Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended June 30, 2010**

 

**o**         **TRANSITION REPORT PURSUANT TO SECTION 13 OR15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Transition Period from                    to                 **

 

**Commission file number 000-53655**

 

**TOUCHMARKBANCSHARES, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**3651 Old Milton Parkway**

**Alpharetta, Georgia 30005**

(Address of principal executive offices)

 

**(770) 407-6700**

(Registrant’s telephone number)

 

----

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  x  YES  o  NO

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T(Section 232.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files). o  YES   o  NO

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of 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) |   |                        |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). o YES  x NO

 

Indicatethe number of shares outstanding of each of the registrant’s classes of commonequity, as of the latest practicable date: **3,465,391**shares of common stock, par value $.01 per share, outstanding as of August 13,2010.

 

 

 

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INDEX

 
| ** **                          | ** **                                                                                                                              | **Page** |
|-------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                |                                                                                                                                    |     |
| Part I.  Financial Information |                                                                                                                                    |
|                                |                                                                                                                                    |     |
|                                | Item 1.  Financial Statements (unaudited)                                                                                               | 3        |
|                                |                                                                                                                                    |     |
|                                | Condensed  Consolidated Balance Sheets as of June 30, 2010 and December 31,  2009                                             | 3        |
|                                |                                                                                                                                    |     |
|                                | Condensed  Consolidated Statements of Operations and Comprehensive Loss for the Three  and Six Months Ended June 30, 2010 and 2009 | 4        |
|                                |                                                                                                                                    |     |
|                                | Condensed  Consolidated Statements of Cash Flows for the Six Months Ended June 30,  2010 and 2009                                  | 5        |
|                                |                                                                                                                                    |     |
|                                | Notes to Condensed Consolidated Financial Statements                                                                                    | 6        |
|                                |                                                                                                                                    |     |
|                                | Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                     | 18       |
|                                |                                                                                                                                    |     |
|                                | Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                                                     | 27       |
|                                |                                                                                                                                    |     |
|                                | Item 4. Controls and Procedures                                                                                                         | 27       |
|                                |                                                                                                                                    |     |
| Part II.  Other Information    | 27                                                                                                                                      |
|                                |                                                                                                                                    |     |
|                                | Item 6.  Exhibits                                                                                                                       | 27       |

 

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**PART I— FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

 

**TOUCHMARKBANCSHARES, INC.**

**ANDSUBSIDIARY**

 

**CondensedConsolidated Balance Sheets**

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

 
| ** **                                                                                      | ** ** | **(unaudited)**   | ** **  | ** **            | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
| ** **                                                                                      | ** ** | **2010**          | ** **  | **2009**              | ** ** |
| ASSETS                                                                                          |       |              |        |                  |       |
|                                                                                            |       |              |        |                  |       |
| Cash and due from banks                                                                         |       | $                 | 2,406,709   |                  | $          | 1,695,884 |   |
| Federal funds sold                                                                              |       | 1,100,000         |        | —                |       |
| Interest-bearing accounts with other banks                                                      |       | 1,492,943         |        | 3,073,627             |       |
| Investment securities:                                                                          |       |              |        |                  |       |
| Securities available for sale                                                                   |       | 52,438,697        |        | 43,230,785            |       |
| Securities held to maturity, fair value  approximates $10,706,876, and $4,579,310, respectively |       | 10,638,051        |        | 4,619,299             |       |
| Restricted stock                                                                                |       | 1,505,700         |        | 1,365,750             |       |
| Loans held for sale                                                                             |       | 792,797           |        | 1,832,412             |       |
| Loans, less allowance for loan losses of  $2,083,603 and $1,445,522, respectively               |       | 79,552,923        |        | 66,609,313            |       |
| Accrued interest receivable                                                                     |       | 856,840           |        | 543,334               |       |
| Premises and equipment                                                                          |       | 2,901,271         |        | 3,043,646             |       |
| Foreclosed real estate                                                                          |       | 291,377           |        | —                |       |
| Land held for sale                                                                              |       | 2,409,023         |        | 2,409,023             |       |
| Other assets                                                                                    |       | 621,480           |        | 839,402               |       |
| Total assets                                                                                    |       | $                 | 157,007,811 |                  | $          | 129,262,475 |   |
|                                                                                            |       |              |        |                  |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                       |       |              |        |                  |       |
|                                                                                            |       |              |        |                  |       |
| Liabilities:                                                                                    |       |              |        |                  |       |
| Deposits:                                                                                       |       |              |        |                  |       |
| Non-interest bearing demand                                                                     |       | $                 | 5,044,722   |                  | $          | 3,489,983 |   |
| Interest-bearing                                                                                |       | 108,892,924       |        | 72,553,691            |       |
| Total deposits                                                                                  |       | 113,937,646       |        | 76,043,674            |       |
| Accrued interest payable                                                                        |       | 74,991            |        | 60,624                |       |
| Federal Home Loan Bank advances                                                                 |       | 11,400,000        |        | 11,400,000            |       |
| Secured borrowings                                                                              |       | 2,839,497         |        | —                |       |
| Other borrowings                                                                                |       | —            |        | 12,525,000            |       |
| Other liabilities                                                                               |       | 161,931           |        | 599,935               |       |
| Total liabilities                                                                               |       | 128,414,065       |        | 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                                                                                 |       | 35,948,215        |        | 35,827,141            |       |
| Accumulated deficit                                                                             |       | (7,663,297        | )           | (7,471,431            | )          |
| Accumulated other comprehensive income                                                          |       | 274,174           |        | 242,878               |       |
| Total shareholders’ equity                                                                 |       | 28,593,746        |        | 28,633,242            |       |
|                                                                                            |       |              |        |                  |       |
| Total liabilities and shareholders’ equity                                                 |       | $                 | 157,007,811 |                  | $          | 129,262,475 |   |

 

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**TOUCHMARKBANCSHARES, INC.**

**ANDSUBSIDIARY**

 

**CondensedConsolidated Statements of Operations and Comprehensive Income (Loss)**

**Three andSix Months Ended June 30, 2010 and 2009**

**(Unaudited)**

** **
| ** **                                                   | ** ** | **Three**         | ** ** | **Three**         | ** ** | **Six**           | ** ** | **Six**           | ** ** |
|--------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                   | ** ** | **Months**        | ** ** | **Months**        | ** ** | **Months**        | ** ** | **Months**        | ** ** |
| ** **                                                   | ** ** | **Ended**         | ** ** | **Ended**         | ** ** | **Ended**         | ** ** | **Ended**         | ** ** |
| ** **                                                   | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                   | ** ** | **2010**          | ** ** | **2009**          | ** ** | **2010**          | ** ** | **2009**          | ** ** |
| Interest income:                                             |       |              |       |              |       |              |       |              |       |
| Loans, including fees                                        |       | $                 | 1,137,829  |              | $          | 593,876           |       | $                 | 2,264,677  |   | $ | 1,123,941 |   |
| Investment income                                            |       | 640,278           |       | 439,336           |       | 1,181,291         |       | 852,090           |       |
| Federal funds sold                                           |       | 321               |       | 43                |       | 805               |       | 1,023             |       |
| Total interest income                                        |       | 1,778,428         |       | 1,033,255         |       | 3,446,773         |       | 1,977,054         |       |
|                                                         |       |              |       |              |       |              |       |              |       |
| Interest expense:                                            |       |              |       |              |       |              |       |              |       |
| Deposits                                                     |       | 500,494           |       | 304,237           |       | 942,884           |       | 614,712           |       |
| Federal Home Loan Bank advances                              |       | 69,939            |       | 69,939            |       | 139,801           |       | 139,801           |       |
| Other borrowings                                             |       | 1,976             |       | 243               |       | 10,077            |       | 492               |       |
| Total interest expense                                       |       | 572,409           |       | 374,419           |       | 1,092,762         |       | 755,005           |       |
|                                                         |       |              |       |              |       |              |       |              |       |
| Net interest income                                          |       | 1,206,019         |       | 658,836           |       | 2,354,011         |       | 1,222,049         |       |
| Provision for loan losses                                    |       | 540,654           |       | 600,185           |       | 738,010           |       | 703,450           |       |
| Net interest income after provision for loan losses          |       | 665,365           |       | 58,651            |       | 1,616,001         |       | 518,599           |       |
|                                                         |       |              |       |              |       |              |       |              |       |
| Noninterest income:                                          |       |              |       |              |       |              |       |              |       |
| Service charges on deposit accounts and other fees           |       | 11,250            |       | 7,278             |       | 36,768            |       | 11,137            |       |
| Gain on sale of securities available for sale                |       | 316,532           |       | 331,773           |       | 381,883           |       | 461,417           |       |
| Gain on sale of loans held for sale                          |       | 3,273             |       | —            |       | 418,103           |       | —            |       |
| Gain on sale of SBA loans                                    |       | 169,340           |       | —            |       | 169,340           |       | —            |       |
| Other noninterest income                                     |       | 18,436            |       | —            |       | 26,253            |       | —            |       |
| Total noninterest income                                     |       | 518,831           |       | 339,051           |       | 1,032,347         |       | 472,554           |       |
|                                                         |       |              |       |              |       |              |       |              |       |
| Noninterest expense:                                         |       |              |       |              |       |              |       |              |       |
| Salaries and employee benefits                               |       | 673,931           |       | 677,310           |       | 1,403,406         |       | 1,366,582         |       |
| Occupancy and equipment                                      |       | 181,239           |       | 156,253           |       | 366,243           |       | 307,806           |       |
| Other operating expense                                      |       | 600,503           |       | 325,894           |       | 1,070,565         |       | 617,825           |       |
| Total noninterest expense                                    |       | 1,455,673         |       | 1,159,457         |       | 2,840,214         |       | 2,292,213         |       |
|                                                         |       |              |       |              |       |              |       |              |       |
| Net loss                                                     |       | $                 | (271,477   | )                 | $          | (761,755          | )          | $                 | (191,866   | ) | $ | (1,301,060 | ) |
| Other comprehensive income (loss):                           |       |              |       |              |       |              |       |              |       |
| Unrealized holding gains (losses) arising during  the period |       | 73,449            |       | (285,223          | )          | 428,594           |       | 167,341           |       |
| Reclassification adjustment for gain realized in  net loss   |       | (316,532          | )          | (331,773          | )          | (381,883          | )          | (461,417          | )          |
| Tax effect                                                   |       | 80,217            |       | 203,608           |       | (15,415           | )          | 97,045            |       |
| Other comprehensive income (loss)                            |       | (162,866          | )          | (413,388          | )          | 31,296            |       | (197,031          | )          |
| Comprehensive loss                                           |       | $                 | (434,343   | )                 | $          | (1,175,143        | )          | $                 | (160,570   | ) | $ | (1,498,091 | ) |
| Basic and diluted loss per share                             |       | $                 | (0.08      | )                 | $          | (0.22             | )          | $                 | (0.06      | ) | $ | (0.37 | ) |
| Dividends per share                                          |       | $                 | —     |              | $          | —            |       | $                 | —     |   | $ | — |   |

 

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**TOUCHMARKBANCSHARES, INC.**

**ANDSUBSIDIARY**

 

**CondensedConsolidated Statement of Cash Flows**

**Six MonthsEnded June 30, 2010 and 2009**

**(Unaudited)**

** **
| ** **                                                                             | ** ** | **Six**           | ** ** | **Six**           | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                             | ** ** | **Months**        | ** ** | **Months**        | ** ** |
| ** **                                                                             | ** ** | **Ended**         | ** ** | **Ended**         | ** ** |
| ** **                                                                             | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                                             | ** ** | **2010**          | ** ** | **2009**          | ** ** |
| Cash flow from operating activities:                                                   |       |              |       |              |       |
| Net loss                                                                               |       | $                 | (191,866   | )                 | $          | (1,301,060 | ) |
| Adjustments to reconcile net loss to net cash  provided (used) by operating activities |       |              |       |              |       |
| Depreciation                                                                           |       | 146,764           |       | 114,270           |       |
| Amortization of premium                                                                |       | 14,375            |       | 9,889             |       |
| Provision for loan losses                                                              |       | 738,010           |       | 703,450           |       |
| Gain on sale of securities available for sale                                          |       | (381,883          | )          | (461,417          | )          |
| Proceeds from sale of loans held for sale                                              |       | 1,166,341         |       | —            |       |
| Gain on sale of loans held for sale                                                    |       | (418,103          | )          | —            |       |
| Stock compensation expense                                                             |       | 121,074           |       | 88,212            |       |
| Decrease (increase) in interest receivable                                             |       | (313,506          | )          | 5,099             |       |
| Increase in interest payable                                                           |       | 14,367            |       | 17,108            |       |
| Decrease (increase) in other assets                                                    |       | 217,922           |       | (25,930           | )          |
| Decrease in other liabilities                                                          |       | (453,419          | )          | (156,228          | )          |
|                                                                                   |       |              |       |              |       |
| Net cash provided (used) by operating activities                                       |       | 660,076           |       | (1,006,607        | )          |
|                                                                                   |       |              |       |              |       |
| Cash flow from investing activities:                                                   |       |              |       |              |       |
| Sale (purchase) of federal funds sold                                                  |       | (1,100,000        | )          | 1,047,000         |       |
| Decrease (increase) in interest bearing deposits                                       |       | 1,580,684         |       | (95,091           | )          |
| Purchase of securities held to maturity                                                |       | (6,023,415        | )          | (7,351,444        | )          |
| Purchase of securities available for sale                                              |       | (36,775,173       | )          | (15,778,215       | )          |
| Proceeds from maturities of securities held to  maturity                               |       | —            |       | 500,000           |       |
| Proceeds from paydowns, calls, and maturities of  securities available for sale        |       | 6,737,828         |       | 2,922,430         |       |
| Proceeds from sales of securities available for  sale                                  |       | 21,248,315        |       | 14,126,115        |       |
| Purchase of restricted stock                                                           |       | (139,950          | )          | (69,500           | )          |
| Net increase in loans                                                                  |       | (13,681,620       | )          | (16,131,217       | )          |
| Purchase of premises and equipment                                                     |       | (4,389            | )          | (1,719,920        | )          |
|                                                                                   |       |              |       |              |       |
| Net cash used by investing activities                                                  |       | (28,157,720       | )          | (22,549,842       | )          |
|                                                                                   |       |              |       |              |       |
| Cash flow from financing activities:                                                   |       |              |       |              |       |
| Net increase in deposits                                                               |       | 37,893,972        |       | 25,068,649        |       |
| Increase in secured borrowing                                                          |       | 2,839,497         |       | —            |       |
| Repayment of other borrowings                                                          |       | (12,525,000       | )          | —            |       |
|                                                                                   |       |              |       |              |       |
| Net cash provided by financing activities                                              |       | 28,208,469        |       | 25,068,649        |       |
|                                                                                   |       |              |       |              |       |
| Net change in cash                                                                     |       | 710,825           |       | 1,512,200         |       |
|                                                                                   |       |              |       |              |       |
| Cash at the beginning of the period                                                    |       | 1,695,884         |       | 1,029,163         |       |
|                                                                                   |       |              |       |              |       |
| Cash at the end of the period                                                          |       | $                 | 2,406,709  |              | $          | 2,541,363 |   |
|                                                                                   |       |              |       |              |       |
| Supplemental disclosures of cash flow information  -                                   |       |              |       |              |       |
| Interest paid                                                                          |       | $                 | 1,078,395  |              | $          | 737,895 |   |
| Transfer of loan principal to foreclosed real  estate                                  |       | $                 | (291,377   | )                 | $          | — |   |

 

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**TOUCHMARK BANCSHARES, INC.**

**AND SUBSIDIARY**

 

**Notes to Condensed ConsolidatedFinancial Statements**

**June 30, 2010**

**(unaudited)**

 

1.                                       BASIS OFPRESENTATION

 

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

 

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

 

2.                                       ORGANIZATIONAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

*Basis of Accounting:*The accounting and reportingpolicies of the Company conform to accounting principles generally accepted inthe United States of America. In preparing the

 

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financialstatements, management is required to make estimates and assumptions thataffect the reported amounts of assets, liabilities, shareholders’ equity andnet loss. Actual results may differ significantly from those estimates. TheCompany uses the accrual basis of accounting by recognizing revenues when theyare earned and expenses in the period incurred, without regard to the time ofreceipt or payment of cash.

 

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

 

Theprocess of reviewing the adequacy of the allowance for loan losses requiresmanagement to make numerous judgments and assumptions about current events andsubjective judgments, including the likelihood of loan repayment, riskevaluation, actual loan losses and the extrapolation of historical losses ofsimilar banks, and other qualitative factors. If these assumptions prove to beincorrect, charge-offs in future periods could exceed the allowance for loanlosses.

 

*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. The expected term of warrants granted is based on the short-cutmethod and represents the period of time that the warrants granted are expectedto be outstanding. 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 $17,800 and$17,800 for the six months ended June 30, 2010 and 2009, respectively.

 

AtJune 30, 2010, there was $20,767 of unrecognized compensation cost relatedto warrants, which is expected to be recognized over a weighted-average periodof 0.58 years. The weighted average remaining contractual life of the warrantsoutstanding as of June 30, 2010 was approximately 7.5 years. The Companyhad 462,500 warrants exercisable as of June 30, 2010.

 

ThroughJune 30, 2010, the Company issued 149,822 options to purchase common stockto employees of the Company or the Bank and the Company issued 10,000 optionsto purchase common stock to a director. No options were issued during the first six months of 2010. Uponissuance of options, compensation cost was recognized in the consolidatedfinancial statements of the Company for all options granted, based on the grantdate fair value as estimated in accordance

 

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withthe provisions of FASB ASC 718, which requires recognition of expense equal tothe fair value of the option over the vesting period of the option.

 

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. The expected term of options granted is based on the short-cutmethod and represents the period of time that the options granted are expectedto be outstanding. 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.

 

TheCompany recorded stock-based compensation expense related to the options of$103,274 and $70,410 during the six months ended June 30, 2010 and 2009,respectively.

 

AtJune 30, 2010, there was $229,172 of unrecognized compensation costrelated to options outstanding, which is expected to be recognized over aweighted-average period of 1.04 years. The weighted average remainingcontractual life of the options outstanding as of June 30, 2010 wasapproximately 8.02 years. The Company had 75,881 options exercisable as of June 30,2010.

 

*Income Taxes:*Deferredincome tax assets and liabilities are determined using the liability (orbalance sheet) method.  Under thismethod, the net deferred tax asset or liability is determined based on the taxeffects of the differences between the book and tax bases of the variousbalance sheet assets and liabilities, and gives current recognition to changesin tax rates and laws.  A valuationallowance for deferred tax assets is required when it is more likely than notthat some portion or all of the deferred tax asset will not be realized.  In assessing the realization of the deferredtax assets, management considers the scheduled reversals of deferred taxliabilities, projected future taxable income (in the near-term based on currentprojections), and tax planning strategies.

 

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

 
| ** **                                | ** ** | **June 30, 2010** | ** ** | **December  31, 2009** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| Deferred income tax assets (liabilities): |       |                   |       |                        |       |
|                                      |       |                   |       |                        |       |
| Allowance for loan losses                 |       | $                      | 612,255    |                        | $          | 363,245 |   |
| Pre-opening expenses                      |       | 433,762                |       | 450,998                     |       |
| Net operating loss carryforward           |       | 1,248,913              |       | 1,482,913                   |       |
| Depreciation                              |       | (175,108               | )          | (202,035                    | )          |
| Stock options                             |       | 488,415                |       | 488,415                     |       |
| Deferred loan fees                        |       | 96,168                 |       | 78,897                      |       |
| Other                                     |       | —                 |       | 1,505                       |       |
| Securities available for sale             |       | (135,011               | )          | (119,626                    | )          |
|                                      |       | 2,569,394              |       | 2,544,312                   |       |
| Less valuation allowance                  |       | (2,704,405             | )          | (2,663,938                  | )          |
| Deferred taxes, net                       |       | $                      | (135,011   | )                           | $          | (119,626 | ) |

 

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

 

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

 

3.                                       SECURITIES

 

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

 
| ** **                                  | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|---------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                                  | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| ** **                                  | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**     | ** ** |
|                                        |       |          |       |           |       |           |       |          |       |
| Securities Available for Sale               |       |          |       |           |       |           |       |          |       |
| U.S Government-sponsored enterprises (GSEs) |       | $             | 18,986,288 |           | $          | 71,726         |       | $             | —     |   | $ | 19,058,014 |   |
| Corporate bonds                             |       | 21,876,246    |       | 398,573        |       | (107,202       | )          | 22,167,617    |       |
| Mortgage-backed GSE residential             |       | 11,166,949    |       | 48,545         |       | (2,428         | )          | 11,213,066    |       |
|                                        |       | $             | 52,029,483 |           | $          | 518,844        |       | $             | (109,630   | ) | $ | 52,438,697 |   |
|                                        |       |          |       |           |       |           |       |          |       |
| Held to Maturity Securities Municipal bonds |       | $             | 10,638,051 |           | $          | 85,083         |       | $             | (16,258    | ) | $ | 10,706,876 |   |

 

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

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

 

Theamortized cost and estimated fair value of investment securities available forsale and held to maturity at June 30, 2010, by contractual maturity areshown below.  Expected maturities willdiffer from contractual maturities because borrowers may have the right to callor prepay

 

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obligationswith or without call or prepayment penalties.

 
| ** **                                   | ** ** | **Securities Available** | ** ** | **Securities Held** | ** ** |
|----------------------------------------------|------------|--------------------------|------------|---------------------|------------|
| ** **                                   | ** ** | **For Sale**             | ** ** | **To Maturity**     | ** ** |
| ** **                                   | ** ** | ** **               | ** ** | **Estimated**       | ** ** | ** ** | ** ** | **Estimated** | ** ** |
| ** **                                   | ** ** | **Amortized**            | ** ** | **Fair**            | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| ** **                                   | ** ** | **Cost**                 | ** ** | **Value**           | ** ** | **Cost** | ** ** | **Value** | ** ** |
|                                         |       |                     |       |                |       |   |   |   |   |
| Due in one year or less                      |       | $                        | 4,404,027  |                | $          | 4,434,508 |   | $ | — |   | $ | — |   |
| Due after one year but less than five years  |       | 29,553,300               |       | 29,753,026          |       | — |   | — |   |
| Due after five years but less than ten years |       | 17,680,886               |       | 17,859,893          |       | 5,309,289 |   | 5,328,088 |   |
| Due after ten years                          |       | 391,270                  |       | 391,270             |       | 5,328,762 |   | 5,378,788 |   |
|                                         |       | $                        | 52,029,483 |                | $          | 52,438,697 |   | $ | 10,638,051 |   | $ | 10,706,876 |   |

 

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

 

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

 
| ** **                                  | ** ** | **Less than**     | ** ** | **More than**     | ** ** |
|---------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                  | ** ** | **Twelve Months** | ** ** | **Twelve Months** | ** ** |
| ** **                                  | ** ** | **Gross**         | ** ** | **Estimated**     | ** ** | **Gross** | ** ** | **Estimated** | ** ** |
| ** **                                  | ** ** | **Unrealized**    | ** ** | **Fair**          | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                  | ** ** | **Losses**        | ** ** | **Value**         | ** ** | **Losses** | ** ** | **Value** | ** ** |
|                                        |       |              |       |              |       |   |   |   |   |
| Securities Available for Sale               |       |              |       |              |       |   |   |   |   |
| GSEs                                        |       | $                 | —     |              | $          | — |   | $ | — |   | $ | — |   |
| Mortgage-backed securities GSE residential  |       | (2,428            | )          | 362,389           |       | — |   | — |   |
| Corporate bonds                             |       | (107,202          | )          | 7,609,655         |       | — |   | — |   |
|                                        |       | $                 | (109,630   | )                 | $          | 7,972,044 |   | $ | — |   | $ | — |   |
|                                        |       |              |       |              |       |   |   |   |   |
| Securities Held to Maturity Municipal bonds |       | $                 | (16,258    | )                 | $          | 491,655 |   | $ | — |   | $ | — |   |

 

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

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

 

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

 

AtJune 30, 2010, nine debt securities have unrealized losses with aggregatedepreciation of 1.47% from the Company’s amortized cost basis. In analyzing anissuer’s financial condition, management considers whether the securities areissued by the federal government or its agencies, whether downgrades by bondrating agencies have occurred, and industry analysts’ reports. Although some ofthe issuers have shown declines in earnings and/or a weakened financialcondition as a result of the weakened economy, no credit issues have beenidentified that cause management to believe the declines in market value areother than temporary. As management has the ability to hold debt securitiesuntil maturity, or for the foreseeable future if classified as available forsale, no declines are deemed to be other than temporary.

 

*Municipal bonds.*    TheCompany’s unrealized loss on one investment in a municipal bond relates tointerest rate increases. The Company currently does not believe it is probablethat it will be unable to collect all amounts due according to the contractualterms of the investments. Because the Company does not plan to sell theinvestments, and because it is not more likely than not that the Company willbe required to sell the investments before recovery of its par value, which maybe maturity, it does not consider these investments to beother-than-temporarily impaired at June 30, 2010.

 

*Mortgage-backed securities GSE residential.*    Theunrealized losses on the Company’s investment in two residential GSEmortgage-backed securities were caused by interest rate increases. Thecontractual cash flows of those investments are guaranteed by an agency of theU.S. Government. Accordingly, it is expected that the securities would not besettled at a price less than the amortized cost bases of the Company’sinvestments. Because the decline in market value is attributable to changes ininterest rates and not credit quality, and because the Company has no plans tosell the investments, and because it is not more likely than not that theCompany will be required to sell the investments before recovery of theiramortized cost bases, which may be maturity, the Company does not considerthose investments to be other-than-temporarily impaired at June 30, 2010.

 

*Corporate bonds*.    TheCompany’s unrealized losses on six corporate bonds 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 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 this investment to be other-than-temporarily impaired at June 30,2010.

 

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

 

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existingaccounting pronouncements; accordingly, the standard does not require any newfair value measurements of reported balances.

 

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

 

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

 

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

 
| **Assets  as of**                         | ** ** | **Quoted Prices in  Active Markets for  Identical Assets** | ** ** | **Significant Other  Observable Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------|------------|------------|------------|
| **June 30,  2010**                   | ** ** | **(Level 1)**                                                                  | ** ** | **(Level 2)**                                      | ** ** | **(Level 3)**                         | ** ** | **Total**  | ** ** |
| Investment securities  available-for-sale |       | $                                                                              | —     |                                               | $          | 52,438,697                            |       | $          | —     |   | $ | 52,438,697 |   |
| Derivative instruments                    |       | —                                                                         |       | —                                             |       | 131,193                               |       | 131,193    |       |
| Loans held for sale                       |       | —                                                                         |       | —                                             |       | 792,797                               |       | 792,797    |       |
| Total assets at fair value                |       | $                                                                              | —     |                                               | $          | 52,438,697                            |       | $          | 923,990    |   | $ | 53,362,687 |   |

 
| **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 |   |

 

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

 

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

 

Loansheld-for-sale are measured at the lower of cost or fair value. Fair value iscurrently based on the purchase price of the loan held for sale. 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 loss           |       | —              |       | (150,406        | )          |
| Balance June 30, 2010    |       | 792,797             |       | 131,193         |       |

 

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 June 30, 2010 and December 31,2009.

 
| **As of  June 30, 2010** | ** ** | **Quoted Prices in  Active Markets for  Identical Securities  Level 1** | ** ** | **Significant Other  Observable Inputs  Level 2** | ** ** | **Significant  Unobservable  Inputs  Level 3** | ** ** | **Total** | ** ** |
|-------------------------------|------------|-------------------------------------------------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------|------------|-----------|------------|
| Impaired loans                |       | $                                                                       | —     |                                              | $          | —                                         |       | $         | 5,897,235  |   | $ | 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 |   |
|                                   |            |                                                                         |            |                                                   |            |                                                |            |           |            |  |  |  |  |

 

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AtJune 30, 2010 and December 31, 2009, in accordance with theprovisions of the loan impairment guidance (FASB ASC 310-10-35), individualloans with a carrying amount, of $5,897,235, were considered impaired afterpartial charge-offs of $752,125. Impaired loans are evaluated and valued at thetime the loan is identified as impaired, at the lower of cost or fair value.Fair value is measured based on the value of the collateral securing theseloans and is classified at a Level 3 in the fair value hierarchy. Collateralmay include real estate, or business assets including equipment, inventory andaccounts receivable. The value of real estate collateral is determined based onan appraisal by qualified licensed appraisers hired by the Company. The valueof business equipment is based on an appraisal by qualified licensed appraisershired by the Company if significant, or the equipment’s net book value on thebusiness’ financial statements. Inventory and accounts receivable collateralare valued based on independent field examiner review or aging reports.Appraised and reported values may be discounted based on management’shistorical knowledge, changes in market conditions from the time of thevaluation, and management’s expertise and knowledge of the client and client’sbusiness. Impaired loans are evaluated on at least a quarterly basis foradditional impairment and adjusted accordingly.

 

Fair Value of Financial Instruments

 

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

* *

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

 

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

 

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

 

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

 

*Loans receivable.*  Forvariable-rate loans that reprice frequently and have no significant change in creditrisk, fair values are based on carrying values. Fair values for fixed rateloans are estimated using discounted cash flow analyses, using interest ratescurrently being offered for loans with similar terms to borrowers of similarcredit quality. Fair values for impaired loans are estimated using discountedcash flow analyses or underlying collateral values, where applicable.

 

*Deposit liabilities.*  The fair values disclosed for demand depositsare, by definition, equal to the amount payable on demand at the reporting date(that is, their carrying amounts). The carrying amounts of variable-rate,fixed-term money market accounts and certificates of deposit approximate theirfair values at the reporting date.  Fair valuesfor fixed-rate certificates of deposit are estimated using a discounted cashflow calculation that applies interest rates currently being offered oncertificates to a schedule of aggregated expected monthly maturities on timedeposits.

 

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

 

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borrowing arrangements. The carrying values of variable rate FHLBadvances, secured borrowings and other borrowings approximate fair value.

 

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

 

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

 

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

 

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

 
| ** **                                 | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **Carrying**                | ** ** | **Estimated**                   | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                                 | ** ** | **Amount**                  | ** ** | **Fair Value**             | ** ** | **Amount** | ** ** | **Fair Value** | ** ** |
| Assets:                                    |       |                        |       |                            |       |   |   |   |   |
| Cash and due from banks                    |       | $                           | 2,407      |                            | $          | 2,407 |   | $ | 1,696 |   | $ | 1,696 |   |
| Federal funds sold                         |       | 1,100                       |       | 1,100                           |       | — |   | — |   |
| Interest-bearing accounts with other banks |       | 1,493                       |       | 1,493                           |       | 3,074 |   | 3,074 |   |
| Securities available for  sale             |       | 52,439                      |       | 52,439                          |       | 43,231 |   | 43,231 |   |
| Securities held to  maturity               |       | 10,638                      |       | 10,707                          |       | 4,619 |   | 4,579 |   |
| Restricted stock                           |       | 1,506                       |       | 1,506                           |       | 1,366 |   | 1,366 |   |
| Loan held for sale                         |       | 793                         |       | 793                             |       | 1,832 |   | 1,832 |   |
| Loans receivable                           |       | 79,553                      |       | 79,813                          |       | 66,609 |   | 67,196 |   |
| Accrued interest  receivable               |       | 857                         |       | 857                             |       | 543 |   | 543 |   |
| Derivative instruments                     |       | 131                         |       | 131                             |       | 282 |   | 282 |   |
|                                       |       |                        |       |                            |       |   |   |   |   |
| Liabilities:                               |       |                        |       |                            |       |   |   |   |   |
| Deposits                                   |       | 113,938                     |       | 114,305                         |       | 76,044 |   | 76,139 |   |
| Accrued interest payable                   |       | 75                          |       | 75                              |       | 61 |   | 61 |   |
| FHLB advances                              |       | 11,400                      |       | 11,459                          |       | 11,400 |   | 11,823 |   |
| Secured borrowings                         |       | 2,839                       |       | 2,839                           |       | — |   | — |   |
| Other borrowings                           |       | —                      |       | —                          |       | 12,525 |   | 12,525 |   |
|                                            |            |                             |            |                                 |            |  |  |  |  |  |  |  |  |

 

5.                                       LOSS PER SHARE

 

Basicloss per share is computed by dividing net loss by the weighted average numberof shares of common stock outstanding. Diluted loss per share is computed bydividing net loss by the sum of the weighted average number of shares of commonstock outstanding and potential common shares. Potential common shares consistof stock options and warrants. Weighted average shares outstanding for thethree and six months ended June 30, 2010 and 2009 were 3,465,391 and3,470,391, respectively. Basic loss per share for the three months ended June 30,2010 and 2009 was $(0.08) and $(0.22), respectively. Basic loss per share forthe six months ended June 30, 2010 and 2009 was $(0.06) and $(0.37).Diluted loss per share is not presented for June 30, 2010 and 2009, as thenet loss would result in an anti-dilutive calculation.

 

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6.                                       DERIVATIVEINSTRUMENT

 

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.

 

This series of transactions consists of purchasing an interest rate capat 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 stand alone derivative instrument, and as such will be recorded inthe financial statements at fair value, with changes in fair value included innet loss.  Additionally, this transactionhas a net settlement feature, and the effects of the net settlement will beincluded in interest income or expense as appropriate.  The fair values as of June 30, 2010 and December 31,2009 were $131,193 and $281,599, respectively, and were included in otherassets.

 

7.                                       SUBSEQUENTEVENTS

 

In July 2010, thePresident and CEO, and the CFO of the Company and the Bank resigned. Separationpayments of $184,000 related to these resignations will be accrued in the thirdquarter of 2010.  Also in July 2010,the Company entered into employment agreements with a new President and CEO anda new CFO.

 

8.                                       ACCOUNTINGSTANDARDS UPDATES

 

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

 

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

 

InApril 2010, the FASB issued Accounting Standards Update No. 2010-13, *Effect of Denominating the Exercise Price of aShare-based Payment Award in the Currency of the Market in Which the UnderlyingEquity Security Trades*(“ASU No. 2010-13”). ASUNo. 2010-13 clarifies that an employee share-based payment award with anexercise price denominated in the currency of a market in which a substantialportion of an entity’s equity securities trades should not be considered to containa condition that is not a market, performance, or service condition. Therefore,an entity would not classify such an award as a liability if it otherwisequalifies as

 

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equity.This guidance is effective for fiscal years and interim periods within thosefiscal years, beginning on or after December 15, 2010. It is not expectedto have a material impact on the Company’s results of operations, financialposition or disclosures.

 

InApril 2010, the FASB issued Accounting Standards Update No. 2010-18, *Effect of a Loan Modification When the Loan Is Part ofa Pool That Is Accounted for as a Single Asset*(“ASU No. 2010-18”).ASU No. 2010-18 provides guidance on the accounting for loan modificationswhen the loan is part of a pool of loans accounted for as a single asset suchas acquired loans that have evidence of credit deterioration upon acquisitionthat are accounted for under the guidance in ASC 310-30. ASU No. 2010-18addresses diversity in practice on whether a loan that is part of a pool ofloans accounted for as a single asset should be removed from that pool upon amodification that would constitute a troubled debt restructuring or remain inthe pool after modification. ASU No. 2010-18 clarifies that modificationsof loans that are accounted for within a pool under ASC 310-30 do not result inthe removal of those loans from the pool even if the modification of thoseloans would otherwise be considered a troubled debt restructuring. An entitywill continue to be required to consider whether the pool of assets in whichthe loan is included is impaired if the expected cash flows for the poolchange. The amendments in this update do not require any additional disclosuresand are effective for modifications of loans accounted for within pools underASC 310-30 occurring in the first interim or annual period ending on or afterJuly 15, 2010. ASU 2010-18 is not expected to have a material impact onthe Company’s results of operations, financial position or disclosures.

 

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

 

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

 

Thefollowing discussion reviews our results of operations and assesses ourfinancial condition. You should read the following discussion and analysis inconjunction with the accompanying condensed consolidated financial statements.The commentary should be read in conjunction with the discussion offorward-looking statements, the consolidated financial statements, and therelated notes and the other statistical information included in this report andour Annual Report on Form 10-K for the 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 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.                                                                                                                                 |

 

**Company Overview**

 

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

 

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

 

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

 

**Industry Overview**

 

Thefirst six months of 2010 continue to reflect the tumultuous economic conditionswhich have negatively impacted liquidity and credit quality. Concerns regardingincreased credit losses from the weakening economy have negatively affectedcapital and earnings of many financial institutions. 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 theunfortunate distinction of experiencing among the highest incidences of bankclosures nationwide since the onset of the 2007 financial crisis.

 

Dueto credit quality concerns, liquidity in the debt markets remains low in spiteof enormous efforts by the U.S. Department of the Treasury (“Treasury”) and theFederal Reserve Bank (“Federal Reserve”) to inject capital into financialinstitutions. The federal funds rate set by the Federal Reserve has remained athistorically low levels since December 2008, following a decline from4.25% to 0.25% during 2008 through a series of seven rate reductions.

 

Treasury,the FDIC and other governmental agencies continue to evolve rules andregulations to implement the Emergency Economic Stabilization Act of 2008 (“EESA”),the Troubled Asset Relief Program (“TARP”), the Financial Stability Plan, theAmerican Recovery and Reinvestment Act (“ARRA”) and related economic recoveryprograms, many of which curtail the activities of financialinstitutions.  During 2009, we declined to participate in the TARPCapital Purchase Program as we felt that our capital levels were substantialand precluded the need for us to expose ourselves to additional regulatory controls.

 

Difficulteconomic conditions are expected to prevail through the latter part of 2010.Reduced levels of commercial activity will continue to challenge prospects forstable balance sheet growth and earning asset yields at a time when the marketfor profitable commercial banking relationships is intensely competitive. As aresult, financial institutions in general will continue to experience pressureon earning asset yields, funding costs, operating expenses, liquidity andcapital.

 

**Results of Operations for the Three Months Ended June 30,2010 and 2009**

 

Weincurred a net loss of $271,477 and $761,755 for the three months ended June 30,2010 and 2009, respectively. For the three months ended June 30, 2010, werealized $1,778,428 in interest income, consisting primarily of $1,137,829 fromloan activities and $640,599 from investment activities. For the three monthsended June 30, 2009, we realized $1,033,255 in interest income, consistingprimarily of $593,876 from loan activities and $439,379 from investment activities.The provision for loan loss was $540,654 for the quarter ended June 30,2010, and $600,185 for the quarter ended June 30, 2009. We anticipate thegrowth in loans in future quarters will drive the growth in assets and thegrowth in interest income. The primary sources of funding for our loanportfolio are deposits and Federal Home Loan advances. We incurred interestexpense of $500,494 related to deposit accounts, $69,939 related to FederalHome Loan Bank advances, and $1,976 related to other borrowings during thethree months ended June 30, 2010. For the three months ended June 30,2009, we incurred interest expense of $304,237 related to deposit accounts,$69,939 of interest expense related to Federal Home Loan Bank advances, and$243 related to other borrowings.

 

Weincurred non-interest expenses of $1,455,673 and $1,159,457 during the threemonths ended June 30, 2010 and 2009, respectively. Included innon-interest expense for the three months ended June 30, 2010 is 

 

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$673,931in salaries and employee benefits, $181,239 of occupancy and equipmentexpenses, and $600,503 in other expense. The primary components in the otheroperating expense category for the three months ended June 30, 2010 were$177,092 in professional fees, $84,852 in data processing and IT relatedservices, and $49,881 in loan collection expenses.

 

Thenon-interest expense incurred in the three months ended June 30, 2009 was$1,159,457. Included in non-interest expense was $677,310 in salaries andemployee benefits, $156,253 of occupancy and equipment expenses, and $325,894in other operating expenses. The primary components in the other operatingexpense category for the three months ended June 30, 2009 were $53,432 inlegal fees, $53,379 in data processing and IT related services, and $47,400 inadvertising and marketing expense.

 

Thefollowing tables calculate the net yield on earning assets as of June 30,2010 and 2009. Net yield on earning assets, defined as net interest incomeannualized, divided by average interest earning assets, was at 3.50% for thethree months ended June 30, 2010, an increase of 24 basis points from3.26% at June 30, 2009.

 

Forthe three months ended June 30, 2010

(Dollarsin thousands)

 
| **Description**                  | ** ** | **Avg.  Assets/Liabilities** | ** ** | **Interest  Income/Expense** | ** ** | **Yield/Cost** | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------|------------|
| Interest Earning Assets          |       |                         |       |                         |       |           |       |
| Federal Funds Sold               |       | $                            | 658        |                         | $          | —         |       | 0.20 | % |
| Securities                       |       | 64,843                       |       | 640                          |       | 3.95           | %          |
| Loans (1)                        |       | 72,506                       |       | 1,138                        |       | 6.28           | %          |
| Total                            |       | $                            | 138,007    |                         | 1,778      |           | 5.15       | % |
| Interest Bearing Liabilities     |       |                         |       |                         |       |           |       |
| Interest Bearing Demand Deposits |       | $                            | 40,711     |                         | 189        |           | 1.86       | % |
| Time Deposits                    |       | 64,183                       |       | 312                          |       | 1.94           | %          |
| Other Borrowings                 |       | 12,492                       |       | 72                           |       | 2.31           | %          |
| Total                            |       | $                            | 117,386    |                         | 573        |           | 1.95       | % |
| Net interest income              |       |                         |       | $                            | 1,206      |           |       |   |
| Net yield on earning assets      |       |                         |       |                         |       | 3.50           | %          |

 

----

(1)          Average non-accrual loans of $5,944,576 werededucted from average loans.

 

Forthe three months ended June 30, 2009

(Dollarsin thousands)

 
| **Description**                  | ** ** | **Avg.  Assets/Liabilities** | ** ** | **Interest  Income/Expense** | ** ** | **Yield/Cost** | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------|------------|
| Interest Earning Assets          |       |                         |       |                         |       |           |       |
| Federal Funds Sold               |       | $                            | 85         |                         | $          | —         |       | 0.00 | % |
| Securities                       |       | 32,641                       |       | 423                          |       | 5.18           | %          |
| Loans (1)                        |       | 43,219                       |       | 594                          |       | 5.50           | %          |
| Other                            |       | 4,997                        |       | 17                           |       | 1.36           | %          |
| Total                            |       | $                            | 80,942     |                         | 1,034      |           | 5.11       | % |
| Interest Bearing Liabilities     |       |                         |       |                         |       |           |       |
| Interest Bearing Demand Deposits |       | $                            | 23,656     |                         | 148        |           | 2.50       | % |
| Time Deposits                    |       | 21,187                       |       | 156                          |       | 2.95           | %          |
| Other Borrowings                 |       | 11,486                       |       | 70                           |       | 2.44           | %          |
| Total                            |       | $                            | 56,329     |                         | 374        |           | 2.66       | % |
| Net interest income              |       |                         |       | $                            | 660        |           |       |   |
| Net yield on earning assets      |       |                         |       |                         |       | 3.26           | %          |

 

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----

(1)          Average non-accrual loans of $2,232,168 werededucted from average loans.

 

**Results of Operations for the Six Months Ended June 30,2010 and 2009**

 

Weincurred a net loss of $191,866 and $1,301,060 for the six months endedJune 30, 2010 and 2009, respectively. For the six months endedJune 30, 2010, we realized $3,446,773 in interest income, consistingprimarily of $2,264,677 from loan revenue and $1,182,096 from investmentrevenue. Additionally, $381,883 of non-interest income was recognized from thegain on sale of investment securities, $418,103 was recognized from the sale ofloans held for sale, and $169,340 was recognized from the gain on sale of SBAloans. For the six months ended June 30, 2009, we realized $1,977,054 ininterest income consisting primarily of $1,123,941 from loan activities and$853,113 from investment activities. Over time, we anticipate that loan revenuewill comprise an increasing share of total revenue. Since we commenced businessin January 2008, the agency and investment grade debt markets haveprovided opportunities for superior risk-adjusted returns. As such, we haveinvested in these markets along with our primary mission of investing incommercial-grade loans. Our ability to develop an income stream and recognizesecurities gains in recent periods has served to offset overhead costsassociated with being a de novo financial institution, while we build ourbalance sheet to a level of profitability.

 

Ourprovision for loan loss amounted to $738,010 for the six months endedJune 30, 2010, and $703,450 for the six months ended June 30, 2009.The company increased its allowance levels during the second quarter inconjunction with certain classified loans identified in the portfolio. Year todate, the Company recognized approximately $100,000 in net charge-offs.

 

Weincurred interest expense of $942,884 related to deposit accounts, $139,801related to Federal Home Loan Bank advances, and $10,077 related to otherborrowings during the six months ended June 30, 2010. For the six monthsended June 30, 2009, we incurred interest expense of $614,712 related todeposit accounts, $139,801 of interest expense related to Federal Home LoanBank advances, and $492 related to other borrowings.

 

Weincurred non-interest expenses of $2,840,214 and $2,292,213 during the sixmonths ended June 30, 2010 and 2009, respectively. Included in non-interestexpense for the six months ended June 30, 2010 is $1,403,406 in salariesand employee benefits, $366,243 of occupancy and equipment expenses, and$1,070,565 in other operating expense. The primary components in the otheroperating expense category for the six months ended June 30, 2010 were$246,407 in professional fees, $161,239 in data processing and IT relatedservices, and $100,370 in loan collection expenses.

 

Thenon-interest expense incurred in the six months ended June 30, 2009 was$2,292,213. Included in non-interest expense was $1,366,582 in salaries andemployee benefits, $307,806 of occupancy and equipment expenses, and $617,825in other operating expenses.  The primarycomponents of other operating expenses included $79,351 in legal fees, $108,309in data processing and IT related services, and $83,179 in advertising andmarketing expense.

 

Thefollowing tables calculate the net yield on earning assets for the six monthsended June 30, 2010 and 2009, respectively. Net yield on earning assets amountedto 3.64% for the six months ended June 30, 2010, which represents anincrease of 54 basis points from the first six months 2009. The increase is dueprimarily to the Bank’s ability to grow the balance sheet while driving downits cost of funds.

 

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Forthe six months ended June 30, 2010

(Dollarsin thousands)

 
| **Description**                  | ** ** | **Avg.  Assets/Liabilities** | ** ** | **Interest  Income/Expense** | ** ** | **Yield/Cost** | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------|------------|
| Interest Earning Assets          |       |                         |       |                         |       |           |       |
| Federal Funds Sold               |       | $                            | 972        |                         | $          | 1              |       | 0.17 | % |
| Securities                       |       | 60,036                       |       | 1,181                        |       | 3.93           | %          |
| Loans (1)                        |       | 68,427                       |       | 2,265                        |       | 6.62           | %          |
| Total                            |       | $                            | 129,435    |                         | 3,447      |           | 5.33       | % |
| Interest Bearing Liabilities     |       |                         |       |                         |       |           |       |
| Interest Bearing Demand Deposits |       | $                            | 36,163     |                         | 345        |           | 1.91       | % |
| Time Deposits                    |       | 57,371                       |       | 598                          |       | 2.08           | %          |
| Other Borrowings                 |       | 17,006                       |       | 150                          |       | 1.76           | %          |
| Total                            |       | $                            | 110,540    |                         | 1,093      |           | 1.98       | % |
| Net interest income              |       |                         |       | $                            | 2,354      |           |       |   |
| Net yield on earning assets      |       |                         |       |                         |       | 3.64           | %          |

 

----

(1)          Average non-accrual loans of $6,750,875 werededucted from average loans.

 

Forthe six months ended June 30, 2009

(Dollarsin thousands)

 
| **Description**                  | ** ** | **Avg.  Assets/Liabilities** | ** ** | **Interest  Income/Expense** | ** ** | **Yield/Cost** | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------|------------|
| Interest Earning Assets          |       |                         |       |                         |       |           |       |
| Federal Funds Sold               |       | $                            | 757        |                         | $          | 1              |       | 0.26 | % |
| Securities                       |       | 30,539                       |       | 793                          |       | 5.19           | %          |
| Loans (1)                        |       | 39,350                       |       | 1,124                        |       | 5.71           | %          |
| Other                            |       | 8,269                        |       | 59                           |       | 1.43           | %          |
| Total                            |       | $                            | 78,915     |                         | 1,977      |           | 5.01       | % |
| Interest Bearing Liabilities     |       |                         |       |                         |       |           |       |
| Interest Bearing Demand Deposits |       | $                            | 21,755     |                         | 306        |           | 2.81       | % |
| Time Deposits                    |       | 19,730                       |       | 308                          |       | 3.12           | %          |
| Other Borrowings                 |       | 11,481                       |       | 140                          |       | 2.44           | %          |
| Total                            |       | $                            | 52,966     |                         | 754        |           | 2.85       | % |
| Net interest income              |       |                         |       | $                            | 1,223      |           |       |   |
| Net yield on earning assets      |       |                         |       |                         |       | 3.10           | %          |

 

----

(1)          Average non-accrual loans of $1,122,250 were deducted from average loans**.**

 

**Assets and Liabilities**

 

*General*

 

AtJune 30, 2010, we had total assets of $157,007,811, consisting principallyof $79,552,923 in net loans, $52,438,697 in securities available for sale,$10,638,051 in securities held to maturity, $1,492,943 in interest-bearingaccounts with other banks, and $2,901,271 in premises and equipment. Totalassets increased $27,745,336 since December 31, 2009 when we had totalassets of $129,262,475. Assets at December 31, 2009 consisted of cash anddeposits due from banks of $1,695,884, interest-bearing accounts with otherbanks of $3,073,627, securities available for sale of $43,230,785, securitiesheld to maturity of $4,619,299, premises and equipment of $3,043,646, net loansof $66,609,313 and accrued interest receivables of $543,334, restricted stock of$1,365,750 and other assets of $839,402. Liabilities at June 30, 2010totaled $128,414,065 consisting principally of $113,937,646 in deposits,$11,400,000 in Federal Home Loan Bank advances, and $2,839,497 in securedborrowings. Liabilities increased $27,784,832 from 

 

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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 June 30, 2010, shareholders’ equity was$28,670,767.  Shareholders’ equity atDecember 31, 2009 was $28,633,242.

 

*Investments*

 

AtJune 30, 2010, the carrying value of our securities and restricted stockamounted to $64,582,448. This included $11,213,066 in mortgage backedsecurities, $22,167,617 in corporate bonds, and $19,058,014 in governmentagencies, $10,638,051 in municipals and $1,505,700 in restricted equity securities.The restricted equity securities are comprised of stock in the Federal ReserveBank of Atlanta, the Federal Home Loan Bank of Atlanta, and the IndependentBankers Bank of Florida. The increase in securities and restricted stock was$15,366,614 from December 31, 2009 to June 30, 2010. As ofDecember 31, 2009, the carrying value of our securities and restrictedstock amounted to $49,215,834.  Ouravailable for sale portfolio is continuously managed to provide revenue andadequate liquidity, and to minimize interest rate risk.  These portfolio management activitiesresulted in restructuring and significantly shortening the contractualmaturities of the portfolio during the second quarter of 2010.

 

*Loans*

 

Sinceloans typically provide higher interest yields than other types of interestearning assets, we intend to invest a substantial percentage of our earningassets in our loan portfolio. At June 30, 2010, our loan portfolioconsisted of $17,451,182 of construction and land development loans, $54,661,156in other real estate loans, $1,749,334 in consumer loans, $7,619,154 incommercial and industrial loans, and $166,350 in other loans.  The Bank had $5,897,235 in four nonaccrualloans at June 30, 2010. Additionally, the Bank has had net charge-offs of$99,929 during the three and six months ended June 30, 2010.

 

Totalloans less allowance for loan losses increased during the six months ended June 30,2010 by $12,943,610 or 19.4%, to $79,552,923 at June 30, 2010 from$66,609,313 at December 31, 2009.  We had no loans more than 90 dayspast due that were still accruing interest and we had no troubled debtrestructurings at June 30, 2010. Total non-performing loans at June 30,2010 amounted to $6,690,032 of which $792,797 are loans purchased with intentto resell and are characterized as loans held for sale on our balancesheet.  Included in non-performing loans at June 30, 2010 are$5,897,235 of impaired loans, which are comprised of four loans concentrated intwo borrowing relationships.  Total non-performing loans at December 31,2009 amounted to $6,981,410 of which $1,084,175 were loans purchased withintent to resell.

 

Thefollowing table summarizes average loan balances for the three and six monthsended June 30, 2010 and 2009 determined using the daily average balance,changes in the allowance for loan losses and the ratio of net charge-offs toperiod average loans.

 
| ** **                                                                     | ** ** | **Three Months  Ended********June 30, 2010** | ** ** | **Three Months  Ended********June 30, 2009** | ** ** | **Six Months  Ended********June 30, 2010** | ** ** | **Six Months  Ended********June 30, 2009** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
|                                                                           |       |                                                   |       |                                                   |       |                                                 |       |                                                 |       |
| Average amount of loans outstanding                                            |       | $                                                      | 78,450,992 |                                                   | $          | 45,086,582                                           |       | $                                                    | 75,178,406 |   | $ | 40,472,265 |   |
| Balance of allowance for loan losses at beginning  of period                   |       | 1,642,878                                              |       | 505,155                                                |       | 1,445,522                                            |       | 401,890                                              |       |
| Loans recovered                                                                |       | —                                                 |       | —                                                 |       | —                                               |       | —                                               |       |
| Consumer Loan charged-off                                                      |       | (99,929                                                | )          | —                                                 |       | (99,929                                              | )          | —                                               |       |
| Additions to the allowance during the period                                   |       | 540,654                                                |       | 600,185                                                |       | 738,010                                              |       | 703,450                                              |       |
| Balance of allowance for loan losses at the end of  the period                 |       | 2,083,603                                              |       | 1,105,340                                              |       | 2,083,603                                            |       | $                                                    | 1,105,340  |   |
|                                                                           |       |                                                   |       |                                                   |       |                                                 |       |                                                 |       |
| Ratio of net loans charged off during the period  to average loans outstanding |       | 0.13                                                   | %          | 0.00                                                   | %          | 0.13                                                 | %          | 0.00                                                 | %          |
|                                                                                |            |                                                        |            |                                                        |            |                                                      |            |                                                      |            |  |  |  |  |

 

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*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 $2,083,603 as of June 30, 2010, an increaseof $638,081 from December 31, 2009 when the allowance for loan losses was$1,445,522.  Our allowance for loan loss amounted to 2.55% of our loanportfolio at June 30, 2010 and 2.08% of the loan portfolio atDecember 31, 2009.  Our allowance for loan loss as a percentage ofthe total portfolio has risen due to increased reserve levels across variousloan types in our portfolio.  As a result of our analysis of credit andlending conditions during the first half of 2010, we increased reserve levelsacross several categories of our loan portfolio.  The allowance for loanlosses represents an amount which we believe will be adequate to absorbprobable losses on existing loans that may become uncollectible. Our judgmentas to the adequacy of the allowance for loan losses is based on a number ofassumptions regarding current portfolio and economic conditions, which webelieve to be reasonable, but which may or may not prove to be accurate. Overtime, we will periodically determine the amount of the allowance based on ourconsideration of several factors, including an ongoing review of the quality,mix and size of our overall loan portfolio, our historical loan lossexperience, evaluation of economic conditions and other qualitative factors,specific problem loans and commitments that may affect the borrower’s abilityto pay. Following is a category detail of our allowance percentage and reservebalance by loan type at June 30, 2010 and December 31, 2009.

 

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

 
| ** **                                | ** ** | **June 30, 2010** | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **Calculated**              | ** ** | **Reserve**                 | ** ** | **Calculated**                  | ** ** | **Reserve**                     | ** ** |
| **Loan Group Description**      | ** ** | **Reserves**                | ** ** | **%**                       | ** ** | **Reserves**                    | ** ** | **%**                           | ** ** |
| 1-4 Family Construction                   |       | 21,934                      |       | 3.22                        | %          | 4,815                           |       | 1.45                            | %          |
| Other Const., Land & Development |       | 368,155                     |       | 2.88                        | %          | 188,424                         |       | 1.80                            | %          |
| HELOCs                                    |       | 12,826                      |       | 0.66                        | %          | 16,499                          |       | 1.00                            | %          |
| 1-4 Fam  Non-rev.+Multi-Fam Res.          |       | 35,915                      |       | 0.79                        | %          | 55,376                          |       | 1.00                            | %          |
| Owner Occupied Non Family Non Residential |       | 96,373                      |       | 1.03                        | %          | 87,342                          |       | 1.20                            | %          |
| Other Non Family/Non Residential          |       | 372,106                     |       | 1.34                        | %          | 305,856                         |       | 1.30                            | %          |
| Commercial and Industrial                 |       | 62,343                      |       | 1.28                        | %          | 61,947                          |       | 1.25                            | %          |
| Consumer                                  |       | 29,720                      |       | 1.66                        | %          | 21,556                          |       | 1.20                            | %          |
| Other                                     |       | 1,408                       |       | 0.78                        | %          | 1,769                           |       | 1.25                            | %          |
| Convenience Store Loans                   |       | 305,002                     |       | 5.49                        | %          | 465,979                         |       | 8.40                            | %          |
| SBA Loans                                 |       | 72,821                      |       | 5.00                        | %          | —                          |       | —                          |       |
| Classified Credits                        |       | 705,000                     |       | 35.37                       | %          | 235,959                         |       | 9.76                            | %          |
| Total Allowance for Loan Loss             |       | $                           | 2,083,603  |                        | 2.55       | %                               | 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 losses willnot 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 June 30, 2010, we had $113,937,646 indeposits which consisted primarily of $5,044,722 in non-interest bearing demanddeposit accounts, $67,827,386 in time deposits, and $41,065,538 of otherinterest bearing accounts. Deposits increased $37,893,972 fromDecember 31, 2009 when deposits were 

 

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$76,043,674consisting primarily of $3,489,983 in non-interest bearing demand depositaccounts, $45,134,483 in time deposits, and $27,419,208 of other interestbearing accounts.

 

*SecuredBorrowings*

 

Securedborrowings are derived from the transfer of financial assets, specifically SBAloans sold to third parties.  Theseliabilities present short-term credit risk as they are related to correspondingloans receivable pending final sales treatment. At June 30, 2010 the outstanding balances of loans related to thesesecured borrowings were $2,939,903.

 

**Liquidity**

 

Liquidityrepresents the ability of a company to convert assets into cash or cash equivalentswithout significant loss, and the ability to raise additional funds byincreasing liabilities. For an operating bank, liquidity represents the abilityto 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 June 30, 2010, ourprimary source of liquidity included our securities portfolio, lines of creditavailable with correspondent banks totaling $20,600,000, 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 June 30, 2010, we hadissued commitments to extend credit of approximately $12,759,079 throughvarious types of lending arrangements. Commitments to extend credit were$10,869,171 at December 31, 2009. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, ifdeemed necessary by us upon extension of credit, is based on our creditevaluation of the borrower. Collateral varies but may include accountsreceivable, inventory, property, plant and equipment, and commercial andresidential real estate. We manage the credit risk on these commitments bysubjecting them to normal underwriting and risk management processes.

 

**Capital Resources**

 

Totalshareholders’ equity increased from $28.6 million at December 31, 2009 to$28.7 million at June 30, 2010. This increase was the result of stock compensation of approximately$121,000 increasing surplus and an increase in unrealized gains during theperiod of $31,000, offset by net loss of $115,000.

 

TheCompany and the Bank are subject to various regulatory capital requirementsadministered by the federal banking agencies. Failure to meet minimum capitalrequirements can initiate certain mandatory and possibly additionaldiscretionary actions by regulators that, if undertaken, could have a directmaterial effect on the Bank’s financial statements. Under capital adequacyguidelines and the regulatory framework for prompt corrective action, the Bankmust meet specific capital guidelines that involve quantitative 

 

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measuresof the Bank’s assets, liabilities, and certain off-balance-sheet items ascalculated under regulatory accounting practices. The Bank’s capital amountsand classifications are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors. Regardless, the Bank is “wellcapitalized” under these minimum capital requirements as set per bankregulatory agencies.

 

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

 

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

 

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

 
| ** **                | ** ** | **Bank** | ** ** |
|---------------------------|------------|----------|------------|
| Total risk-based capital  |       | 20.56    | %          |
| Tier 1 risk-based capital |       | 19.30    | %          |
| Leverage capital          |       | 15.69    | %          |

 

Webelieve that our capital is sufficient to fund the activities of the Bank andthe rate of asset growth will not negatively impact the capital base. As of June 30,2010, there were no significant firm commitments outstanding for capitalexpenditures.

 

**Critical Accounting Policies**

 

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

 

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

 

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

 

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

 

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

 

**Item 4. Controls and Procedures**

 

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

 

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

 

**Part II — Other Information**

 

**Item 6.  Exhibits**

 
| **Exhibit No.** | ** ** | **Description of Exhibits**                                                                                                                                                                                                |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | Articles  of Incorporation (incorporated by reference to the Registration Statement on  Form SB-2, filed with the SEC on June 18, 2007).                                                                         |
|                 |       |                                                                                                                                                                                                                       |
| 3.2                  |       | Articles  of Amendment to Articles of Incorporation (incorporated by reference to the  Post-Effective Amendment No. 1 to the Registration Statement on  Form SB-2, filed with the SEC on February 1, 2008). |
|                 |       |                                                                                                                                                                                                                       |
| 3.3                  |       | Bylaws  (incorporated by reference to the Registration Statement on Form SB-2,  filed with the SEC on June 18, 2007).                                                                                            |
|                 |       |                                                                                                                                                                                                                       |
| 10.1                 |       | Employment  Agreement by and between the Company, the Bank, and Pin Pin Chau dated  July 2, 2010 (incorporated by reference to Form 8-K, filed with the  SEC on July 9, 2010).                              |
|                 |       |                                                                                                                                                                                                                       |
| 10.2                 |       | Employment  Agreement by and between the Company, the Bank, and Jorge L. Forment dated  July 8, 2010 (incorporated by reference to Form 8-K, filed with the  SEC on July 9, 2010).                          |
|                 |       |                                                                                                                                                                                                                       |
| 31.1                 |       | Rule 13a-14(a)/15d  -14(a) Certification of the Chief Executive Officer.                                                                                                                                         |
|                 |       |                                                                                                                                                                                                                       |
| 31.2                 |       | Rule 13a-14(a)/15d  -14(a) Certification of the Chief Financial Officer.                                                                                                                                         |
|                 |       |                                                                                                                                                                                                                       |
| 32.1                 |       | Section 1350  Certifications.                                                                                                                                                                                         |

 

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**SIGNATURES**

 

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

 
|   |                                   | **Touchmark Bancshares, Inc.** |
|--------|----------------------------------------|-------------------------------------|
|   |                                   |                                |   |
|   | Date:  August 13,  2010 | By:                                 | /s/  Pin Pin Chau |
|   |                                   |                                | Pin  Pin Chau |
|   |                                   |                                | President  and Chief Executive Officer |
|   |                                   |                                | (Principal  Executive Officer) |
|   |                                   |                                |   |
|   | Date:  August 13,  2010 | By:                                 | /s/  Jorge L. Forment |
|   |                                   |                                | Jorge  L. Forment |
|   |                                   |                                | Chief  Financial Officer |
|   |                                   |                                | (Principal  Financial Officer and Principal  Accounting Officer) |

 

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