** **

** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(MARKONE)**

 

| **x** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|-------|----------------------------------------------------------------------------------------------------|

** **

**For the Quarterly Period ended March 31, 2009**

 

**OR**

 

| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For the Transition Period from                  to                  **

 

**Commission File No. 000-51907**

 

**INDEPENDENCEBANCSHARES, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **South  Carolina**           | ** ** | **20-1734180**       |
|-------------------------------|------------|----------------------|
| (State or other  jurisdiction |       | (I.R.S. Employer     |
| of  incorporation)            |       | Identification  No.) |

 

**500 East Washington Street**

**Greenville, South Carolina 296****01**

(Address of principal executive offices)

 

**(864) 672-1776**

(Registrant’s telephone number, including area code)

 

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Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  No o

 

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 (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). o Yes  o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act).

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).Yes o  No x

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: 2,085,010 shares of common stock,$.01 par value per share, were issued and outstanding as of May 1, 2009.

 

 

 

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**Independence Bancshares, Inc.**

 

**Part I - Financial Information**

 

## **Item 1. Financial Statements**

## ** **

**Consolidated Balance Sheets**

** **
| ** **                                                                                                     | ** ** | **March 31, 2009** | ** **  | **December 31, 2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|---------------------------------|------------|
| ** **                                                                                                     | ** ** | **(unaudited)**              | ** **  | **(audited)**                   | ** ** |
| **Assets**                                                                                                     | ** ** | ** **                   | ** **  | ** **                      | ** ** |
| Cash and due from banks                                                                                        |       | $                            | 11,717,046  |                            | $          | 1,724,886 |   |
| Federal funds sold                                                                                             |       | —                       |        | 2,393,000                       |       |
| Investment securities available for sale                                                                       |       | 4,336,653                    |        | 4,484,486                       |       |
| Non-marketable equity securities                                                                               |       | 1,586,900                    |        | 1,599,804                       |       |
| Loans, net of allowance for loan losses of $1,701,977 and $1,611,977,  respectively                            |       | 117,216,589                  |        | 121,835,777                     |       |
| Accrued interest receivable                                                                                    |       | 395,120                      |        | 433,854                         |       |
| Property and equipment, net                                                                                    |       | 3,765,184                    |        | 3,348,042                       |       |
| Other assets                                                                                                   |       | 1,328,983                    |        | 1,070,122                       |       |
|                                                                                                           |       |                         |        |                            |       |
| Total assets                                                                                                   |       | $                            | 140,346,475 |                            | $          | 136,889,971 |   |
|                                                                                                           |       |                         |        |                            |       |
| **Liabilities**                                                                                                |       |                         |        |                            |       |
| Deposits:                                                                                                      |       |                         |        |                            |       |
| Noninterest bearing                                                                                            |       | $                            | 4,194,341   |                            | $          | 4,708,170 |   |
| Interest bearing                                                                                               |       | 98,321,469                   |        | 94,149,548                      |       |
| Total deposits                                                                                                 |       | 102,515,810                  |        | 98,857,718                      |       |
|                                                                                                           |       |                         |        |                            |       |
| Borrowings                                                                                                     |       | 19,181,611                   |        | 19,064,093                      |       |
| Accrued interest payable                                                                                       |       | 126,206                      |        | 131,201                         |       |
| Accounts payable and accrued expenses                                                                          |       | 133,415                      |        | 128,227                         |       |
|                                                                                                           |       |                         |        |                            |       |
| Total liabilities                                                                                              |       | 121,957,042                  |        | 118,181,239                     |       |
|                                                                                                           |       |                         |        |                            |       |
| Commitments and contingencies                                                                                  |       |                         |        |                            |       |
|                                                                                                           |       |                         |        |                            |       |
| **Shareholders’ equity**                                                                                  |       |                         |        |                            |       |
| Preferred stock, par value $.01 per share; 10,000,000 shares authorized;  no shares issued                     |       | —                       |        | —                          |       |
| Common stock, par value $.01 per share; 10,000,000 shares authorized;  2,085,010 shares issued and outstanding |       | 20,850                       |        | 20,850                          |       |
| Additional paid-in capital                                                                                     |       | 20,883,735                   |        | 20,840,248                      |       |
| Accumulated other comprehensive income                                                                         |       | 46,574                       |        | 40,715                          |       |
| Accumulated deficit                                                                                            |       | (2,561,726                   | )           | (2,193,081                      | )          |
|                                                                                                           |       |                         |        |                            |       |
| Total shareholders’ equity                                                                                |       | 18,389,433                   |        | 18,708,732                      |       |
|                                                                                                           |       |                         |        |                            |       |
| Total liabilities and shareholders’ equity                                                                |       | $                            | 140,346,475 |                            | $          | 136,889,971 |   |

 

**The accompanying notes are an integral part of these consolidatedfinancial statements.**

 

2

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**Independence Bancshares, Inc.**

 

**Consolidated Statements ofOperations**

**(unaudited)**

** **
| ** **                                                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                               | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| **Interest  income**                                                     |       |                                             |       |   |   |
| Loans                                                                    |       | $                                                | 1,397,971  |   | $ | 1,800,408 |   |
| Investment  securities                                                   |       | 47,166                                           |       | 57,884 |   |
| Federal funds  sold and other                                            |       | 7,565                                            |       | 48,988 |   |
| Total interest  income                                                   |       | 1,452,702                                        |       | 1,907,280 |   |
|                                                                     |       |                                             |       |   |   |
| **Interest  expense**                                                    |       |                                             |       |   |   |
| Deposits                                                                 |       | 749,972                                          |       | 948,543 |   |
| Borrowings                                                               |       | 148,309                                          |       | 109,710 |   |
| Total interest  expense                                                  |       | 898,281                                          |       | 1,058,253 |   |
|                                                                     |       |                                             |       |   |   |
| Net interest  income                                                     |       | 554,421                                          |       | 849,027 |   |
|                                                                     |       |                                             |       |   |   |
| Provision for  loan losses                                               |       | 90,000                                           |       | 164,000 |   |
|                                                                     |       |                                             |       |   |   |
| Net interest  income after provision for loan losses                     |       | 464,421                                          |       | 685,027 |   |
|                                                                     |       |                                             |       |   |   |
| **Noninterest  income**                                                  |       | 8,724                                            |       | 16,745 |   |
|                                                                     |       |                                             |       |   |   |
| **Noninterest  expenses**                                                |       |                                             |       |   |   |
| Compensation and  benefits                                               |       | 535,681                                          |       | 515,908 |   |
| Professional  fees                                                       |       | 65,068                                           |       | 54,130 |   |
| Marketing                                                                |       | 33,370                                           |       | 56,548 |   |
| Insurance                                                                |       | 88,918                                           |       | 32,280 |   |
| Occupancy and  equipment                                                 |       | 128,186                                          |       | 151,899 |   |
| Data processing  and related costs                                       |       | 87,233                                           |       | 78,270 |   |
| Telephone and  supplies                                                  |       | 22,254                                           |       | 18,408 |   |
| Other                                                                    |       | 32,930                                           |       | 39,195 |   |
| Total  noninterest expenses                                              |       | 993,640                                          |       | 946,638 |   |
|                                                                     |       |                                             |       |   |   |
| Loss before  income tax benefit                                          |       | (520,495                                         | )          | (244,866 | ) |
|                                                                     |       |                                             |       |   |   |
| **Income  tax benefit**                                                  |       | 151,850                                          |       | 82,900 |   |
|                                                                     |       |                                             |       |   |   |
| Net loss                                                                 |       | $                                                | (368,645   | ) | $ | (161,966 | ) |
|                                                                     |       |                                             |       |   |   |
| **Loss  per common share – basic and diluted**                      |       | $                                                | (0.18      | ) | $ | (0.08 | ) |
|                                                                     |       |                                             |       |   |   |
| **Weighted  average common shares outstanding – basic and diluted** |       | 2,085,010                                        |       | 2,085,010 |   |

 

**The accompanying notes are an integral part of these consolidatedfinancial statements.**

 

3

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**Independence Bancshares, Inc.**

** **

**Consolidated Statements of Changes**

**In Shareholders’ Equity and Comprehensive Income(Loss)**

# **(unaudited)**

 
| ** **                                                               | ** ** | ** **            | ** ** | ** **     | ** ** | ** **               | ** ** | **Accumulated** | ** ** | ** **  | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|--------------------------|------------|-----------------|------------|-------------|------------|------------|------------|
| ** **                                                               | ** ** | ** **            | ** ** | ** **     | ** ** | ** **               | ** ** | **other**       | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                                               | ** ** | **Common stock** | ** ** | **Additional** | ** ** | **comprehensive**        | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
| ** **                                                               | ** ** | **Shares**            | ** ** | **Amount**     | ** ** | **paid-in capital** | ** ** | **income**      | ** ** | **deficit** | ** ** | **Total**  | ** ** |
| ** **                                                               | ** ** | ** **            | ** ** | ** **     | ** ** | ** **               | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** |
| **December 31,  2007**                                              |       | 2,085,010             |       | $              | 20,850     |                     | $          | 20,671,588      |       | $           | 5,570      |       | $          | (1,708,575 | ) | $ | 18,989,433 |   |
| Compensation  expense related to stock options granted                   |       | —                |       | —         |       | 40,650                   |       | —          |       | —      |       | 40,650     |       |
| Net loss                                                                 |       | —                |       | —         |       | —                   |       | —          |       | (161,966    | )          | (161,966   | )          |
| Unrealized gain  on investment securities available for sale, net of tax |       | —                |       | —         |       | —                   |       | 43,578          |       | —      |       | 43,578     |       |
| Total  comprehensive loss                                                |       | —                |       | —         |       | —                   |       | —          |       | —      |       | (118,388   | )          |
| **March 31,  2008**                                                 |       | 2,085,010             |       | $              | 20,850     |                     | $          | 20,712,238      |       | $           | 49,148     |       | $          | (1,870,541 | ) | $ | 18,911,695 |   |
|                                                                     |       |                  |       |           |       |                     |       |            |       |        |       |       |       |
| **December 31,  2008**                                              |       | 2,085,010             |       | $              | 20,850     |                     | $          | 20,840,248      |       | $           | 40,715     |       | $          | (2,193,081 | ) | $ | 18,708,732 |   |
| Compensation  expense related to stock options granted                   |       | —                |       | —         |       | 43,487                   |       | —          |       | —      |       | 43,487     |       |
| Net loss                                                                 |       | —                |       | —         |       | —                   |       | —          |       | (368,645    | )          | (368,645   | )          |
| Unrealized gain  on investment securities available for sale, net of tax |       | —                |       | —         |       | —                   |       | 5,859           |       | —      |       | 5,859      |       |
| Total  comprehensive loss                                                |       | —                |       | —         |       | —                   |       | —          |       | —      |       | (362,786   | )          |
| **March 31,  2009**                                                 |       | 2,085,010             |       | $              | 20,850     |                     | $          | 20,883,735      |       | $           | 46,574     |       | $          | (2,561,726 | ) | $ | 18,389,433 |   |

** **

**The accompanying notes are an integral part of these consolidatedfinancial statements.**

 

4

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** **

**Independence Bancshares, Inc.**

** **

**Consolidated Statements of Cash Flows**

**(unaudited)**

 
| ** **                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                              | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| **Operating  activities**                                               |       |                                             |       |   |   |
| Net loss                                                                |       | $                                                | (368,645   | ) | $ | (161,966 | ) |
| Adjustments to  reconcile net loss to cash used in operating activities |       |                                             |       |   |   |
| Provision for  loan losses                                              |       | 90,000                                           |       | 164,000 |   |
| Depreciation                                                            |       | 36,180                                           |       | 63,351 |   |
| Amortization of  investment securities discounts, net                   |       | 538                                              |       | 734 |   |
| Compensation  expense related to stock options granted                  |       | 43,487                                           |       | 40,650 |   |
| Other-than-temporary  impairment on non-marketable equity securities    |       | 60,404                                           |       | — |   |
| Increase in  other assets, net                                          |       | (223,145                                         | )          | (116,816 | ) |
| Increase  (decrease) in other liabilities, net                          |       | 193                                              |       | (94,030 | ) |
| Net cash used in  operating activities                                  |       | (360,988                                         | )          | (104,077 | ) |
|                                                                    |       |                                             |       |   |   |
| **Investing  activities**                                               |       |                                             |       |   |   |
| Repayments  (originations) of loans, net                                |       | 4,529,188                                        |       | (12,618,492 | ) |
| Purchase of  investment securities available for sale                   |       | (1,000,000                                       | )          | — |   |
| Maturity of  investment securities available for sale                   |       | 1,000,000                                        |       | — |   |
| Repayments of  investment securities available for sale                 |       | 156,172                                          |       | 137,531 |   |
| Purchase of  non-marketable equity securities, net                      |       | (47,500                                          | )          | (62,600 | ) |
| Purchase of  property and equipment, net                                |       | (453,322                                         | )          | (43,155 | ) |
| Net cash  provided by (used in) investing activities                    |       | 4,184,538                                        |       | (12,586,716 | ) |
|                                                                    |       |                                             |       |   |   |
| **Financing  activities**                                               |       |                                             |       |   |   |
| Increase in  deposits, net                                              |       | 3,658,092                                        |       | 8,338,480 |   |
| Increase in  borrowings                                                 |       | 117,518                                          |       | 4,172,640 |   |
| Net cash  provided by financing activities                              |       | 3,775,610                                        |       | 12,511,120 |   |
|                                                                    |       |                                             |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**               |       | 7,599,160                                        |       | (179,673 | ) |
|                                                                    |       |                                             |       |   |   |
| **Cash  and cash equivalents at beginning of the period**               |       | 4,117,886                                        |       | 2,617,663 |   |
|                                                                    |       |                                             |       |   |   |
| **Cash  and cash equivalents at end of the period**                     |       | $                                                | 11,717,046 |   | $ | 2,437,990 |   |
|                                                                    |       |                                             |       |   |   |
| **Supplemental  information:**                                          |       |                                             |       |   |   |
| **Cash  paid for**                                                      |       |                                             |       |   |   |
| Interest                                                                |       | $                                                | 903,276    |   | $ | 1,046,456 |   |
| Income taxes                                                            |       | $                                                | —     |   | $ | 14,499 |   |
| **Schedule  of non-cash transactions**                                  |       |                                             |       |   |   |
| Change in unrealized gain on securities, net of tax                     |       | $                                                | 5,859      |   | $ | 43,578 |   |

** **

**The accompanying notes are an integral part of these consolidatedfinancial statements.**

 

5

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**Notes toUnaudited Consolidated Financial Statements**

 

###### **NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION**

###### ** **

***IndependenceBancshares, Inc.*** (the “Company”) is a South Carolina corporation organized to operateas a bank holding company pursuant to the Federal Bank Holding Company Act of1956 and the South Carolina Bank Holding Company Act, and to own and controlall of the capital stock of Independence National Bank (the “Bank”).  The Bank is a national association organizedunder the laws of the United States to conduct general banking business inGreenville, South Carolina.

 

**Basis of Presentation**

 

The accompanying unaudited consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financialinformation and with the instructions to Form 10-Q.  Accordingly, they do not include allinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements.  However, in the opinion of management, alladjustments (consisting of normal recurring adjustments) considered necessaryfor a fair presentation have been included. Operating results for the three month period ended March 31, 2009 arenot necessarily indicative of the results that may be expected for the yearending December 31, 2009.  For furtherinformation, refer to the financial statements and footnotes thereto includedin our Annual Report on Form 10-K for 2008 as filed with the Securities andExchange Commission.

** **

**NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

A summary of thesepolicies is included in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission for the year ended December 31,2008.  For further information, refer to the consolidated financialstatements and footnotes thereto included in our Annual Report on Form 10-Kfor 2008 as filed with the Securities and Exchange Commission.  Accountingstandards that have been issued or proposed by the Financial AccountingStandards Board that do not require adoption until a future date are notexpected to have a material impact on the consolidated financial statementsupon adoption.

 

**Cash and Cash Equivalents**- For purposes ofreporting cash flows, cashand cash equivalents include cash, amounts due from banks and federal fundssold.  Generally, federal funds are soldfor one-day periods.  In February 2009the Bank discontinued the use of the federal funds sold program offered throughits primary correspondent bank due to the historically low rate earned onfederal funds sold.  All cash balancesmaintained at the Bank’s primary correspondent bank earn 0.25% and are fullyinsured deposits under the Federal Deposit Insurance Corporation (the “FDIC”)Temporary Liquidity Guarantee Program (the “TLGP”).

 

**Loss per Share** - Basic loss per share represents net loss divided by the weighted-average number of common shares outstanding during the period.  Dilutive loss per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued.  Potential common shares that may be issued by the Company relate to outstanding stock options and warrants, and are determined using the treasury stock method.  For the three month periods ended March 31, 2009 and 2008, as a result of the Company’s net loss, all of the potential common shares were considered anti-dilutive.

 

6

 

**Fair Value Measurements -**Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), which provides a framework for measuring and disclosing fair value under generally accepted accounting principles.  SFAS 157 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans).

 

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value:  Level 1 - quoted prices in active markets for identical assets or liabilities; Level 2 - observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3 - unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The Company is predominantly an asset based lender with real estate serving as collateral on approximately 82% of loans.  Loans which are deemed to be impaired are valued on a nonrecurring basis at the lower of cost or market value of the underlying real estate collateral.  Such market values are generally obtained using independent appraisals, which the Company considers to be level 2 inputs (other observable inputs).  The aggregate carrying amount, net of specific reserves, of impaired loans at March 31, 2009 was $3.7 million.

 

Available-for-sale investment securities ($4,336,653 at March 31, 2009) are the only assets whose fair values are measured on a recurring basis using Level 2 inputs (other observable inputs).

 

The Company has no liabilities carried at fair value or measured at fair value on a nonrecurring basis.  The Company also has no assets or liabilities whose fair values are measured using Level 1 or Level 3 inputs.

 

**NOTE 3 – INVESTMENT SECURITIES**

 

Investment securities classified as “Available forSale” are carried at fair value with unrealized gains and losses excluded fromearnings and reported as a separate component of shareholders’ equity (net ofestimated tax effects).  Realized gainsor losses on the sale of investments are based on the specific identificationmethod.

 

At March 31, 2009, the investment portfolioincluded an unrealized gain of approximately $71,000. At March 31, 2009the investment portfolio included no securities in a loss position.

 

**NOTE 4 – OTHER-THAN-TEMPORARYIMPAIRMENT**

 

On May 1, 2009,Silverton Bank, N.A. the Bank’s primary correspondent bank, was closed by theOffice of the Comptroller of the Currency and the FDIC was named Receiver.  The FDIC created a bridge bank to take overthe operations of Silverton Bank, N.A.  The newly created bank isSilverton Bridge Bank, N.A.  The creationof the bridge bank allows its client banks to transition their correspondentbanking needs to other providers with the least amount of disruptions.  Silverton Bridge Bank N.A. will continue tooperate business as usual through July 29, 2009.  As a result of this announcement, it ishighly unlikely that we will recover any portion of our investment in the stockof Silverton Bank, N.A.’s holding company, Silverton Financial Services, Inc.  Accordingly, the Bank recorded another-than-temporary impairment charge of $60,404 which is included as anoffset to noninterest income in the consolidated statements of operations.  The Bank’s original cost basis in the stockwas $154,404, and the Bank recorded an other-than-temporary impairment chargeof $94,000 as of December 31, 2008. These two impairment charges have brought the carrying value of ourinvestment to zero as of March 31, 2009.

 

7

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

 

*The following discussion reviewsour results of operations and assesses our financial condition.  You should read the following discussion andanalysis in conjunction with the accompanying consolidated financialstatements.  The commentary should beread in conjunction with the discussion of forward-looking statements, thefinancial statements, and the related notes and the other statisticalinformation included in this report.*

 

**DISCUSSION OF FORWARD-LOOKING STATEMENTS**

 

Thisreport contains statements which constitute forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. These statements are based on many assumptions and estimates and are notguarantees of future performance.  Ouractual results may differ materially from those anticipated in anyforward-looking statements, as they will depend on many factors about which weare unsure, including many factors which are beyond our control.  The words “may,” “would,” “could,” “will,” “expect,”“anticipate,” “believe,” “intend,” “plan,” and “estimate,” as well as similarexpressions, are meant to identify such forward-looking statements.  Potential risks and uncertainties that couldcause our actual results to differ from those anticipated in ourforward-looking statements include, but are not limited, to the following:

 

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

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

·                  changes in political conditions or the legislative orregulatory environment;

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

·                  changes occurring in business conditions andinflation;

·                  changes in technology;

·                  changes in monetary and tax policies;

·                  adequacy of the level of our allowance for loanlosses;

·                  the rate of delinquencies and amounts of charge-offs;

·                  the rates of loan growth;

·                  adverse changes in asset quality and resulting creditrisk-related losses and expenses;

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

·                  changes in the securities markets; and

·                  other risks and uncertainties detailed from time totime in our filings with the Securities and Exchange Commission.

 

These risks are exacerbated by the recent developmentsin national and international financial markets, and we are unable to predictwhat effect these uncertain market conditions will have on our company.  During 2008, the capital and credit marketsexperienced extended volatility and disruption. In the last 180 days, thevolatility and disruption have reached unprecedented levels.  There can be no assurance that theseunprecedented recent developments will not materially and adversely affect ourbusiness, financial condition and results of operations.

 

All forward-looking statements in this report arebased on information available to us as of the date of this report.  We undertake no obligation to publicly updateor otherwise revise any forward-looking statements, whether as a result of newinformation, future events, or otherwise.

 

8

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**Critical Accounting Policies**

 

We have adopted various accounting policies thatgovern the application of accounting principles generally accepted in theUnited States of America and with general practices within the banking industryin the preparation of our financial statements. Our significant accounting policies are described in the footnotes toour audited consolidated financial statements as of December 31, 2008, asfiled on our Annual Report on Form 10-K.

 

Certain accountingpolicies involve significant judgments and assumptions by us that have amaterial impact on the carrying value of certain assets and liabilities.  We consider these accounting policies to becritical accounting policies.  Thejudgment and assumptions we use are based on historical experience and otherfactors, which we believe to be reasonable under the circumstances.  Because of the nature of the judgment andassumptions we make, actual results could differ from these judgments andestimates that could have a material impact on the carrying values of our assetsand liabilities and our results of operations.

 

**Allowance for Loan Losses**

 

We believe the allowancefor loan losses is the critical accounting policy that requires the mostsignificant judgment and estimates used in preparation of our consolidatedfinancial statements.  Some of the morecritical judgments supporting the amount of our allowance for loan lossesinclude judgments about the credit worthiness of borrowers, the estimated valueof the underlying collateral, the assumptions about cash flow, determination ofloss factors for estimating credit losses, the impact of current events andconditions, and other factors impacting the level of probable inherentlosses.  Under different conditions orusing different assumptions, the actual amount of credit losses incurred by usmay be different from management’s estimates provided in our consolidatedfinancial statements.  Refer to theportion of this discussion that addresses our allowance for loan losses for amore complete discussion of our processes and methodology for determining ourallowance for loan losses.

 

**Income Taxes**

 

We use assumptions andestimates in determining income taxes payable or refundable for the currentyear, deferred income tax liabilities and assets for events recognizeddifferently in our financial statements and income tax returns, and income taxbenefit or expense.  Determining theseamounts requires analysis of certain transactions and interpretation of taxlaws and regulations.  Managementexercises judgment in evaluating the amount and timing of recognition of resultingtax liabilities and assets.  Thesejudgments and estimates are reevaluated on a continual basis as regulatory andbusiness factors change.  Valuationallowances are established to reduce deferred tax assets if it is determined tobe “more likely than not” that all or some portion of the potential deferredtax asset will not be realized.  Noassurance can be given that either the tax returns submitted by us or theincome tax reported on the financial statements will not be adjusted by eitheradverse rulings by the United States Tax Court, changes in the tax code, orassessments made by the Internal Revenue Service.  We are subject to potential adverseadjustments, including, but not limited to, an increase in the statutoryfederal or state income tax rates, the permanent non-deductibility of amountscurrently considered deductible either now or in future periods, and thedependency on the generation of future taxable income, including capital gains,in order to ultimately realize deferred income tax assets.

 

**Overview**

 

Thefollowing discussion describes our results of operations for the three monthperiods ended March 31, 2009 and 2008 and also analyzes our financialcondition as of March 31, 2009.

 

Likemost community banks, we derive the majority of our income from interest wereceive on our loans and investments. Our primary source of funds for making these loans and investments isour deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount ofnet interest income, or the difference between the income on ourinterest-earning assets, such as loans and investments, and the expense on ourinterest-bearing liabilities, such as deposits and borrowings.  Another key measure is the spread between theyield we earn on these interest-earning assets and the rate we pay on ourinterest-bearing liabilities.

 

Thereare risks inherent in all loans, so we maintain an allowance for loan losses toabsorb probable losses on existing loans that may become uncollectible.  We establish and maintain this allowance bycharging a provision for loan losses against our operating earnings.  In the following section we have included adetailed discussion of this process.

 

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Inaddition to earning interest on our loans and investments, we earn incomethrough fees and other expenses we charge to our customers.  We describe the various components of thisnoninterest income, as well as our noninterest expenses, in the followingdiscussion.

 

Marketsin the United States and elsewhere have experienced extreme volatility anddisruption for more than 12 months. These circumstances have exerted significant downward pressure on pricesof equity securities and virtually all other asset classes, and have resultedin substantially increased market volatility, severely constrained credit andcapital markets, particularly for financial institutions, and an overall lossof investor confidence.  Loan portfolioperformances have deteriorated at many institutions resulting from, among otherfactors, a weak economy and a decline in the value of the collateral supportingtheir loans.  Dramatic slowdowns in thehousing industry, due in part to falling home prices and increasingforeclosures and unemployment, have created strains on financialinstitutions.  Many borrowers are nowunable to repay their loans, and the collateral securing these loans has, insome cases, declined below the loan balance.  In response to the challenges facing thefinancial services sector, several regulatory and governmental actions haverecently been announced including:

 

·                  The Emergency Economic Stabilization Act,approved by Congress and signed by President Bush on October 3, 2008,which, among other provisions, allowed the U.S. Treasury to purchase troubledassets from banks, authorized the Securities and Exchange Commission to suspendthe application of marked-to-market accounting, and temporarily raised thebasic limit of FDIC deposit insurance from $100,000 to $250,000; the legislationcontemplated a return to the $100,000 limit on December 31, 2009;

 

·                  On October 7, 2008, the FDICapproved a plan to increase the rates banks pay for deposit insurance;

 

·                  On October 14, 2008, the U.S.Treasury announced the creation of a new program, the Capital Purchase Program,that encourages and allows financial institutions to build capital through thesale of senior preferred shares to the U.S. Treasury on terms that arenon-negotiable;

 

·                  On October 14, 2008, the FDICannounced the creation of the TLGP, which seeks to strengthen confidence andencourage liquidity in the banking system. The TLGP has two primary components that are available on a voluntarybasis to financial institutions:

 

·                  Guarantee of newly-issued seniorunsecured debt; the guarantee would apply to new debt issued on or before June 30,2009 and would provide protection until June 30, 2012; issuers electing toparticipate would pay a 75 basis point fee for the guarantee;

 

·                  Unlimited deposit insurance fornon-interest bearing deposit transaction accounts; financial institutionselecting to participate will pay a 10 basis point premium in addition to theinsurance premiums paid for standard deposit insurance.

 

·                  On February 17, 2009, the AmericanRecovery and Reinvestment Act (the “Recovery Act”) was signed into law in aneffort to, among other things, create jobs and stimulate growth in the UnitedStates economy.  The Recovery Actspecifies appropriations of approximately $787 billion for a wide range ofFederal programs and will increase or extend certain benefits payable under theMedicaid, unemployment compensation, and nutrition assistance programs.  The Recovery Act also reduces individual andcorporate income tax collections and makes a variety of other changes to taxlaws.  The Recovery Act also imposescertain limitations on compensation paid by participants in the U.S. Treasury’sTroubled Asset Relief Program (“TARP”).

 

·                  On March 23, 2009, the U.S.Treasury, in conjunction with the FDIC and the Federal Reserve, announced thePublic-Private Partnership Investment Program for Legacy Assets which consistsof two separate plans, addressing two distinct asset groups:

 

·                  The Legacy Loan Program, which theprimary purpose will be to facilitate the sale of troubled mortgage loans byeligible institutions, which include FDIC-insured federal or state banks andsavings associations. Eligible assets may not be strictly limited to loans;however, what constitutes an eligible asset will be determined by participatingBanks, their primary regulators, the FDIC and the U.S. Treasury. Additionally,the Loan Program’s requirements and structure will be subject to notice andcomment rulemaking, which may take some time to complete.

 

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·                  The Securities Program, which will beadministered by the U.S. Treasury, involves the creation of public-privateinvestment funds to target investments in eligible residential mortgage-backedsecurities and commercial mortgage-backed securities issued before 2009 thatoriginally were rated AAA or the equivalent by two or more nationallyrecognized statistical rating organizations, without regard to ratingenhancements (collectively, “Legacy Securities”). Legacy Securities must bedirectly secured by actual mortgage loans, leases or other assets, and may bepurchased only from financial institutions that meet TARP eligibilityrequirements.

 

We will participate inboth components of the TLGP; however, we do not expect to issue unsecured debtbefore the termination of that component of the TLGP.  As a result of the enhancements to depositinsurance protection and the expectation that there will be demands on the FDIC’sdeposit insurance fund, our deposit insurance costs have increased and willcontinue to increase significantly throughout 2009.  We are evaluating whether to participate inthe TARP Capital Purchase Program. Regardless of our participation, governmental intervention and newregulations under these programs could materially and adversely affect ourbusiness, financial condition and results of operations.  The followingdiscussion and analysis describes our performance in this challenging economicenvironment.

 

**Resultsof Operations**

 

*Three months ended March 31,2009 and 2008*

 

We incurred a net loss of$368,645, or $0.18 per diluted share, for the quarter ended March 31, 2009compared to a net loss of $161,966, or $0.08 per diluted share, for the quarterended March 31, 2008, a difference of $206,679.  As described below, the increase in net lossis primarily due to a decrease in net interest income, discussed in greaterdetail below, an other-than-temporary impairment, an increase in noninterestexpenses due to the opening of a new branch in February 2009 and increasedFDIC insurance premiums.

 

The following table sets forth information related to ouraverage balance sheet, average yields on assets, and average costs ofliabilities.  We derived these yields bydividing annualized income or expense by the average balance of thecorresponding assets or liabilities.  Wederived average balances from the daily balances throughout the periodsindicated.  The net amount of capitalizedloan fees are amortized into interest income on loans.

 
| ** **                                       | ** ** | **For the Three Months Ended March 31,** | ** **  |
|--------------------------------------------------|------------|------------------------------------------------------------------------|-------------|
| ** **                                       | ** ** | **2009**                                                               | ** **  | **2008** | ** ** |
| ** **                                       | ** ** | **Average  Balance**                                                   | ** **  | **Income/**

**Expense** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Income/  Expense** | ** ** | **Yield/  Rate** | ** ** |
|                                             |       |                                                                   |        |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold and other                     |       | $                                                                      | 2,508,876   |   | $ | 7,565 |   | 1.22 | % | $ | 5,426,170 |   | $ | 48,988 |   | 3.63 | % |
| Investment securities (1)                        |       | 4,199,532                                                              |        | 47,166 |   | 4.55 |   | 5,091,918 |   | 57,884 |   | 4.57 |   |
| Loans (2)                                        |       | 121,565,386                                                            |        | 1,397,971 |   | 4.66 |   | 100,781,895 |   | 1,800,408 |   | 7.19 |   |
| Total interest-earning assets                    |       | $                                                                      | 128,273,794 |   | $ | 1,452,702 |   | 4.59 | % | $ | 111,299,983 |   | $ | 1,907,280 |   | 6.89 | % |
|                                             |       |                                                                   |        |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                                     |       | $                                                                      | 5,290,470   |   | $ | 8,242 |   | 0.63 | % | $ | 3,459,035 |   | $ | 17,398 |   | 2.02 | % |
| Savings & money market                  |       | 12,375,603                                                             |        | 58,984 |   | 1.93 |   | 11,430,889 |   | 94,246 |   | 3.32 |   |
| Time deposits (excluding brokered time deposits) |       | 29,568,094                                                             |        | 254,293 |   | 3.49 |   | 31,534,062 |   | 391,013 |   | 4.99 |   |
| Brokered time deposits                           |       | 49,344,168                                                             |        | 428,453 |   | 3.52 |   | 36,217,935 |   | 445,886 |   | 4.95 |   |
| Total interest-bearing deposits                  |       | 96,578,335                                                             |        | 749,972 |   | 3.15 |   | 82,641,921 |   | 948,543 |   | 4.62 |   |
| Borrowings                                       |       | 19,222,314                                                             |        | 148,309 |   | 3.13 |   | 9,187,132 |   | 109,710 |   | 4.80 |   |
| Total interest-bearing liabilities               |       | $                                                                      | 115,800,649 |   | $ | 898,281 |   | 3.15 | % | $ | 91,829,053 |   | $ | 1,058,253 |   | 4.63 | % |
|                                             |       |                                                                   |        |   |   |   |   |   |   |   |   |   |   |
| Net interest spread                              |       |                                                                   |        |   |   | 1.44 | % |   |   |   |   | 2.26 | % |
| Net interest income/ margin                      |       |                                                                   |        | $ | 554,421 |   | 1.75 | % |   |   | $ | 849,027 |   | 3.07 | % |

 

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(1)                                  The average balances for investment securities exclude theunrealized gain recorded for available for sale securities.

(2)                                  Nonaccrual loans are included in average balances for yieldcomputations.

 

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For the three monthsended March 31, 2009, we recognized $1.5 million in interest income and$898,281 in interest expense, resulting in net interest income of $554,421, adecrease of $294,606, or 35%, over the same period in 2008, despite an increasein our average earning assets during this period.  Average earning assets increased to $128.3million for the three months ended March 31, 2009 from $111.3 million forthe three months ended March 31, 2008, an increase of $17.0 million, or15%.  Average interest bearingliabilities increased to $115.8 million for the three months ended March 31,2009 from $91.8 million for the three months ended March 31, 2008, anincrease of $24.0 million, or 26%.  Netinterest margin, calculated as annualized net interest income divided byaverage earning assets, decreased from 3.07% for the quarter ended March 31,2008 to 1.75% for the quarter ended March 31, 2009, primarily due to adecrease in yield on earning assets from 6.89% to 4.59% between periods due tosignificant rate decreases initiated by the Federal Reserve Board during2008.   This decrease was slightly offsetby a lesser decrease in cost of funds from 4.63% to 3.15% between periods dueto the mix of liabilities and the timing of their repricing.

 

Provision for loan losseswas $90,000 for the quarter ended March 31, 2009 representing a decreaseof $74,000, or 45%, compared to the expense of $164,000 for the quarter ended March 31,2008.  This decrease in provision expenseis due to net repayments of loans during the current quarter compared to netloan originations in the comparable quarter in 2008 which was offset by anincrease in impaired loans between comparable quarters.  The provision for loan losses is discussedfurther below under “Provision and Allowance for Loan Losses”.

 

For the three monthsended March 31, 2009, noninterest income was $8,724 compared to $16,745for the three months ended March 31, 2008, a decrease of $8,021, or 48%,between comparable periods.  Mortgageorigination income increased approximately $47,000 between periods; however,this increase was offset by the other-than-temporary impairment onnon-marketable equity securities of $60,404 discussed in Note 4.  Noninterest income for the three months endedMarch 31, 2009 and 2008 was derived from service charges on deposits,customer service fees, rental income, and mortgage origination income.

 

During the currentquarter, we incurred noninterest expenses of $993,640, compared to noninterestexpenses of $946,638 for the quarter ended March 31, 2008, an increase of$47,002, or 5%.  This increase ofnoninterest expenses for the three month period ended March 31, 2009primarily resulted from an increase of $56,638 in insurance expense compared tothe quarter ended March 31, 2008, primarily due to increased FDIC insurancepremium assessments.  Compensation andbenefits expense increased $19,773 due to the addition of the Simpsonvillebranch in February 2009.  There werealso small increases in data processing and related costs, and telephone andsupplies due to the opening of the new branch. Marketing expenses decreased $23,178 in the current quarter compared tothe prior year comparable quarter as a result of more focused marketingefforts.

 

Income tax benefit forthe quarter ended March 31, 2009 was $151,850 compared to $82,900 for thequarter ended March 31, 2008.  Theincome tax benefit for the quarters ended March 31, 2009 and 2008 is basedon our estimated effective tax rate.  Theincrease in income tax benefit is a result of the increase in net loss betweenperiods.  We recorded an additionalvaluation allowance of $20,537 against our deferred tax assets related to theother-than-temporary impairment as this is a capital loss which can only beoffset against capital gains.

 

**Assets and Liabilities**

 

*General*

 

Total assets as of March 31,2009 were $140.3 million, representing an increase of $3.5 million, or 3%,compared to December 31, 2008.  Theincrease in assets is due to an increase in cash and cash equivalents of $7.6million which was the result of $4.5 million of net loan payoffs and anincrease in deposits of $3.7 million during the quarter.  At March 31, 2009, our total assetsconsisted principally of $11.7 million in cash and due from banks, $4.3 millionin investment securities, $117.2 million in net loans, and $3.8 million inproperty and equipment.  Our managementclosely monitors and seeks to maintain appropriate levels of interest-earningassets and interest-bearing liabilities so that maturities of assets are suchthat adequate funds are provided to meet customer withdrawals and demand.

 

Liabilities at March 31,2009 totaled $122.0 million, representing an increase of $3.8 million, or 3%,compared to December 31, 2008, and consisted principally of $102.5 millionin deposits and $19.2 million in borrowings. Our borrowings consisted of Federal Home Loan Bank (“FHLB”) Advances andcustomer repurchase agreements.  At March 31,2009, shareholders’ equity was $18.4 million compared to $18.7 million at December 31,2008. The decrease in shareholders’ equity was primarily due to the net loss of$368,645 for the quarter ended March 31, 2009.

 

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*Loans*

 

Since loans typically provide higher interest yields than other types of interest-earning assets, we invest a substantial percentage of our earning assets in our loan portfolio.  At March 31, 2009, our gross loan portfolio consisted primarily of $73.2 million of commercial real estate loans, $19.9 million of commercial business loans, and $26.0 million of consumer and home equity loans. Our current loan portfolio composition is not materially different that the loan portfolio composition disclosed in the footnotes to the consolidated financial statements included in our Annual Report on Form 10-K for 2008 as filed with the SEC.  We experienced net payoffs of $4.5 million during the quarter ended March 31, 2009 due to careful consideration of liquidity needs and credit risk management.

 

We discontinue accrual of interest on a loan when we conclude it is doubtful that we will be able to collect interest from the borrower.  We reach this conclusion by taking into account factors such as the borrower’s financial condition, economic and business conditions, and the results of our previous collection efforts.  Generally, we place a delinquent loan in non-accrual status when the loan becomes 90 days or more past due.  When we place a loan in non-accrual status, we reverse all interest which has been accrued on the loan but remains unpaid and deduct this interest from earnings as a reduction of reported interest income.  We do not accrue any additional interest on the loan balance until we conclude the collection of both principal and interest is reasonably certain. We had approximately $2.4 million and $394,950 in non-accrual loans at March 31, 2009 and December 31, 2008, respectively.  This increase between periods is due to several new loans which were changed to non-accrual status as a result of a review of these relationships, their payment history and the current economic environment.  Non-accrual loans represented 2.02% of gross loans at March 31, 2009.  We continue to carefully monitor each of these loans and have established specific reserves as warranted based on a review of the underlying collateral of each loan as well as the financial condition of each borrower.

 

At March 31, 2009, we had $3.7 million of loans that were considered impaired with specific reserves of approximately $200,000 allocated in the allowance for loan losses.  At March 31, 2009, we were not aware of any potential problem loans that were not already considered for impairment or categorized as impaired or non-accrual.

 

*Provision and Allowance for Loan Losses*

 

We have established anallowance for loan losses through a provision for loan losses charged toexpense on our consolidated statement of operations.  The allowance for loan losses for the threemonths ended March 31, 2009 and 2008 is presented below:

 
| ** **                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                  | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Balance at  beginning of the period         |       | $                                                | 1,611,977  |   | $ | 1,283,491 |   |
| Provision for  loan losses                  |       | 90,000                                           |       | 164,000 |   |
| Loans  charged-off                          |       | —                                           |       | — |   |
| Recoveries of  loans previously charged-off |       | —                                           |       | — |   |
| Balance at end  of the period               |       | $                                                | 1,701,977  |   | $ | 1,447,491 |   |

 

As of March 31,2009, the allowance for loan losses was $1.7 million, or 1.43% of gross loans,compared to $1.6 million, or 1.31% of gross loans as of December 31,2008.  Provision for loan losses was$90,000 for the quarter ended March 31, 2009, a decrease of $74,000, or45%, compared to the expense of $164,000 for the quarter ended March 31,2008.  This decrease in provision expenseis due to net repayments in loans during the current quarter compared to netloan originations in the comparable quarter in 2008 which was offset by anincrease in impaired loans between comparable quarters.

 

The allowance for loanlosses represents an amount which we believe will be adequate to absorb probablelosses on existing loans that may become uncollectible.  Our judgment as to the adequacy of theallowance for loan losses is based on a number of assumptions about futureevents, which we believe to be reasonable, but which may or may not prove to beaccurate.  Our determination of theallowance for loan losses is based on evaluations of the collectability ofloans, including consideration of factors such as the balance of impairedloans, the quality, mix, and size of our overall loan portfolio, economic conditionsthat may affect the borrower’s ability to repay, the amount and quality ofcollateral securing the loans, our historical loan loss experience, and areview of specific problem loans.  Wealso consider subjective issues such as changes in lending policies andprocedures, changes in the local/national economy, changes in volume or type ofcredits, changes in volume/severity of problem loans, quality of loan reviewand board of director oversight, concentrations of credit, and peer groupcomparisons.  Due to our limitedoperating history, to date the provision for loan losses has been madeprimarily as a result of our 

 

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assessment of generalloan loss risk compared to banks of similar size and maturity.  Due to our short operating history, the loansin our loan portfolio and our lending relationships are of very recentorigin.  In general, loans do not beginto show signs of credit deterioration or default until they have beenoutstanding for some period of time, a process known as seasoning.  As a result, a portfolio of older loans willusually behave more predictably than a newer portfolio.  Because our loan portfolio is new, thecurrent level of delinquencies and defaults may not be representative of thelevel that will prevail when the portfolio becomes more seasoned, which may behigher than current levels.   Ifdelinquencies and defaults increase, we may be required to increase ourprovision for loan losses, which would adversely affect our results ofoperations and financial condition. Periodically, we will adjust the amount of the allowance based onchanging circumstances.  We will chargerecognized losses to the allowance and add subsequent recoveries back to theallowance for loan losses.  There can beno assurance that charge-offs of loans in future periods will not exceed theallowance for loan losses as estimated at any point in time or that provisionsfor loan losses will not be significant to a particular accounting period.

 

*Deposits*

 

Our primary source offunds for loans and investments is our deposits.  At March 31, 2009, we had $102.5 millionin deposits, representing an increase of $3.7 million, or 4%, compared to December 31,2008.  Deposits at March 31, 2009consisted primarily of $10.5 million in demand deposit accounts, $13.1 millionin money market accounts and $78.7 million in time deposits.  During the fourth quarter of 2006, we beganobtaining deposits outside of our local market area in the form of brokeredtime deposits.  Due to the interest rateenvironment in our market, as well as strong competition from other banking andfinancial services companies in gathering deposits, brokered time depositsallow us to obtain funding in order to support loan growth.  At March 31, 2009, we had $47.3 millionin brokered time deposits, a decrease of $2.1 million compared to December 31,2008.  We are seeking to reduce ourreliance on brokered time deposits and other noncore funding sources, whilefocusing our efforts to gather core deposits in our local market.

 

*Borrowings*

 

We use borrowings to fundgrowth of earning assets in excess of deposit growth.  Borrowings totaled $19.2 million at March 31,2009, compared to $19.1 million at December 31, 2008.  FHLB Advances accounted for $19.0 million oftotal borrowings.  These advances aresecured with approximately $42.2 million of first and second mortgage loans and$1.1 million of stock in the FHLB.    The remaining balance inborrowings represents customer repurchase agreements.

 

**Liquidity**

 

Liquidity is the ability to meet current and futureobligations through liquidation or maturity of existing assets or theacquisition of liabilities.  We manageboth assets and liabilities to achieve appropriate levels of liquidity.  Cash and short-term investments are ourprimary sources of asset liquidity. These funds provide a cushion against short-term fluctuations in cashflow from both deposits and loans.  Theinvestment portfolio is our principal source of secondary asset liquidity.  However, the availability of this source offunds is influenced by market conditions and pledging agreements.  Individual and commercial deposits, brokereddeposits and borrowings are our primary source of funds for credit activities.  We maintain federal funds purchased lines ofcredit with correspondent banks totaling $7.0 million.  Of that total availability, $5 millionrepresents a federal funds purchased line of credit with Silverton Bank, N.A.,which was closed by the OCC and the FDIC named Receiver on May 1, 2009.  This line of credit will remain outstandingthrough the end of July, 2009, and we will seek to obtain a new federal fundsline of credit as part of the establishment of a new correspondent bankingrelationship.  We are also a member ofthe Federal Home Loan Bank of Atlanta, from which applications for borrowingscan be made for leverage purposes, if so desired, in an amount up to 20% of thetotal assets of the Bank.  We also pledgecollateral to the Federal Reserve Bank’s Borrower-in-Custody of Collateral program, and our available creditunder this program was approximately $11.8 million as of March 31, 2009.  As brokered deposits or advances mature in2009, we intend to replace these funds with new brokered deposits or advancesto the extent necessary after considering core deposit growth, although overallwe will seek to reduce our reliance on brokered time deposits and other noncorefunding sources.  We believe ourliquidity sources are adequate to meet our operating needs. The level ofliquidity is measured by the cash, cash equivalents, and investment securitiesavailable for sale to total assets ratio, which was at 11.44% at March 31,2009.  Our liquidity ratio has increasedduring the quarter from 6.28% as of December 31, 2008 as a result of netloan payoffs and an increase in retail deposits offset by a decrease inbrokered time deposits.  We carefullyfocused on liquidity management during the first quarter of 2009.  We will continue to reduce brokered timedeposits as cash balances, retail deposit growth and operating needsallow.  In February 2009 wediscontinued the use of the federal funds sold program offered through ourprimary correspondent bank due to the historically low rate currently earned onfederal funds sold.  All cash balancesmaintained at our primary correspondent bank earn 0.25% and are fully insureddeposits under the TLGP.

 

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**Impact of Off-Balance SheetInstruments**

 

Through the operations ofour Bank, we have made contractual commitments to extend credit in the ordinarycourse of our business activities.  Thesecommitments are legally binding agreements to lend money to our customers atpredetermined interest rates for a specified period of time. At March 31,2009, we had issued commitments to extend credit of $14.5 million throughvarious types of lending arrangements. We evaluate each customer’s credit worthiness on a case-by-case basis.The amount of collateral obtained, if deemed necessary by us upon extension ofcredit, is based on our credit evaluation of the borrower.  Collateral varies but may include accountsreceivable, inventory, property, plant and equipment, and commercial andresidential real estate.  We manage thecredit risk on these commitments by subjecting them to normal underwriting andrisk management processes.

 

**Commitments and Contingencies**

 

As of March 31,2009, there were no significant firm commitments outstanding for capitalexpenditures.

 

**Capital Resources**

 

Total shareholders’ equity decreased to $18.4 million at March 31, 2009 from $18.7 million at December 31, 2008, primarily due to our net loss for the three months of $368,645. We believe that our capital is sufficient to fund the activities of the Bank’s operations and that the rate of asset growth will not negatively impact the capital base.

 

Our Bank and Company are subject to various regulatory capital requirements administered by the federal banking agencies.  However, the Federal Reserve guidelines contain an exemption from the capital requirements for “small bank holding companies,” which in 2006 were amended to cover most bank holding companies with less than $500 million in total assets that do not have a material amount of debt or equity securities outstanding registered with the SEC.  Although our class of common stock is registered under Section 12 of the Securities Exchange Act, we believe that because our stock is not listed on any exchange or otherwise actively traded, the Federal Reserve Board will interpret its new guidelines to mean that we qualify as a small bank holding company.  Nevertheless, our Bank remains subject to these capital requirements.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%.  Tier 1 capital of the Bank consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available for sale, less certain intangible assets.  The Bank’s Tier 2 capital consists of the allowance for loan losses subject to certain limitations.  Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital.  The regulatory minimum requirements are 4% for Tier 1 capital and 8% for total risk-based capital.

 

The Bank is also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.  Only the strongest banks are allowed to maintain capital at the minimum requirement of 3%.  All others are subject to maintaining ratios 1% to 2% above the minimum.  The Bank exceeded its minimum regulatory capital ratios as of March 31, 2009, as well as the ratios to be considered “well capitalized.”

 

The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements at March 31, 2009.

 

(Dollars in thousands)

 
| ** **                              | ** ** | **Actual** | ** ** | **Well Capitalized  Requirement** | ** ** | **Adequately Capitalized   Requirement** | ** ** |
|-----------------------------------------|------------|------------|------------|----------------------------------------|------------|----------------------------------------------------|------------|
| ** **                              | ** ** | **Amount** | ** ** | **Ratio**                              | ** ** | **Amount**                                         | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Total capital to  risk weighted assets  |       | $          | 15,948     |                                   | 12.86      | %                                                  | $          | 12,404 |   | 10.0 | % | $ | 9,923 |   | 8.0 | % |
| Tier 1 capital  to risk weighted assets |       | $          | 14,396     |                                   | 11.61      | %                                                  | $          | 7,442 |   | 6.0 | % | $ | 4,962 |   | 4.0 | % |
| Tier 1 capital  to average assets       |       | $          | 14,396     |                                   | 10.45      | %                                                  | $          | 6,885 |   | 5.0 | % | $ | 5,508 |   | 4.0 | % |

 

15

 

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

 

Not applicable.

 

**Item 4. Controls and Procedures**

 

As of the end of theperiod covered by this report, we carried out an evaluation, under the supervisionand with the participation of our management, including our Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of our disclosurecontrols and procedures as defined in Exchange Act Rule 13a-15(e).  Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that our currentdisclosure controls and procedures are effective as of March 31,2009.  There have been no significantchanges in our internal controls over financial reporting during the fiscalquarter ended March 31, 2009 that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

 

The design of any systemof controls and procedures is based in part upon certain assumptions about thelikelihood of future events.  There canbe no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions, regardless of how remote.

 

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**Part II- Other Information**

 

**Item 1.Legal Proceedings**

 

There are no materialpending legal proceedings to which we are a party or of which any of ourproperties are the subject.

 

**Item 2.Unregistered Sales of Equity Securities and Use of Proceeds**

 

Not applicable

 

**Item 3.Default Upon Senior Securities**

 

Not applicable

 

**Item 4.Submission of Matters to a Vote of Security Holders**

 

Not applicable

 

**Item 5.Other Information**

 

On May 4, 2009, weentered into an employment agreement with our Chief Financial Officer, Katie N.Tuttle. A copy of the agreement is attached to this Quarterly Report on Form10-Q as Exhibit 10.1.

 

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**Item 6.Exhibits**

 
| 10.1   | Employment  Agreement with Katie N. Tuttle dated May 4, 2009.          |
|--------|-----------------------------------------------------------------------------|
|   |                                                                        |
| 31.1   | Rule 13a-14(a) Certification  of the Principal Executive Officer. |
|   |                                                                        |
| 31.2   | Rule 13a-14(a) Certification of the  Principal Financial Officer. |
|   |                                                                        |
| 32     | Section 1350  Certifications.                                          |

 

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# **SIGNATURES**

# ** **

In accordance withthe requirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned thereunto duly authorized.

 

 
| Date: May 7, 2009 | By:    | /s/ Lawrence R. Miller                                                |
|------------------------|--------|-----------------------------------------------------------------------|
|                   |   | Lawrence R. Miller                                                    |
|                   |   | Chief Executive Officer  (Principal Executive Officer)                |
|                   |   |
| Date: May 7, 2009 | By:    | /s/ Katie N. Tuttle                                                   |
|                   |   | Katie N. Tuttle                                                       |
|                   |   | Chief Financial Officer  (Principal Accounting and Financial Officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                             |
|---------------------|------------|-----------------------------------------------------------------------------|
|                |       |                                                                        |
| 10.1                |       | Employment  Agreement with Katie N. Tuttle dated May 4, 2009.          |
|                |       |                                                                        |
| 31.1                |       | Rule 13a-14(a) Certification  of the Principal Executive Officer. |
|                |       |                                                                        |
| 31.2                |       | Rule 13a-14(a) Certification of the  Principal Financial Officer. |
|                |       |                                                                        |
| 32                  |       | Section 1350  Certifications.                                          |

 

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