighted-average contractual maturities because of principalprepayments.

 

Information pertaining tosecurities with gross unrealized losses at March 31, 2010 aggregated byinvestment category and length of time that individual securities have been ina 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                                         |       | $                 | (40,088    | )                 | $          | 6,955,989 |   | $ | — |   | $ | — |   |
| Mortgage-backed  securities GSE residential  |       | (2,695            | )          | 1,011,696         |       | — |   | — |   |
| Corporate  bonds                             |       | (3,750            | )          | 996,250           |       | — |   | — |   |
|                                         |       | $                 | (46,533    | )                 | $          | 8,963,935 |   | $ | — |   | $ | — |   |
|                                         |       |              |       |              |       |   |   |   |   |
| Securities  Held to Maturity Municipal bonds |       | $                 | (28,018    | )                 | $          | 2,285,239 |   | $ | — |   | $ | — |   |

 

Information pertaining tosecurities with gross unrealized losses at December 31, 2009 aggregated byinvestment category and length of time that individual securities have been ina 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  securities                  |       |               |       | —             |       | — |   | — |   |
| GSE  residential                             |       | (56,376            | )          | 12,083,366         |       | — |   | — |   |
|                                         |       | $                  | (225,490   | )                  | $          | 22,655,775 |   | $ | — |   | $ | — |   |
|                                         |       |               |       |               |       |   |   |   |   |
| Securities  Held to Maturity Municipal bonds |       | $                  | (42,626    | )                  | $          | 3,748,851 |   | $ | — |   | $ | — |   |

 

Management evaluatessecurities for other-than-temporary impairment at least on a quarterly basis,and more frequently when economic or market concerns warrant such evaluation.

 

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AtMarch 31,2010, fifteen (15) debt securities have unrealized losses withaggregate depreciation of 0.66% 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 if classified asavailable for sale, no declines are deemed to be other than temporary.

 

*GSE debt securities.*  Theunrealized losses on the five investments in GSEs were caused by interest rateincreases. The contractual cash flows of those investments are guaranteed by anagency of the U.S. Government. Accordingly, it is expected that the securitieswould not be settled at a price less than the amortized cost bases of theCompany’s investments. Because the Company has no immediate plans to sell theinvestments, and because it is not more likely than not that the Company willbe required to sell the investments before recovery of their amortized cost bases,which may be maturity, the Company does not consider those investments to beother-than-temporarily impaired at March 31 2010.

 

*Municipal bonds.*  The Company’sunrealized losses on five investments in municipal bonds relates to interestrate increases. The Company currently does not believe it is probable that itwill be unable to collect all amounts due according to the contractual terms ofthe investments. Because the Company does not plan to sell the investments, andbecause it is not more likely than not that the Company will be required tosell the investments before recovery of its par value, which may be maturity,it does not consider these investments to be other-than-temporarily impaired atMarch 31, 2010.

 

*Mortgage-backed securities GSEresidential.*  The unrealized losses on the Company’sinvestment in four residential GSE mortgage-backed securities were caused byinterest rate increases. The contractual cash flows of those investments areguaranteed by an agency of the U.S. Government. Accordingly, it is expectedthat the securities would not be settled at a price less than the amortizedcost bases of the Company’s investments. Because the decline in market value isattributable to changes in interest rates and not credit quality, and 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, the Company does not consider those investments to beother-than-temporarily impaired at March 31, 2010.

 

*Corporate bonds.*    TheCompany’s unrealized loss on one corporate bond relates to interest rateincreases. The Company currently does not believe it is probable that it willbe unable to collect all amounts due according to the contractual terms of theinvestments. Because the Company does not plan to sell the investment, andbecause it is not more likely than not that the Company will be required tosell the investment before recovery of its par value, which may be maturity, itdoes not consider this investment to be other-than-temporarily impaired at March 31,2010.

 

4.                                       FAIR VALUEMEASUREMENTS

 

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 

 

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includedin Level 1 that are observable for the asset or liability, either directly orindirectly. Level 2 inputs may include quoted prices for similar assets andliabilities in active markets, as well as inputs that are observable for theasset or liability (other than quoted prices), such as interest rates, foreignexchange rates and yield curves that are observable at commonly quotedintervals. Level 3 inputs are unobservable inputs for the asset or liability,which are typically based on an entity’s own assumptions, as there is little,if any, related market activity. In instances where the determination of the fairvalue measurement is based on inputs from different levels of the fair valuehierarchy, the level in the fair value hierarchy within which the entire fairvalue measurement falls is based on the lowest level input that is significantto the fair value measurement in its entirety. The Company’s assessment of thesignificance of a particular input to the fair value measurement in itsentirety requires judgment, and considers factors specific to the asset orliability.

 

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Thetable below presents the Company’s assets and liabilities measured at fairvalue on a recurring basis as of March 31, 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** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------|------------|------------|------------|
| **March 31,  2010**                 | ** ** | **(Level 1)**                                                                       | ** ** | **(Level 2)**                                      | ** ** | **(Level 3)**                         | ** ** | **Total**  | ** ** |
| ** **                               | ** ** | ** **                                                                          | ** ** | ** **                                         | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Investment securities available-for-sale |       | $                                                                                   | —     |                                               | $          | 52,270,828                            |       | $          | —     |   | $ | 52,270,828 |   |
|                                     |       |                                                                                |       |                                               |       |                                  |       |       |       |
| Derivative instruments                   |       | —                                                                              |       | —                                             |       | 237,106                               |       | 237,106    |       |
|                                     |       |                                                                                |       |                                               |       |                                  |       |       |       |
| Loans held for sale                      |       | —                                                                              |       | —                                             |       | 792,797                               |       | 792,797    |       |
|                                     |       |                                                                                |       |                                               |       |                                  |       |       |       |
| Total assets at fair value               |       | $                                                                                   | —     |                                               | $          | 52,270,828                            |       | $          | 1,029,903  |   | $ | 53,300,731 |   |

 
| **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) during the covered period. The variable interestrates used in the calculation of projected receipts on the floor (cap) arebased on an expectation of future interest rates derived from observable marketinterest rate curves and volatilities. To comply with the provisions of ASC820, the Company incorporates credit valuation adjustments to appropriatelyreflect both its own nonperformance risk and the respective counterparty’snonperformance risk in the fair value measurements. In adjusting the fair valueof its derivative contracts for the effect of nonperformance risk, the Companyhas considered the impact of netting 

 

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anyapplicable credit enhancements, such as collateral postings, thresholds, mutualputs, and guarantees.

 

Loansheld-for-sale are measured at the lower of cost or fair value. The fair valueof loans held for sale are evaluated on an on-going basis by monitoring whatsecondary markets are offering for loans and portfolios with similarcharacteristics.

 

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  |       | (748,238            | )          | —          |       |
| Loan foreclosure              |       | (291,377            | )          | —          |       |
| Mark to market gain           |       | —              |       | (44,493         | )          |
| Balance, March 31, 2010  |       | 792,797             |       | 237,106         |       |

 

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

 
| **As of March 31, 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                              |       | $                                                                                                     | —     |                                                             | $          | —                                              |       | $          | 5,897,235  |   | $ | 5,897,235 |   |
| ** **                                   | ** ** | ** **                                                                                            | ** ** | ** **                                                       | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **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 |   |

 

At March 31, 2010 and December 31,2009, in accordance with the provisions of the loan impairment guidance (FASBASC 310-10-35), individual loans with a carrying amount of $5,897,235 wereconsidered impaired after partial charge-offs amounting to $752,125. There wasno change to the allowance for impaired loans at March 31, 2010.  The charge-off of $752,125 was recognized atDecember 31, 2009 in conjunction with a certain commercial real estate-securedloan.  The amount had previously beenreserved in our allowance for loan loss, but the write-down of the loan balanceand the corresponding reduction of the reserve allowance was made effectiveDecember 31, 2009.  There were nocharge-offs recorded during the quarter ended March 31, 2010. Impaired loansare evaluated and valued at the time the loan is identified as impaired, at thelower of cost or fair value. Fair value is measured based on the value of thecollateral securing these loans and is classified at a Level 3 in the fairvalue hierarchy. Collateral may include real estate, or business assetsincluding equipment, inventory and accounts receivable. The value of realestate collateral is determined based on an appraisal by qualified licensedappraisers hired by the Company. The value of business equipment is based on anappraisal by qualified licensed appraisers hired by the Company if significant,or the equipment’s net book value on the business’ financial statements.Inventory and accounts receivable collateral are valued based on independentfield examiner review or aging reports. Appraised and reported values may bediscounted based on management’s historical knowledge, changes in marketconditions from the time of the valuation, and management’s expertise andknowledge of the client and client’s business. Impaired loans are evaluated onat least a quarterly basis for additional impairment and adjusted accordingly.

 

FairValue of Financial Instruments

 

The following methods and assumptions that were used bythe Company in estimating fair values 

 

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of financial instruments are disclosed herein:

 

*Cash,federal funds sold, and interest bearing deposits with other banks.*  The carrying amounts of cash and short-terminstruments approximate their fair value due to the relatively short period tomaturity of instruments.

 

*Investmentsecurities 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.

 

*Restrictedstock.* The carrying values of restricted equity securities approximate fairvalues.

 

*Loans Held for Sale.*  Loans held forsale are carried at the lower of cost or market value. Fair value is currentlybased on what secondary markets are offering for loans and portfolios withsimilar characteristics.

 

*Loansreceivable.*  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 usingdiscounted cash flow analyses, using interest rates currently being offered forloans with similar terms to borrowers of similar credit quality. Fair valuesfor impaired loans are estimated using discounted cash flow analyses orunderlying collateral values, where applicable.

 

*Depositliabilities.*  The fairvalues disclosed for demand deposits are, by definition, equal to the amountpayable on demand at the reporting date (that is, their carrying amounts). Thecarrying amounts of variable-rate, fixed-term money market accounts andcertificates of deposit approximate their fair values at the reportingdate.  Fair values for fixed-ratecertificates of deposit are estimated using a discounted cash flow calculationthat applies interest rates currently being offered on certificates to aschedule of aggregated expected monthly maturities on time deposits.

 

*FederalHome Loan Bank (“FHLB”) advances and other borrowings.* Fair values offixed rate FHLB advances and other borrowings are estimated using discountedcash flow analyses based on the Bank’s current incremental borrowing rates forsimilar types of borrowing arrangements. The carrying values of variable rateFHLB advances and other borrowings approximate fair value.

 

*Accruedinterest.*  The carryingamounts of accrued interest approximate their fair values.

 

*Derivative instruments.*  The fair valuesof these instruments are determined using widely accepted valuation techniquesincluding discounted cash flow analysis on the expected cash flows of eachderivative. This analysis reflects the contractual terms of the derivatives,including the period to maturity, and uses observable market-based inputs,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.

 

The Company’s carryingamounts and estimated fair values of financial instruments as of March 31,2010 and December 31, 2009 (in thousands) were as follows:

 

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| ** **                                 | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|--------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **2010**          | ** ** | **2009**             | ** ** |
| ** **                                 | ** ** | **Carrying**      | ** ** | **Estimated**        | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                                 | ** ** | **Amount**        | ** ** | **Fair Value**  | ** ** | **Amount** | ** ** | **Fair Value** | ** ** |
| Assets:                                    |       |              |       |                 |       |   |   |   |   |
| Cash and due from banks                    |       | $                 | 1,937      |                 | $          | 1,937 |   | $ | 1,696 |   | $ | 1,696 |   |
| Federal funds sold                         |       | 2,425             |       | 2,425                |       | — |   | — |   |
| Interest-bearing accounts with other banks |       | 3,885             |       | 3,885                |       | 3,074 |   | 3,074 |   |
| Securities available for sale              |       | 52,271            |       | 52,271               |       | 43,231 |   | 43,231 |   |
| Securities held to maturity                |       | 6,819             |       | 6,817                |       | 4,619 |   | 4,579 |   |
| Restricted stock                           |       | 1,397             |       | 1,397                |       | 1,366 |   | 1,366 |   |
| Loan held for sale                         |       | 793               |       | 793                  |       | 1,832 |   | 1,832 |   |
| Loans receivable                           |       | 69,645            |       | 67,196               |       | 66,609 |   | 67,196 |   |
| Accrued interest receivable                |       | 735               |       | 735                  |       | 543 |   | 543 |   |
| Derivative instruments                     |       | 237               |       | 237                  |       | 282 |   | 282 |   |
|                                       |       |              |       |                 |       |   |   |   |   |
| Liabilities:                               |       |              |       |                 |       |   |   |   |   |
| Deposits                                   |       | 96,950            |       | 97,248               |       | 76,044 |   | 76,139 |   |
| Accrued interest payable                   |       | 89                |       | 89                   |       | 61 |   | 61 |   |
| FHLB advances                              |       | 11,400            |       | 11,012               |       | 11,400 |   | 11,823 |   |
| Other borrowing                            |       | 10,000            |       | 10,000               |       | 12,525 |   | 12,525 |   |
|                                            |            |                   |            |                      |            |  |  |  |  |  |  |  |  |

 

5.             EARNINGS (LOSS) PER SHARE

 

Basic loss per share iscomputed by dividing net income (loss) by the weighted average number of sharesof common stock outstanding. Diluted income (loss) per share is computed bydividing net income (loss) by the sum of the weighted average number of sharesof common stock outstanding and potential common shares. Potential commonshares consist of stock options and warrants. Weighted average sharesoutstanding for the three months ended March 31, 2010 and 2009 were 3,465,391 and 3,470,391, respectively. Basic earnings (loss) per share for thethree months ended March 31, 2010 and 2009 was $0.02 and $(0.16),respectively. Fully diluted weighted average shares outstanding for the threemonths ended March 31, 2010 was 3,465,391, and diluted earnings per sharefor the period was $0.02. Diluted loss per share is (0.16) at March 31,2009, as the net loss would result in an anti-dilutive calculation.

 

6.             DERIVATIVE INSTRUMENT

 

During September 2009,the Company entered into an interest rate corridor transaction. An interestrate corridor is composed of a long interest rate cap position and a shortinterest rate cap position. The buyer of the corridor purchases a cap with alower strike while selling a second cap with a higher strike. The premiumearned on the second cap then reduces the cost of the structure as a whole. Thebuyer of the corridor is then protected from rates rising above the first cap’sstrike, but exposed again if they rise past the second cap’s strike.

 

Thisseries of transactions consists of purchasing an interest rate cap at 0.75%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 atermination date of July 1, 2013. The notional amount for each is $10,000,000.  The interest rate corridor transaction isconsidered a standalone derivative instrument, and as such will be recorded inthe financial statements at fair value, with changes in fair value included innet income (loss).  Additionally, thistransaction has a net settlement feature, and the effects of the net settlementwill be included in interest income or expense as appropriate.  The fair values as of March 31, 2010 andDecember 31, 2009 were $237,106 and $281,599, respectively, and wereincluded in other assets.

 

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7.             ACCOUNTING STANDARDS UPDATES

 

In February 2010, theFASB issued Accounting Standards Update No. 2010-09, *Subsequent Events: Amendments to Certain Recognitionand Disclosure Requirements*(“ASC No. 2010-09”). ASU No. 2010-09removes some contradictions between the requirements of GAAP and the filing rules ofthe Securities and Exchange Commission (“SEC”). SEC filers are required to evaluatesubsequent events through the date the financial statements are issued, andthey are no longer required to disclose the date through which subsequentevents have been evaluated. This guidance was effective upon issuance exceptfor the use of the issued date for conduit debt obligors, and it is notexpected to have a material impact on the Company’s results of operations,financial position or disclosures.

 

In March 2010, the FASBissued Accounting Standards Update No. 2010-11, *Derivatives and Hedging: Scope Exception Related to Embedded CreditDerivatives*(“ASU No. 2010-11”)*.*ASU No. 2010-11 clarifies the type of embedded creditderivative that is exempt from embedded derivative bifurcation requirements, byresolving a potential ambiguity about the breadth of the embedded creditderivative scope exception with regard to some types of contracts, such ascollateralized debt obligations (“CDO’s”) and synthetic CDO’s. The scopeexception will no longer apply to some contracts that contain an embedded creditderivative feature that transfers credit risk. The ASU is effective for fiscalquarters beginning after June 15, 2010, and is not expected to have amaterial impact on the Company’s results of operations, financial position ordisclosures.

 

In April 2010, the FASBissued Accounting Standards Update No. 2010-13, *Effect of Denominating the Exercise Price of a Share-based PaymentAward in the Currency of the Market in Which the Underlying Equity SecurityTrades*(“ASU No. 2010-13”). ASU No. 2010-13 clarifies thatan employee share-based payment award with an exercise price denominated in thecurrency of a market in which a substantial portion of an entity’s equitysecurities trades should not be considered to contain a condition that is not amarket, performance, or service condition. Therefore, an entity would notclassify such an award as a liability if it otherwise qualifies as equity. Thisguidance is effective for fiscal years and interim periods within those fiscalyears, beginning on or after December 15, 2010. It is not expected to havea material impact on the Company’s results of operations, financial position ordisclosures.

 

In April 2010, the FASBissued Accounting Standards Update No. 2010-18, *Effect of a Loan Modification When the Loan Is Part of a Pool ThatIs Accounted for as a Single Asset*(“ASU No. 2010-18”). ASU No. 2010-18provides guidance on the accounting for loan modifications when the loan ispart of a pool of loans accounted for as a single asset such as acquired loansthat have evidence of credit deterioration upon acquisition that are accountedfor under the guidance in ASC 310-30. ASU No. 2010-18 addresses diversityin practice on whether a loan that is part of a pool of loans accounted for asa single asset should be removed from that pool upon a modification that wouldconstitute a troubled debt restructuring or remain in the pool aftermodification. ASU No. 2010-18 clarifies that modifications of loans thatare accounted for within a pool under ASC 310-30 do not result in the removalof those loans from the pool even if the modification of those loans wouldotherwise be considered a troubled debt restructuring. An entity will continueto be required to consider whether the pool of assets in which the loan isincluded is impaired if the expected cash flows for the pool change. Theamendments in this update do not require any additional disclosures and areeffective for modifications of loans accounted for within pools under ASC310-30 occurring in the first interim or annual period ending on or after July 15,2010. ASU 2010-18 is not expected to have a material impact on the Company’sresults of operations, financial position or disclosures.

** **

**Item 2.**         **Management’s Discussion andAnalysis 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 

 

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statisticalinformation included in this report and our Annual Report on Form 10-K forthe year ended December 31, 2009.

 

**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 the banking and financial services  industries;                                                                                                                       |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                    |
|   | · | changes  in the interest rate environment which could reduce anticipated or actual  margins;                                                                                                                            |
|   |   |                                                                                                                                                                                                                    |
|   | · | changes  in political conditions or the legislative or regulatory environment;                                                                                                                                          |
|   |   |                                                                                                                                                                                                                    |
|   | · | general  economic conditions, either nationally or regionally and especially in our  primary service area, becoming less favorable than expected, resulting in,  among other things, a deterioration in credit quality; |
|   |   |                                                                                                                                                                                                                    |
|   | · | changes  occurring in business conditions and inflation;                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                    |
|   | · | changes  in technology;                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                    |
|   | · | the  level of our allowance for loan losses and the lack of seasoning of our loan  portfolio;                                                                                                                           |
|   |   |                                                                                                                                                                                                                    |
|   | · | the  rate of delinquencies and amounts of charge-offs;                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                    |
|   | · | the  rates of loan growth;                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                    |
|   | · | adverse  changes in asset quality and resulting credit risk-related losses and  expenses;                                                                                                                               |
|   |   |                                                                                                                                                                                                                    |
|   | · | changes  in monetary and tax policies;                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                    |
|   | · | loss  of consumer confidence and economic disruptions resulting from terrorist  activities;                                                                                                                             |
|   |   |                                                                                                                                                                                                                    |
|   | · | changes  in the securities markets; and                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                    |
|   | · | other  risks and uncertainties detailed from time to time in our filings with the  SEC.                                                                                                                                 |

 

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**Company Overview**

 

The following reportdescribes our results of operations for the three months ended March 31,2010 and 2009 and also analyzes our financial condition as of March 31,2010 and December 31, 2009..  Like most community banks, weexpect to derive most of our income from interest that we receive on our loansand investments. As we grow, our primary source of funds for making these loansand investments is our deposits, on the majority of which we pay interest.Consequently, one of the key measures of our success is our level of netinterest income, which is the difference between the income on ourinterest-earning assets, such as loans and investments, and the expense on ourinterest-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.  Our results for the three months ended March 31,2010 and 2009 as well as the years ended December 31, 2009 and December 31,2008 have included significant gains recorded on the sale of investment assets.

 

There are risks inherent inall loans, so we maintain an allowance for loan losses to absorb probablelosses on existing loans that may become uncollectible. We establish andmaintain this allowance by charging a provision for loan losses against ourearnings. We have included a detailed discussion of this process Under thesubsection entitled “Provision and Allowance for Loan Losses” below.

 

In addition to earninginterest on our loans and investments, we earn income through fees and othercharges to our customers.  We have also included a discussion of thevarious components of this noninterest income, as well as of our noninterestexpense.

 

**IndustryOverview**

 

The first three months of2010 have provided some market stabilization from the tumultuous economicconditions experienced since the onset of the 2007 financial crisis.  Market conditions, however, continue to havea severe impact on asset valuations. Increased credit losses from the weakenedeconomy have negatively affected the capital and earnings of many financialinstitutions.  Financial institutionshave experienced significant declines in the value of collateral for realestate loans and serious deterioration in the credit quality of their loanportfolios.  These factors have resulted in record levels ofnon-performing assets, charge-offs and foreclosures.  The State ofGeorgia and the Atlanta metropolitan area in particular have gained the unfortunatedistinction of experiencing the highest incidences of bank closures nationwidesince the onset of the 2007 financial crisis.

 

Treasury, the FDIC and othergovernmental agencies continue to evolve regulations to implement and managethe Emergency Economic Stabilization Act of 2008 (“EESA”), the Troubled AssetRelief Program (“TARP”), the Financial Stability Plan, the American Recoveryand Reinvestment Act (“ARRA”) and related economic recovery programs, many ofwhich curtail the activities of financial institutions.  During 2009,we declined to participate in the TARP Capital PurchaseProgram.  While TARP has been a valuable element in the efforts tostabilize the banking system, we felt that our capital levels were substantialand precluded the need for us to expose ourselves to additional regulatorycontrols.  While we are grateful for the support provided to troubledfinancial institutions and have noted a stabilizing benefit for thoseinstitutions thus far, we are even more grateful that we have not required anysuch support and the ensuing regulation that accompanies it.

 

We expect that difficulteconomic conditions will continue through the fourth quarter of 2010. Reducedlevels of commercial activity will continue to challenge prospects for stablebalance sheet growth and earning asset yields at a time when the market forprofitable commercial banking relationships is intensely competitive. As aresult, financial institutions in general will continue to experience pressureon earning asset yields, operating expenses, liquidity and capital.

 

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**Results of Operations for the Three Months Ended March 31,2010 and 2009**

 

Wereported net income (loss) of $79,611 and $(539,305) for the three months endedMarch 31, 2010 and 2009, respectively. For the three months ended March 31, 2010, we realized $1,668,345in interest income, consisting primarily of $1,126,848 from loan activities and$541,497 from investment activities. For the three months ended March 31,2009, we realized $943,799 in interest income, consisting primarily of $530,065from investment activities and $413,734 from loan activities. The provision forloan loss was $197,356 for the quarter ended March 31, 2010, and $103,265for the quarter ended March 31, 2009. We anticipate that loan growth infuture quarters will drive our overall growth in assets and interest income,but we will continue to augment our performance with income frominvestment-grade securities and non-interest income when appropriate.  During the first quarter of 2010, webenefitted from the sale of two loan participations which we had purchasedduring the fourth quarter of 2009 at a significant discount.  The loans were sold at a gain of $414,830.

 

Theprimary sources of funding for our loan portfolio are deposits and Federal HomeLoan advances. We incurred interest expense of $442,390 related to depositaccounts, $69,862 related to Federal Home Loan Bank advances, and $8,101related to other borrowings during the three months ended March 31, 2010.For the three months ended March 31, 2009, we incurred interest expense of$310,475 related to deposit accounts and $69,862 of interest expense related toFederal Home Loan Bank advances, and $249 related to other borrowings. Growthof a diversified, low-cost deposit base is a key priority toward reachingsustainable profitability.

 

Weincurred non-interest expenses of $1,384,541 and $1,132,756 during the threemonths ended March 31, 2010 and 2009, respectively. Included innon-interest expense for the three months ended March 31, 2010 is $729,475in salaries and employee benefits, $185,004 of occupancy and equipmentexpenses, and $470,062 in other expense. The primary components in the otheroperating expense category for the three months ended March 31, 2010 were$69,315 in professional fees, $76,387 in data processing and IT relatedservices, and $50,989 in loan collection expenses.

 

Thenon-interest expense incurred in the three months ended March 31, 2009 was$1,132,756. Included in non-interest expense was $689,272 in salaries andemployee benefits, $151,553 of occupancy and equipment expenses, and $291,931in other operating expenses.

 

Thefollowing tables calculate the net yield on earning assets as of March 31,2010 and 2009. Net yield on earning assets, defined as net interest incomeannualized, divided by average interest earning assets, was at 3.78% for thefirst three months of 2010. The net yield increased from 2.95% at March 31,2009 to 3.78% at March 31, 2010. The improvement in our earning assetyield is attributable to growth in performing assets as a percentage of totalassets as well as a decline in our overall borrowing costs.

 

Forthe Period Ended March 31, 2010

(Dollarsin thousands)

 
| **Description**                   | ** ** | **Avg.  Assets/Liabilities** | ** ** | **Interest  Income/Expense** | ** ** | **Yield/Cost** | ** ** |
|-----------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------|------------|
| Interest  Earning Assets          |       |                         |       |                         |       |           |       |
| Federal  Funds Sold               |       | $                            | 1,291      |                         | $          | 1              |       | 0.31 | % |
| Securities                        |       | 55,176                       |       | 541                          |       | 3.92           | %          |
| Loans  (1)                        |       | 65,096                       |       | 1,126                        |       | 6.92           | %          |
|                              |       |                         |       |                         |       |           |       |
| Total                             |       | $                            | 121,563    |                         | 1,668      |           | 5.49       | % |
|                              |       |                         |       |                         |       |           |       |
| Interest  Bearing Liabilities     |       |                         |       |                         |       |           |       |
| Interest  Bearing Demand Deposits |       | $                            | 31,565     |                         | 156        |           | 1.98       | % |
| Time  Deposits                    |       | 50,473                       |       | 286                          |       | 2.27           | %          |
| Other  Borrowings                 |       | 21,570                       |       | 78                           |       | 1.45           | %          |
|                              |       |                         |       |                         |       |           |       |
| Total                             |       | $                            | 103,608    |                         | 520        |           | 2.01       | % |
|                              |       |                         |       |                         |       |           |       |
| Net  interest income              |       |                         |       | $                            | 1,148      |           |       |   |
|                              |       |                         |       |                         |       |           |       |
| Net  yield on earning assets      |       |                         |       |                         |       | 3.78           | %          |

 

----

(1)  Average non-accrual loans of $7,566,133 werededucted from average loans. 

 

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Forthe Period Ended March 31, 2009

(Dollarsin thousands)

 
| **Description**                   | ** ** | **Avg.  Assets/Liabilities** | ** ** | **Interest  Income/Expense** | ** ** | **Yield/Cost** | ** ** |
|-----------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------|------------|
| Interest  Earning Assets          |       |                         |       |                         |       |           |       |
| Federal  Funds Sold               |       | $                            | 1,437      |                         | $          | 1              |       | 0.28 | % |
| Securities                        |       | 28,058                       |       | 370                          |       | 5.27           | %          |
| Loans  (1)                        |       | 35,437                       |       | 530                          |       | 5.98           | %          |
| Other                             |       | 11,580                       |       | 43                           |       | 1.49           | %          |
|                              |       |                         |       |                         |       |           |       |
| Total                             |       | $                            | 76,512     |                         | 944        |           | 5.00       | % |
|                              |       |                         |       |                         |       |           |       |
| Interest  Bearing Liabilities     |       |                         |       |                         |       |           |       |
| Interest  Bearing Demand Deposits |       | $                            | 19,833     |                         | 158        |           | 3.19       | % |
| Time  Deposits                    |       | 18,257                       |       | 152                          |       | 3.33           | %          |
| Other  Borrowings                 |       | 11,556                       |       | 70                           |       | 2.42           | %          |
|                              |       |                         |       |                         |       |           |       |
| Total                             |       | $                            | 49,646     |                         | 380        |           | 3.06       | % |
|                              |       |                         |       |                         |       |           |       |
| Net  interest income              |       |                         |       | $                            | 564        |           |       |   |
|                              |       |                         |       |                         |       |           |       |
| Net  yield on earning assets      |       |                         |       |                         |       | 2.95           | %          |

 

----

(1)  There were no loans in non-accrual status atMarch 31, 2009.

 

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**Assets and Liabilities**

 

*General*

 

AtMarch 31, 2010, we had total assets of $148,504,944, consistingprincipally of $71,805,704 in net loans, $52,270,828 in securities availablefor sale, $6,818,971 in securities held to maturity, $3,884,820 ininterest-bearing accounts with other banks, and $2,971,606 in premises and equipment.Total assets increased $19,242,469 since December 31, 2009 when we hadtotal assets of $129,262,475.  Increasingour earning assets is a key priority toward reaching sustainableprofitability.  Assets at December 31,2009 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 $4,619,299, premises andequipment of $3,043,646, net loans of $66,609,313, accrued interest receivable$543,334, restricted stock of $1,365,750 and other assets of $839,402.Liabilities at March 31, 2010 totaled $119,537,392 consisting principallyof $96,949,717 in deposits, $11,400,000 in Federal Home Loan Bank advances, and$10,000,000 in other borrowings. Liabilities increased $18,908,159 from December 31,2009. Our liabilities at December 31, 2009 were $100,629,233 and consistedof deposits of $76,043,674, FHLB advances of $11,400,000 and other borrowingsof $12,525,000. At March 31, 2010, shareholders’ equity was$28,967,552.  Continued growth of adiversified deposit base is also a key priority in funding our asset growth andreaching sustainable profitability. Shareholders’ equity at December 31, 2009 was $28,633,242.

 

*Investments*

 

AtMarch 31, 2010, the carrying value of our securities and restricted stockamounted to $60,487,149. This included $16,771,768 in mortgage backedsecurities, $14,792,873 in corporate bonds, and $20,706,187 in governmentagencies, $6,818,971 in municipals and $1,397,350 in restricted equitysecurities. The restricted equity securities are comprised of stock in theFederal Reserve Bank of Atlanta and the Federal Home Loan Bank of Atlanta. Thecarrying value of securities and restricted stock increased by $11,271,315 fromDecember 31, 2009 to March 31, 2010. As of December 31, 2009,the carrying value of our securities and restricted stock amounted to$49,215,834.

 

*Loans*

 

Sinceloans typically provide higher interest yields than other types of interestearning assets, we ultimately intend to invest a substantial percentage of ourearning assets in our loan portfolio as we build out the balance sheet. At March 31,2010, our loan portfolio consisted of $16,199,000 of construction and landdevelopment loans, $49,552,000 in other real estate loans, $1,886,000 inconsumer loans, $5,618,000 in commercial and industrial loans, and $193,000 inother loans. The interest on loans is discontinued when, in management’sopinion, the borrower may be unable to meet payments as they become due. Wheninterest accrual is discontinued, all unpaid accrued interest is reversed.Interest income is subsequently recognized only to the extent cash payments arereceived. Loans are returned to accrual status when all the principal andinterest amounts contractually due are reasonably assured of repayment within areasonable time frame. The Bank had $5,870,000 in nonaccrual loans at March 31,2010. Additionally, the Bank has not had to charge-off any loan amounts duringthe quarter ended March 31, 2010.

 

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Totalloans less allowance for loan losses increased during the three months ended March 31,2010 by $5,195,761 or 7.8%, to $71,805,074 at March 31, 2010 from$66,609,313 at December 31, 2009. We had no loans more than 90 days past due that were still accruinginterest and we had no Troubled Debt Restructurings at March 31, 2010. Totalnon-performing loans at March 31, 2010 amounted to $6,690,033 of which $792,797are loans purchased with intent to resell and are characterized as loans heldfor sale on our balance sheet.  Includedin non-performing loans at March 31, 2010 are $5,897,235 of impaired loans, whichare comprised of four loans concentrated in two borrowing relationships.  Total non-performing loans at December 31,2009 amounted to $6,981,410 of which $1,084,175were loans purchased with intentto resell.

 

Thefollowing table summarizes average loan balances for the quarter determinedusing the daily average balance, changes in the allowance for loan losses andthe ratio of net charge-offs to period average loans.

 
| ** **                                                                     | ** ** | **March 31, 2010** | ** ** | **March 31, 2009** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
|                                                                           |       |                         |       |                         |       |
| Average amount of loans outstanding                                            |       | $                            | 71,869,458 |                         | $          | 35,436,938 |   |
| Balance of allowance for loan losses at beginning  of period                   |       | 1,445,522                    |       | 401.890                      |       |
| Loans recovered                                                                |       | —                       |       | —                       |       |
| Additions to the allowance during the period                                   |       | 197,356                      |       | 103,265                      |       |
| Balance of allowance for loan losses at the end of  the period                 |       | 1,642,878                    |       | $                            | 401,890    |   |
|                                                                           |       |                         |       |                         |       |
| Ratio of net loans charged off during the period to  average loans outstanding |       | 0.00                         | %          | 0.00                         | %          |
|                                                                                |            |                              |            |                              |            |  |  |

 

*Provision and Allowance for Loan Losses*

 

Wehave established an allowance for loan losses through a provision for loanlosses charged to expense on our consolidated statement of operations. Theallowance for loan losses was $1,642,878 as of March 31, 2010, an increaseof $197,356 from December 31, 2009 when the allowance for loan losses was$1,445,522.  Our allowance for loan lossamounted to 2.24% of our loan portfolio at March 31, 2010 and 2.08% of theloan portfolio at December 31, 2009. Our allowance for loan loss as a percentage of the total portfolio hasrisen due to increased reserve levels across various loan types in our portfolio.  As a result of our analysis of credit andlending conditions during the first quarter of 2010, we increased reservelevels across several categories of our loan portfolio.  The allowance for loan losses represents anamount which we believe will be adequate to absorb probable losses on existingloans that 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. Over time, we will periodically determinethe amount of the allowance based on our consideration of several factors,including an ongoing review of the quality, mix and size of our overall loanportfolio, our historical loan loss experience, evaluation of economicconditions and other qualitative factors, specific problem loans andcommitments that may affect the borrower’s ability to pay. Following is acategory detail of our allowance percentage and reserve balance by loan type atMarch 31, 2010 and December 31, 2009.

 
| ** **                                | ** ** | **March 31, 2010** | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **Calculated**               | ** ** | **Reserve**                  | ** ** | **Calculated**                  | ** ** | **Reserve**                     | ** ** |
| **Loan Group Description**      | ** ** | **Reserves**                 | ** ** | **%**                        | ** ** | **Reserves**                    | ** ** | **%**                           | ** ** |
| 1-4 Family Construction                   |       | 8,314                        |       | 1.60                         | %          | 4,815                           |       | 1.45                            | %          |
| Other Const., Land & Development |       | 232,232                      |       | 1.90                         | %          | 188,424                         |       | 1.80                            | %          |
| HELOCs                                    |       | 19,961                       |       | 1.00                         | %          | 16,499                          |       | 1.00                            | %          |
| 1-4 Fam Non-rev.+Multi-Fam Res.           |       | 60,636                       |       | 1.10                         | %          | 55,376                          |       | 1.00                            | %          |
| Owner Occupied Non Family Non Residential |       | 88,542                       |       | 1.25                         | %          | 87,342                          |       | 1.20                            | %          |
| Other Non Family/Non Residential          |       | 350,570                      |       | 1.35                         | %          | 305,856                         |       | 1.30                            | %          |
| Commercial and Industrial                 |       | 55,989                       |       | 1.30                         | %          | 61,947                          |       | 1.25                            | %          |
| Consumer                                  |       | 27,912                       |       | 1.60                         | %          | 21,556                          |       | 1.20                            | %          |
| Other                                     |       | 3,507                        |       | 1.75                         | %          | 1,769                           |       | 1.25                            | %          |
| Convenience Store Loans                   |       | 470,947                      |       | 8.40                         | %          | 465,979                         |       | 8.40                            | %          |
| SBA Loans                                 |       | 24,873                       |       | 3.23                         | %          | —                          |       | —                          |       |
| Classified Credits                        |       | 299,395                      |       | 14.29                        | %          | 235,959                         |       | 9.76                            | %          |
| Total Allowance for Loan Loss             |       | $                            | 1,642,878  |                         | 2.24       | %                               | 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 are customer deposits andFederal Home Loan Bank advances. At March 31, 2010, we had $96,949,717 indeposits which consisted primarily of $5,033,670 in non-interest bearing demanddeposit accounts, $53,542,968 in time deposits, and $38,373,079 of otherinterest bearing accounts. Deposits increased $20,906,043 from December 31,2009 when deposits were $76,043,674 consisting primarily of $3,489,983 innon-interest bearing demand deposit accounts,

 

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$45,134,483in time deposits, and $27,419,208 of other interest bearing accounts.  The primary driver of our deposit increasehas been promotional rates that we have offered on money market accounts andcertificates of deposit in our local market.

 

**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 ability, on a short-term basis, to purchasefederal funds from other financial institutions. As of March 31, 2010, ourprimary source of liquidity included our securities portfolio, lines of creditavailable with correspondent banks totaling $23,000,000, and a line of creditwith the Federal Home Loan Bank of Atlanta. We believe our liquidity levels areadequate to meet our operating needs.

 

**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 March 31, 2010 and December 31,2009, we had issued commitments to extend credit of approximately $10,634,000through various types of lending arrangements. We evaluate each customer’scredit worthiness on a case-by-case basis. The amount of collateral obtained,if deemed 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 increased from $28.6 million at December 31, 2009 to$29.0 million at March 31, 2010. The increase is primarily attributable to a gain in the value of oursecurities portfolio and the net profit that we accomplished for the quarter.

 

TheFederal Reserve and bank regulatory agencies require bank holding companies anddepository institutions to maintain regulatory capital requirements at adequatelevels based on a percentage of assets and off-balance sheet exposures.However, under the Federal Reserve Board’s guidelines, we believe we are a “smallbank holding company,” and thus qualify for an exemption from the consolidatedrisk-based and leverage capital adequacy guidelines applicable to bank holdingcompanies with assets of $500 million or more. Regardless, we still maintainlevels of capital on a consolidated basis which qualify us as “well capitalized”under the Federal Reserve’s capital guidelines.

 

Nevertheless,the bank is subject to regulatory capital requirements. Failure to meet minimumcapital requirements 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

 

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meetspecific capital guidelines that involve quantitative measures of the bank’sassets, liabilities, and certain off-balance-sheet items as calculated underregulatory accounting practices. The bank’s capital amounts and classificationsare also subject to qualitative judgments by the regulators about components,risk weightings, and other factors.

 

Underthe capital adequacy guidelines, the bank is required to maintain a certainlevel of Tier 1 and total risk-based capital to risk-weighted assets. At leasthalf of the bank’s total risk-based capital must be comprised of Tier 1capital, which consists of common shareholders’ equity, excluding theunrealized gain or loss on securities available for sale, minus certainintangible assets. The remainder may consist of Tier 2 capital, which issubordinated debt, other preferred stock and the general reserve for loanlosses, subject to certain limitations. In determining the amount ofrisk-weighted assets, all assets, including certain off-balance sheet assets,are multiplied by a risk-weight factor of 0% to 100% based on the risksbelieved to be inherent in the type of asset. The bank is also required tomaintain capital at a minimum level based on total average assets, which isknown as the Tier 1 leverage ratio.

 

Tobe considered “adequately capitalized” under the various regulatory capitalrequirements administered by the federal banking agencies, the bank mustmaintain a minimum total risk-based capital of 8%, with at least 4% being Tier1 capital. In addition, the bank must maintain a minimum Tier 1 leverage ratioof at least 4%. To be considered “well-capitalized,” the bank must maintaintotal risk-based capital of at least 10%, Tier 1 capital of at least 6%, and aleverage ratio of at least 5%. For the first three years of operation, duringthe bank’s “de novo” period, the bank will be required to maintain a leverageratio of at least 8%. The bank exceeded its minimum regulatory capital ratiosas of March 31, 2010 and December 31, 2009, as well as the ratios tobe considered “well capitalized.”

 

Thefollowing table sets forth the Bank’s various capital ratios at March 31,2010.

 
| ** **                 | ** ** | **Bank** | ** ** |
|----------------------------|------------|----------|------------|
| Total  risk-based capital  |       | 23.08    | %          |
|                       |       |     |       |
| Tier  1 risk-based capital |       | 21.81    | %          |
|                       |       |     |       |
| Leverage  capital          |       | 17.59    | %          |

 

Webelieve that our capital is sufficient to fund the activities of the Bank andthat the rate of asset growth will not negatively impact the capital base. Asof March 31, 2010, there were no significant firm commitments outstandingfor 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 and liabilities.We consider such accounting policies to be critical accounting policies. Thejudgments and assumptions we use are based on historical experience and otherfactors, which we believe are reasonable under the circumstances. Because ofthe nature of the judgments and assumptions we make, actual results coulddiffer from these judgments and estimates that could have a material impact onthe carrying values of our assets and liabilities and our results ofoperations.

 

*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

 

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ourconsolidated financial statements. Refer to section “Allowance for Loan Losses”in this report for a more detailed description of the methodology related tothe allowance for loan losses.

 

**Item 3. Quantitative andQualitative Disclosure About Market Risk**

 

Not applicable.

 

**Item 4T.Controls and Procedures  Need to provideupdate from controls and procedures documented in the 10-K.**

 

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 Act Rule 13a-15(e).  Basedupon that evaluation, our Chief Executive Officer and Chief Financial Officerhave concluded that our current disclosure controls and procedures areeffective as of March 31, 2010.  There have been no significantchanges in our internal controls over financial reporting during the fiscalquarter ended March 31, 2010 that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

 

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**

 

**Item6.  Exhibits**

 
| **Exhibit No.** | ** ** | **Description of Exhibits**                                                                                                                                                          |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | Articles of Incorporation  (incorporated by reference to the Registration Statement on Form SB-2).                                                                              |
|                 |       |                                                                                                                                                                                 |
| 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).         |
|                 |       |                                                                                                                                                                                 |
| 3.3                  |       | Bylaws (incorporated by  reference to the Registration Statement on Form SB-2).                                                                                                 |
|                 |       |                                                                                                                                                                                 |
| 4.1                  |       | See Exhibits 3.1, 3.2 and  3.3 for provisions in Touchmark Bancshares, Inc. Articles of  Incorporation, as amended, and Bylaws defining the rights of holders of  common stock. |
|                 |       |                                                                                                                                                                                 |
| 4.2                  |       | Form of certificate  of common stock (incorporated by reference to the Registration on  Form SB-2).                                                                        |
|                 |       |                                                                                                                                                                                 |
| 31.1                 |       | Rule 13a-14(a) Certification  of the Chief Executive Officer.                                                                                                              |
|                 |       |                                                                                                                                                                                 |
| 31.2                 |       | Rule 13a-14(a) Certification  of the Chief Financial Officer.                                                                                                              |
|                 |       |                                                                                                                                                                                 |
| 32                   |       | Section 1350  Certifications.                                                                                                                                                   |

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|   |                                |   | **Touchmark Bancshares, Inc.** |
|--------|-------------------------------------|--------|-------------------------------------|
|   |                                |   |                                |   |
|   | Date:  May 17,  2010 |   | By:                                 | /s/ William R. Short |
|   |                                |   |                                | William R. Short |
|   |                                |   |                                | President and Chief  Executive Officer |
|   |                                |   |                                | (Principal Executive  Officer) |
|   |                                |   |                                |   |
|   | Date:  May 17,  2010 |   | By:                                 | /s/ Robert D. Koncerak |
|   |                                |   |                                | Robert D. Koncerak |
|   |                                |   |                                | Chief Financial Officer |
|   |                                |   |                                | (Principal Financial  Officer and Principal Accounting Officer) |

 

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