BankGreenville Financial (BGVF) 10-Q 2009 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended September 30, 2009

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                        to                      

Commission File Number 333-127409

BANKGREENVILLE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

South Carolina	20-2645711
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

499 Woodruff Road

Greenville, South Carolina 29607

(Address of principal executive offices) (Zip Code)

(864) 335-2200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o  No  o

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 1,180,000 shares of common stock, no par value per share, were issued and outstanding as of November 12, 2009.

BANKGREENVILLE FINANCIAL CORPORATION

INDEX

Part I - Financial Information
Item 1.	Financial Statements (unaudited)
Item 2.	Management’s Discussion and Analysis or Plan of Operation
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II - Other Information
Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Default Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
SIGNATURES
EXHIBIT INDEX

2

BANKGREENVILLE FINANCIAL CORPORATION

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

Consolidated Balance Sheets

	September 30,			December 31,
	2009			2008
	(unaudited)			(audited)
Assets
Cash and due from banks	$	1,727,201		$	1,171,498
Federal funds sold	10,600,175			2,153,000
Total cash and cash equivalents	12,327,376			3,324,498
Investment securities, available for sale	24,720,885			21,149,100
Federal Home Loan Bank Stock	799,300			755,900
Loans, net of allowance for loan losses of $841,525 and $665,442 at September 30, 2009 and December 31, 2008, respectively	58,856,012			53,994,983
Property and equipment, net	2,708,377			2,772,907
Accrued interest receivable	458,403			443,492
Other real estate	2,110,341			—
Other assets	183,505			182,285
Total assets	$	102,164,199		$	82,623,165
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Non-interest bearing	$	3,610,689		$	3,462,092
Interest bearing	74,815,205			54,216,125
Total deposits	78,425,894			57,678,217
Federal Home Loan Bank advances	12,455,000			14,455,000
Accrued interest payable	319,823			301,016
Accounts payable and accrued liabilities	269,741			601,506
Total liabilities	91,470,458			73,035,739
Shareholders’ Equity
Preferred stock, no par value; 10,000,000 shares authorized; 1,000 shares of Series A issued and outstanding at September 30, 2009, and	945,824			—
50 shares of Series B issued and outstanding at September 30, 2009	58,838			—
Common stock, no par value; 10,000,000 shares authorized; 1,180,000 shares issued and outstanding at September 30, 2009 and December 31, 2008	11,238,183			11,197,692
Accumulated other comprehensive income (loss)	205,288			(27,761		)
Accumulated deficit	(1,754,392		)	(1,582,505		)
Total shareholders’ equity	10,693,741			9,587,426
Total liabilities and shareholders’ equity	$	102,164,199		$	82,623,165

The accompanying notes are an integral part of these financial statements.

3

BANKGREENVILLE FINANCIAL CORPORATION

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2009			2008		2009			2008
Interest income
Loans and fees	$	765,167		$	763,881	$	2,251,303		$	2,140,580
Investment securities and Federal Home Loan Bank stock	318,346			309,159		920,433			847,479
Federal funds sold	3,215			2,086		4,586			13,395
Total interest income	1,086,728			1,075,126		3,176,322			3,001,454
Interest expense
Deposits	461,346			471,600		1,310,423			1,445,128
Federal funds purchased	—			2,884		1,084			13,307
Federal Home Loan Bank borrowings	109,921			87,319		336,751			167,765
Total interest expense	571,267			561,803		1,648,258			1,626,200
Net interest income	515,461			513,323		1,528,064			1,375,254
Provision for loan losses	75,000			70,382		428,185			182,990
Net interest income after provision for loan losses	440,461			442,941		1,099,879			1,192,264
Non-interest income
Gains on investment securities sales and calls	29,183			—		172,281			38,924
Mortgage brokerage fees	8,975			—		39,096			5,245
Service charges on deposit accounts	20,746			14,787		55,662			41,531
Other income	9,074			—		8,974			—
Total non-interest income	67,978			14,787		276,013			85,700
Non-interest expense
Compensation and employee benefits	258,895			261,894		788,646			800,803
Occupancy and equipment	50,495			52,165		151,704			151,834
Data processing and related costs	61,913			57,861		183,064			158,460
Marketing, advertising and shareholder communications	8,364			5,992		32,517			28,035
Legal and audit	22,738			14,525		72,510			48,664
Other professional fees	13,043			11,601		31,997			31,075
Supplies, postage and telephone	9,150			8,077		29,354			26,689
Insurance	4,672			4,505		13,247			12,409
Credit related expenses	15,148			1,168		28,782			8,603
Courier and armored carrier service	1,779			4,795		9,655			14,235
Regulatory fees and FDIC insurance	44,610			15,208		138,196			39,162
Other	9,223			15,229		35,892			38,721
Total non-interest expense	500,030			453,020		1,515,564			1,358,690
Income (loss) before income taxes	8,409			4,708		(139,672		)	(80,726		)
Income tax provision	—			—		—			—
Net income (loss)	$	8,409		$	4,708	$	(139,672	)	$	(80,726	)
Dividends and net accretion of discount on preferred stock	15,926			—		39,482			—
Net income (loss) available to common shareholders	(7,517		)	4,708		(179,154		)	(80,726		)
Basic and diluted income (loss) per common share	$	—		$	—	$	(0.15	)	(0.07		)
Weighted average common shares outstanding-basic and diluted	1,180,000			1,180,000		1,180,000			1,180,000

The accompanying notes are an integral part of these financial statements.

4

BANKGREENVILLE FINANCIAL CORPORATION

Consolidated Statements of Changes In Shareholders’ Equity

and Comprehensive Income (Loss)

(Unaudited)

	Preferred Stock				Common Stock			Accumulated other comprehensive			Accumulated			Total
	Shares	Amount			Shares	Amount		income (loss)			deficit			shareholders’ equity
Balance, December 31, 2007	—	$	—		1,180,000	$	11,142,669	$	57,834		$	(1,521,642	)	$	9,678,861
Stock compensation expense	—	—			—	41,526		—			—			41,526
Comprehensive loss:
Net loss	—	—			—	—		—			(80,726		)	(80,726		)
Unrealized losses on investment securities available for sale, no tax effect	—	—			—	—		(619,323		)	—			(619,323		)
Total comprehensive loss	—	—			—	—		—			—			(700,049		)
Balance, September 30, 2008	—	$	—		1,180,000	$	11,184,195	$	(561,489	)	$	(1,602,368	)	$	9,020,338
Balance, December 31, 2008	—	$	—		1,180,000	$	11,197,692	$	(27,761	)	$	(1,582,505	)	$	9,587,426
Issue Series A preferred stock at a discount	1,000	939,629			—	—		—			—			939,629
Issue Series B preferred stock at a premium	50	60,371			—	—		—			—			60,371
Accretion of Series A preferred stock discount	—	6,195			—	—		—			(6,195		)	—
Amortization of Series B preferred stock premium	—	(1,533		)	—	—		—			1,533			—
Dividends on preferred stock	—	—			—	—		—			(27,553		)	(27,553		)
Stock compensation expense	—	—			—	40,491		—			—			40,491
Comprehensive loss:
Net loss	—	—			—	—		—			(139,672		)	(139,672		)
Unrealized gains on investment securities available for sale, net of income tax	—	—			—	—		233,049			—			233,049
Total comprehensive income	—	—			—	—		—			—			93,377
Balance, September 30, 2009	1,050	$	1,004,662		1,180,000	$	11,238,183	$	205,288		$	(1,754,392	)	$	10,693,741

The accompanying notes are an integral part of these financial statements.

5

BANKGREENVILLE FINANCIAL CORPORATION

Consolidated Statements of Cash Flows

For the Nine Months Ended

(Unaudited)

	September 30, 2009			September 30, 2008
Operating activities
Net loss	$	(139,672	)	$	(80,726	)
Provision for loan losses	428,185			182,990
Stock compensation expense	40,491			41,526
Depreciation	71,428			78,578
Net amortization of premiums on investment securities	36,547			8,166
Gains on sales and calls of investment securities	(172,281		)	(38,924		)
Increase in interest receivable	(14,911		)	(102,232		)
Increase in other assets	(1,220		)	(292,679		)
Increase (decrease) in accrued interest payable	18,807			(96,981		)
(Decrease) increase in accounts payable and accrued liabilities	(331,765		)	710,674
Net cash (used for) provided by operating activities	(64,391		)	410,392
Investing activities
Increase in loans, net	(7,399,555		)	(16,408,726		)
Purchase of investment securities available for sale	(17,440,919		)	(11,178,725		)
Proceeds from sales of investment securities available for sale	10,436,892			3,356,522
Proceeds from called investment securities available for sale	2,250,000			3,748,575
Proceeds from principal pay-downs on mortgage-backed securities	1,551,025			1,460,139
Purchase of FHLB Stock	(43,400		)	(572,900		)
Purchase of property and equipment	(6,898		)	(5,120		)
Net cash used for investing activities	(10,652,855		)	(19,600,235		)
Financing activities
Proceeds from issuance of preferred stock	1,000,000			—
Payment of preferred stock dividend	(27,553		)	—
Increase in deposits, net	20,747,677			10,717,797
(Repayment of) proceeds from Federal Home Loan Bank advances	(2,000,000		)	12,015,000
Decrease in federal funds purchased	—			(1,648,000		)
Net cash provided by financing activities	19,720,124			21,084,797
Net increase in cash and cash equivalents	9,002,878			1,894,954
Cash and cash equivalents, beginning of period	3,324,498			830,543
Cash and cash equivalents, end of period	$	12,327,376		$	2,725,497
Supplemental information
Cash paid for:
Interest	$	1,629,451		$	1,723,181
Non-cash activities:
Loans transferred to other real estate	2,110,341			—
Loans charged-off	252,102			3,279
Unrealized gains (losses) on investment securities available for sale	233,049			(619,323		)
Net accretion of discount on preferred stock	4,662			—

The accompanying notes are an integral part of these financial statements.

6

BANKGREENVILLE FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

NOTE 1 — NATURE OF BUSINESS AND BASIS OF PRESENTATION

BankGreenville Financial Corporation (the “Company”) is a South Carolina corporation organized to operate as a bank holding company pursuant to the Federal Bank Holding Company Act of 1956 and the South Carolina Bank Holding Company Act, and to own and control all of the capital stock of BankGreenville (the “Bank”). The Bank is a state chartered institution organized under the laws of South Carolina to conduct general banking business in Greenville, South Carolina. From our inception on March 18, 2005 and before opening the Bank for business on January 30, 2006, we engaged in organizational and pre-opening activities necessary to obtain regulatory approvals and to prepare the Bank to commence business as a financial institution. The Company sold 1,180,000 shares of its common stock at $10.00 per share and raised $11.80 million in its initial public offering. Proceeds, net of brokerage commissions and other offering costs, totaled approximately $11.04 million and the Bank was capitalized with $11 million of the net proceeds.  In addition, on February 13, 2009 the Company issued shares of its Series A and Series B preferred stock to the U.S. Treasury under the Treasury’s Capital Purchase Program as part of the Emergency Economic Stabilization Act of 2008.  The Bank is primarily engaged in the business of accepting deposits, insured by the FDIC, and providing commercial, consumer and mortgage loans to the general public in Greenville County, South Carolina.

The following is a description of the more significant accounting and reporting policies that the Company follows in preparing and presenting consolidated financial statements.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank.  In consolidation, all significant intercompany transactions have been eliminated.  The accounting and reporting policies conform to accounting principles generally accepted in the United States of America and to general practices in the banking industry. The Company uses the accrual basis of accounting.

Operating results for the nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.  For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission.

Subsequent Events

In accordance with FASB ASC 855, “Subsequent Events”, issued in May 2009 and effective for periods ending after June 15, 2009, management performed an evaluation to determine whether or not there have been any subsequent events since the balance sheet date.  The evaluation was performed through November 12, 2009, the date on which the Company’s 10-Q was issued as filed with the Securities and Exchange Commission.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the Company’s significant accounting policies is included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2008.  For further information, refer to the financial statements and footnotes thereto included in that filing.  Accounting standards that have been issued or proposed by the Financial Accounting Standards Board (“FASB”) that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

Net Income (Loss) per Common Share

Basic income (loss) per common share represents net income (loss) to common shareholders divided by the weighted-average number of common shares outstanding during the period. 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 quarters and nine months ended September 30, 2009 and 2008, the stock options and warrants were not “in-the-money”, as the exercise price of the

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stock options and warrants exceeded the weighted average fair market value of the common stock.  The outstanding stock options and warrants were anti-dilutive, and basic and dilutive shares and loss per common share, respectively, were the same.

Stock Compensation Plans

Upon completion of the offering, the Company issued stock warrants to the organizing directors for the purchase of three shares of common stock at $10.00 per share for every four shares purchased in the stock offering, up to a maximum of 10,000 warrants per director. The Company issued a total of 107,500 warrants, all of which immediately vested upon completion of the offering. Of these warrants, 10,000 expired in February 2008 due to the death of one of our organizing directors in 2007. The average fair value per share of warrants issued amounted to approximately $1.83.  The fair value of each warrant granted was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions used for grants:  expected volatility of 6.0%, risk-free interest rate of 4.0% and expected lives of five years.

In addition, during 2006 the Company adopted a stock option plan.  The stock options for 212,400 shares which are authorized under the plan vest over a five-year period from the date of grant and have a contractual term of ten years.

On January 1, 2006, the Company adopted the fair value recognition provisions of FASB ASC 718, “Accounting for Stock-Based Compensation”, to account for compensation costs under its stock option plan.  Previously, stock option plans were accounted for using the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees (as amended)” (“APB 25”).  Under the intrinsic value method prescribed by APB 25, the Company would not have recognized compensation cost for stock options because the option exercise price in its plan equals the market price on the date of grant.  In adopting ASC 718, the Company elected to use the modified prospective method to account for the transition from the intrinsic value method to the fair value recognition method.  Under the modified prospective method, compensation cost is recognized from the grant date for all new stock options granted and for any outstanding unvested awards, applying the fair value method to those awards as of the date of grant, and is expensed over the employee’s requisite service period.

There were no options forfeited and no options granted during the nine months ended September 30, 2009. At September 30, 2009 and December 31, 2008, the Company had 95,900 options outstanding at $10.00 per share.  Vested options amounted to 57,240 and 38,060 at September 30, 2009 and December 31, 2008, respectively.  Options outstanding at September 30, 2009 have a weighted average remaining contractual term of approximately 6.50 years. Total unrecognized compensation cost related to non-vested options granted as of September 30, 2009 was $67,060 and is expected to be expensed ratably over the remaining vesting periods of the stock options. Net loss, as reported, included stock-based employee compensation expense of $13,497 for the three months ended September 30, 2009 and $40,491for the nine month period ended September 30, 2009, and net loss, as reported, included stock-based employee compensation expense of $13,497 and $41,526 for the three months and nine months ended September 30, 2008, respectively. The exercise or conversion ratio of all stock options granted was 1:1 and the aggregate intrinsic value of the stock options was zero for both periods.

Statement of Cash Flows

For purposes of reporting cash flows, cash equivalents include amounts due from banks and federal funds sold.  Generally, federal funds are sold for one-day periods.  Federal funds sold were $10,600,175 and $1,936,000 at of September 30, 2009 and 2008, respectively.

Investment Securities

Investment securities are accounted for in accordance with FASB ASC 320 “Investments-Debt and Equity Securities.”  Management classifies securities at the time of purchase into securities held to maturity, trading securities and securities available for sale.  Securities held to maturity are securities which the Company has the positive intent and ability to hold to maturity, and are reported at amortized cost. Trading securities are purchased and held principally for the purpose of selling them in the near future and are reported at fair value, with unrealized gains and losses included in earnings. Securities available for sale are securities that may be sold under certain conditions, and are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity as accumulated other comprehensive income (loss). At September 30, 2009, the Company’s investment securities were classified as available for sale. The amortization of premiums and accretion of discounts on investment securities are recorded as adjustments to interest income. Gains or losses on sales of investment securities are based on the net proceeds and the adjusted carrying amount of the securities sold using the specific identification method. Unrealized losses on securities, reflecting a decline in value or impairment judged by the Company to be other than temporary, are charged to earnings in the consolidated statements of operations.

Management’s Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of

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contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period.  Actual results could differ from those estimates.

Reclassifications

Certain captions and amounts in the prior financial statements were reclassified to conform to 2009 presentation.  Such reclassifications had no effect on previously reported net income (loss) or on shareholders’ equity.

NOTE 3 — FAIR VALUE

Effective January 1, 2008, the Company adopted FASB ASC 820 “Fair Value Measurements and Disclosure” (“ASC 820”) which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. ASC 820 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).

ASC 820 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. ASC 820 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 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.
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. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.
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. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.

Available for sale investment securities ($24,720,885 at September 30, 2009) are the only assets whose fair values are measured on a recurring basis using Level 1 inputs (active market quotes).

The Company is predominantly a collateral-based lender with real estate serving as collateral on a substantial majority of loans. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be level 2 inputs. The aggregate carrying amount of impaired loans at September 30, 2009 was $2.7 million.

Certain assets such as other real estate and repossessed collateral are measured at fair value less cost to sell. The Company considers such fair values to be level 2 inputs. Management believes the fair value component in its valuation follows the provisions of ASC 820.  The carrying amounts of other real estate and repossessed collateral were $2.1 million and $30 thousand, respectively, at September 30, 2009.

The Company has no assets or liabilities whose fair values are measured using level 3 inputs and has no liabilities carried at fair value or measured at fair value on a nonrecurring basis.  The table below presents assets and liabilities measured at fair value (in thousands) on a recurring basis at September 30, 2009.

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	Total		Level 1		Level 2	Level 3
Investment securities available for sale	$	24,721	$	24,721	—	—

The table below presents assets and liabilities measured at fair value (in thousands) on a nonrecurring basis at September 30, 2009.

	Total		Level 1	Level 2		Level 3
Impaired loans	$	2,735	—	$	2,735	—
Other real estate	2,110		—	2,110		—
Repossessed collateral	30		—	30		—

The carrying amounts and estimated fair values (in thousands), of the Company’s financial instruments at December 31, 2008 and September 30, 2009 were as follows:

	September 30, 2009				December 31, 2008
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial Assets:
Cash and due from banks	$	1,727	$	1,727	$	1,171	$	1,171
Federal funds sold	10,600		10,600		2,153		2,153
Investment securities available for sale	24,721		24,721		21,149		21,149
Federal Home Loan Bank stock	799		799		756		756
Loans, net	58,856		55,818		53,995		50,014
Other real estate	2,110		2,110		—		—
Repossessed collateral	30		30		—		—
Financial Liabilities:
Deposits	78,426		78,034		57,678		57,583
Federal funds purchased	—		—		—		—
Federal Home Loan Bank borrowings	12,455		12,372		14,455		13,979

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

The following discussion reviews our results of operations and assesses our financial condition. You should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements. The commentary should be read in conjunction with the discussion of forward-looking statements, the financial statements, and the related notes and the other statistical information included in this report and in our 2008 Form 10-K.

DISCUSSION OF FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” relating to, without limitation, future economic performance, plans and objectives of management for future operations, and projections of revenues and other financial items that are based on the beliefs of management, as well as assumptions made by and information currently available to management. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements. Our actual results may differ materially from the results discussed in the forward-looking statements, and our operating performance each quarter is subject to various risks and uncertainties that are discussed in detail in our 2008 Form 10-K under the “Risk Factors” heading as filed with the Securities and Exchange Commission (the “SEC”) and that include, without limitation, the following:

· reduced earnings due to higher credit losses generally and specifically because losses in the sectors of our loan portfolio secured by real estate are greater than expected due to economic factors, including declining real estate values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors;

· reduced earnings due to higher credit losses because our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral;

· the amount of our real estate-based loan portfolio collateralized by real estate, and the weakness in the commercial real estate market;

· our short operating history;

· 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;

· our ability to control costs, expenses and loan delinquency rates;

· 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;

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· changes in technology;

· changes in deposit flows;

· the lack of seasoning of our loan portfolio;

· changes in monetary and tax policies;

· the level of allowance for loan loss;

· 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;

· 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.

The above risks are exacerbated by the recent developments in national and international financial markets, and we are unable to predict what effect these uncertain market conditions will have on our Company.  During 2008 and thus far in 2009, the capital and credit markets have experienced unprecedented levels of extended volatility and disruption.  There can be no assurance that these unprecedented recent developments will not materially and adversely affect our business, financial condition and results of operations.

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

General

Like most community banks, we derive the majority of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, also known as net interest margin, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities, which is referred to as net interest spread.

There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section, we have included a detailed discussion of this process.

In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our clients. We describe the various components of this non-interest income, as well as our non-interest expenses, in the following discussion.

Effect of Economic Trends

Following an economic decline and historically low interest rates that ended in the first six months of 2004, the Federal Reserve began increasing short-term rates as the economy showed signs of strengthening.  Between July 2004 and July 2006, the Federal Reserve increased rates at 17 of their meetings for a total of 425 basis points. Between July 2006 and September 18, 2007, the Federal Reserve allowed short-term rates to remain unchanged.  Beginning in July 2004 and continuing until September 18, 2007, rates on both short-term and variable rate interest-earning assets and interest-bearing liabilities increased.  The momentum of the 17 rate increases resulted in higher rates on interest-earning assets and interest-bearing liabilities during the first nine months of 2007 and as fixed rate loans, deposits, and borrowings matured they repriced at higher interest rates.  In late September 2007, the Federal Reserve reversed their position and has since lowered the short-term rates by 500 basis points through December 2008, causing the rates on our short-term or variable rate assets and liabilities to decline.  The majority of economic analysts predict little to no change in short-term rates throughout the remainder of 2009.  The following discussion may include our analysis of the effect that we anticipate changes in interest rates will have on our financial condition.  However, we can give no assurances as to the future actions of the Federal Reserve or to the anticipated results that will actually occur.

Recent Legislative and Regulatory Initiatives to Address Financial and Economic Crises

Markets in the United States and elsewhere have experienced extreme volatility and disruption for more than 12 months.  These circumstances have exerted significant downward pressure on prices of equity securities and virtually all other asset classes, and have resulted in substantially increased market volatility, severely constrained credit and capital markets, particularly for financial institutions, and an overall loss of investor confidence.  Loan portfolio performances have deteriorated at many institutions resulting from, among other factors, a weak economy and a decline in the value of the collateral supporting their loans.  Dramatic slowdowns in the housing industry, due in part to falling home prices and increasing foreclosures and unemployment,

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have created strains on financial institutions.  Many borrowers are now unable to repay their loans, and the collateral securing these loans has, in some cases, declined below the loan balance.   In response to the challenges facing the financial services sector, several regulatory and governmental actions have recently been announced including:

·The Emergency Economic Stabilization Act of 2008 (“EESA”), approved by Congress and signed by President Bush on October 3, 2008, which, among other provisions, allowed the U.S. Treasury to purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.  EESA also raised the basic limit of FDIC deposit insurance from $100,000 to $250,000 through  December 31, 2013;

·On October 7, 2008, the FDIC approved 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 Troubled Asset Relief Program (the “TARP”) Capital Purchase Program (the “CPP”) that encourages and allows financial institutions to build capital through the sale of senior preferred shares to the U.S. Treasury on terms that are non-negotiable;

·On October 14, 2008, the FDIC announced the creation of the Temporary Liquidity Guarantee Program (the “TLGP”), which seeks to strengthen confidence and encourage liquidity in the banking system.  The TLGP has two primary components that are available on a voluntary basis to financial institutions:

·The Transaction Account Guarantee Program (“TAGP”), which provides unlimited deposit insurance coverage through June 30, 2010 for noninterest-bearing transaction accounts (typically business checking accounts) and certain funds swept into noninterest-bearing savings accounts.  Institutions participating in the TLGP pay a 10 basis points fee (annualized) on the balance of each covered account in excess of $250,000, while the extra deposit insurance is in place;

·The Debt Guarantee Program (“DGP”), under which the FDIC guarantees certain senior unsecured debt of FDIC-insured institutions and their holding companies.  The unsecured debt must be issued on or after October 14, 2008 and not later than June 30, 2009, and the guarantee is effective through the earlier of the maturity date or June 30, 2012.  The DGP coverage limit is generally 125% of the eligible entity’s eligible debt outstanding on September 30, 2008 and scheduled to mature on or before June 30, 2009 or, for certain insured institutions, 2% of their liabilities as of September 30, 2008.  Depending on the term of the debt maturity, the nonrefundable DGP fee ranges from 50 to 100 basis points (annualized) for covered debt outstanding until the earlier of maturity or June 30, 2012.  The TAGP and DGP are in effect for all eligible entities, unless the entity opted out on or before December 5, 2008.

·On February 17, 2009 President Obama signed into law The American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as the economic stimulus or economic recovery package. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs.  In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients, including our Company, that are in addition to those previously announced by the U.S. Treasury. These new limits are in place until the institution has repaid the Treasury, which is now permitted under ARRA without penalty and without the need to raise new capital, subject to the Treasury’s consultation with the recipient institution’s appropriate regulatory agency.

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

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

·The Securities Program, which will be administered by the Treasury, involves the creation of public-private investment funds to target investments in eligible residential mortgage-backed securities and commercial mortgage-backed securities issued before 2009 that originally were rated AAA or the equivalent by two or more nationally recognized statistical rating organizations, without regard to rating enhancements (collectively, “Legacy Securities”). Legacy Securities must be directly secured by actual mortgage loans, leases or other assets, and may be purchased only from financial institutions that meet TARP eligibility requirements.

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It is likely that further regulatory actions may arise as the Federal government continues to attempt to address the economic situation.

On December 26, 2008, we received preliminary approval to participate in the CPP in the amount of $1,891,000, which represented the maximum 3% of our risk-weighted assets at September 30, 2008.  After careful evaluation by our executive management and board of directors, including the impact of our participation on our capital ratios and operations as well as on our common shareholders, we elected to participate at $1 million and were able to participate under the private company terms, which resulted in less dilution to our common shareholders than the public company terms.  The transaction closed on February 13, 2009 and on that date we issued shares of our Series A and Series B Preferred Stock to the U.S. Treasury.

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in footnote 1 to our audited consolidated financial statements as of December 31, 2008, as filed on our annual report on Form 10-K.

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

Allowance for Loan Losses

We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the creditworthiness of borrowers, the estimated value of the underlying collateral, cash flow assumptions, determination of loss factors for estimating credit losses, the impact of current events, and conditions, and other factors impacting the level of probable inherent losses.  Under different conditions or using different assumptions, the actual amount of credit losses incurred by us may be different from management’s estimates provided in our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a more complete discussion of our processes and methodology for determining our allowance for loan losses.

Other Real Estate

Other real estate represents properties acquired through the foreclosure process and is recorded at the lower of net principal loan balance outstanding or estimated fair market value less estimated selling costs.  Estimated fair market values are based on appraisals obtained at the time of acquisition of the properties by the Bank.  Holding period costs are charged to expense as incurred.  Examples of holding period costs include real property taxes, maintenance and insurance.

Income Taxes

We use assumptions and estimates in determining income taxes payable or refundable for the current year, deferred income tax liabilities and assets for events recognized differently in our financial statements and income tax returns, and income tax benefit or expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. Management exercises judgment in evaluating the amount and timing of recognition of resulting tax liabilities and assets. These judgments and estimates are re-evaluated on a continual basis as regulatory and business factors change.  Valuation allowances are established to reduce deferred tax assets if it is determined that it is “more likely than not” that all or some portion of the potential deferred tax asset will not be realized. No assurance can be given that either the tax returns submitted by us or the income tax reported on the financial statements will not be adjusted by either adverse rulings by the United States Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service. We are subject to potential adverse adjustments, including, but not limited to, an increase in the statutory federal or state income tax rates, the permanent non-deductibility of amounts currently considered deductible either now or in future periods, and the dependency on the generation of future taxable income, including capital gains, in order to ultimately realize deferred income tax assets.

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Results of Operations

Three months ended September 30, 2009 and 2008

General

Our net income for the quarter ended September 30, 2009 was $8,409 compared to net income of $4,708 for the quarter ended September 30, 2008, for an improvement in net income of $3,701, or 79%.

Net Interest Income

Our primary source of revenue is net interest income.  Net interest income is the difference between income earned on interest-bearing assets and interest paid on deposits and borrowings used to support such assets. The level of net interest income is determined by the balances of interest-earning assets and interest-bearing liabilities and corresponding interest rates earned and paid on those assets and liabilities, respectively.  In addition to the volume of and corresponding interest rates associated with these interest-earning assets and interest-bearing liabilities, net interest income is affected by the timing of re-pricing these interest-earning assets and interest-bearing liabilities.

Net interest income for the quarter ended September 30, 2009 was $515,461, an increase of $2,138, or 0.42%, over net interest income of $513,323 for the quarter ended September 30, 2008.  Interest income increased $11,602, or 1%, to $1,086,728 for the quarter ended September 30, 2009.  Although the volume of average interest-earning assets increased $20 million from September 30, 2008 to September 30, 2009, as shown in the table below, we did not experience as significant of an increase in corresponding interest income due to the 175 basis point drop in the average prime rate from period to period.  Additionally, $2.4 million of our loans were placed on non-accrual status in the third quarter of 2009 compared to none during the quarter ended September 30, 2008.  Interest expense for the quarter ended September 30, 2009 increased $9,464 over the same period in 2008.  Although average interest-bearing liabilities grew $20.9 million from quarter to quarter, as interest rates declined and higher-priced certificates of deposit matured, our deposits were re-priced at lower rates and resulted in a 2% decrease in interest expense on deposits.  Interest expense on Federal Home Loan Bank advances grew 26% as the average balance outstanding increased $2.8 million from quarter to quarter.

The following table sets forth information related to our average balance sheet, average yields on assets, and average costs of liabilities for the quarters ended September 30, 2009 and 2008. We derived these yields and rates by dividing annualized income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated.  The net amount of capitalized loan fees is amortized into interest income over the lives of the loans.

Average Balances, Income and Expenses, Yields and Rates for the Quarter Ended September 30,

	2009						2008
	Average balance		Income/ expense		Yield /rate		Average balance		Income/ expense		Yield /rate
Interest-earning assets:
Federal funds sold	$	6,731,443	$	3,215	0.19	%	$	387,692	$	2,086	2.14	%
Investment securities and FHLB stock	25,062,296		318,346		5.04		21,936,987		309,159		5.61
Loans (1)	60,327,368		765,167		5.03		49,752,270		763,881		6.11
Total interest-earning assets	92,121,107		1,086,728		4.68	%	72,076,949		1,075,126		5.93	%
Non-earning assets	5,531,247						3,781,863
Total assets	$	97,652,354					$	75,858,812
Interest-bearing liabilities:
Interest checking	$	5,884,251	$	36,877	2.49	%	$	2,361,396	$	13,057	2.20	%
Savings and money market	19,209,772		85,920		1.77		15,001,931		105,235		2.79
Time deposits	44,932,730		338,549		2.99		34,187,150		353,308		4.11
Federal funds purchased	—		—		—		402,750		2,884		2.85
FHLB advances	13,868,043		109,921		3.14		11,035,435		87,319		3.15
Total interest-bearing liabilities	83,894,796		571,267		2.70	%	62,988,662		561,803		3.55	%
Non-interest bearing liabilities	3,553,634						4,069,422
Shareholders’ equity	10,203,924						8,800,728
Total liabilities and shareholders’ equity	$	97,652,354					$	75,858,812
Net interest spread					1.98	%					2.38	%
Net interest income/margin			$	515,461	2.22	%			$	513,323	2.83	%

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(1)  Loan fees, which are immaterial, are included in interest income.  There were five nonaccrual loans totaling $2,362,104 at September 30, 2009 and no nonaccrual loans at September 30, 2008.  Nonaccrual loans are included in the average balances above and income on nonaccrual loans is included on the cash basis for yield computation purposes.

Our consolidated net interest margin for the quarter ended September 30, 2009 was 2.22%, a decrease of 61 basis points from the net interest margin of 2.83% for the same period in 2008.  In September 2009, loans totaling $2,362,104 were placed on nonaccrual status and $34,121 of previously accrued interest was reversed.  This reversal of interest in the third quarter of 2009 was the primary reason that our quarterly loan yield declined from 5.14% in the second quarter of 2009 to 5.03% in the quarter ended September 30, 2009.  The average prime interest rate was 5.00% during the three months ended September 30, 2008, while the average prime interest rate during the three-month period ended September 30, 2009 was 3.25%. With a 175 basis point decrease in the average prime rate during the comparable periods, and with approximately 55% of our loan portfolio tied to the prime rate, we experienced an immediate decrease in loan yields as the prime rate decreases occurred as evidenced by the 109 basis point decline in loan yield over the comparable periods.  The cost of interest-bearing liabilities decreased 85 basis points, as we reduced our rates on transaction deposit accounts, and as higher priced certificates of deposits matured and were replaced at lower interest rates.  Fixed maturity certificates of deposit are priced higher than core deposits and have stated maturity dates, so there is not an immediate decrease in the interest rates paid on these time deposits to offset the immediate decrease in loan yields.  The net interest margin is calculated by dividing annualized net interest income by year-to-date average earning assets. Our net interest spread was 1.98% and 2.38% for the quarters ended September 30, 2009 and 2008, respectively. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. In pricing deposits, we consider our liquidity needs, the direction and levels of interest rates and local market conditions.

Provision for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged as a non-cash expense to our statements of operations. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses.

Our provision for loan losses for the quarter ended September 30, 2009 was $75,000 compared to $70,382 for the quarter ended September 30, 2008.  Current economic conditions and credit challenges resulted in the increase in the allowance for loan losses.  Management evaluates the adequacy of the reserve for probable loan losses given the size, mix, and quality of the current loan portfolio as well as other factors, including local economic conditions.  Management also relies on our history of past-dues and charge-offs, as well as peer data to determine our loan loss allowance.

Refer to the discussion below under “Allowance for Loan Losses” for a description of the factors we consider in determining the amount of the provision we expense each period in order to maintain an appropriate allowance for loan losses.

Non-interest Income

Non-interest income totaled $67,978 for the three-month period ended September 30, 2009 compared to $14,787 for the same period in 2008 for an improvement of $53,191.  During the three months ended September 30, 2009, we recorded gains of $29,183 on investment securities sold and called during the period compared to none for the quarter ended September 30, 2008.  One agency bond was called and one corporate and two municipal securities were sold during the quarter.  These proceeds were reinvested in agency bonds and taxable municipal bonds.  Mortgage brokerage fees increased $8,975 for the three-month period ended September 30, 2009 from none in the comparable period in 2008 due to mortgage activity associated with the lower mortgage rate environment. Other income totaled $9,074 for the three-month period ended September 30, 2009 compared to none in the same period in 2008.  During the three months ended September 30, 2009, we recorded a gain of $8,260 on the sale of other real estate owned.  Service charges on deposit accounts increased $5,959, or 40%, from $14,787 for the period ended September 30, 2008 to $20,746 for the comparable period in 2009 due to deposit growth.

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Non-interest Expenses

The following table sets forth our non-interest expenses for the third quarter of 2009 and 2008.

	Three Months Ended September 30,
	2009		2008
Compensation and employee benefits	$	258,895	$	261,894
Occupancy and equipment	50,495		52,165
Data processing and related costs	61,913		57,861
Marketing, advertising and shareholder communications	8,364		5,992
Legal and audit	22,738		14,525
Other professional fees	13,043		11,601
Supplies, postage and telephone	9,150		8,077
Insurance	4,672		4,505
Credit related expenses	15,148		1,168
Courier and armored carrier service	1,779		4,795
Regulatory fees and FDIC insurance	44,610		15,208
Other	9,223		15,229
Total non-interest expense	$	500,030	$	453,020

Non-interest expenses totaled $500,030 for the quarter ended September 30, 2009 compared to $453,020 for the quarter ended September 30, 2008, for an increase of $47,010, or 10%.  Legal and audit fees totaled $22,738 for the quarter ended September 30, 2009 compared to $14,525 for the quarter ended September 30, 2008, for an increase of $8,213 or 57%.   Credit related expenses increased from $1,168 for the quarter ended September 30, 2008 to $15,148 for the quarter ended September 30, 2009, due to attorney fees incurred on loan-related collection and foreclosure efforts as well as real estate taxes incurred on other real estate owned.  Regulatory and FDIC insurance expense increased from $15,208 for the quarter ended September 30, 2008 to $44,610, or 193% for the quarter ended September 30, 2009.  This increase was due to general increases in FDIC assessment rates associated with economic recovery programs and continued growth in the Bank’s deposits.  The FDIC continues to evaluate the insurance fund level and may impose further special assessments in future quarters.  The FDIC currently has submitted a proposal that would require us to prepay the deposit insurance premiums for a period of three years at our current assessment rate.  In the event this proposal is finalized we would recognize the expense over the three year prepayment period.

Nine months ended September 30, 2009 and 2008

General

Our net loss for the nine months ended September 30, 2009 was $139,672, or $0.15 per common share (after preferred stock dividends), compared to a net loss of $80,726 or $0.07 per share, for the nine months ended September 30, 2008, for an increase in net loss of $58,946, or 73%.  The increase in net loss is attributable primarily to net interest margin deterioration between the comparable periods, an increase in our provision for loan losses, and the FDIC special assessment as well as general increases in FDIC insurance costs. This loss was partially offset by improvements in gains on investment securities sales and calls, mortgage loan fees, deposit service charges and increase in net interest income due to growth in earning assets.

Net Interest Income

Net interest income was $1,528,064 for the nine months ended September 30, 2009, which was an increase of $152,810, or 11%, over net interest income of $1,375,254 for the nine months ended September 30, 2008.  Interest income increased $174,868, or 6%, to $3,176,322 for the nine months ended September 30, 2009. Average earning assets increased to $85.5 million for the nine months ended September 30, 2009 from $65.3 million for the nine months ended September 30, 2008, an increase of $20.2 million, or 32%.  Although the volume of average interest-earning assets increased $20.2 million from September 30, 2008 to September 30, 2009, as shown in the table below, we did not experience as significant of an increase in corresponding interest income due to the 218 basis point drop in the average prime rate from period to period. Loan interest and related fees improved $110,723, or 5%, over the same period ended 2008 due to continued growth in the loan portfolio. Interest expense on deposits decreased $134,705, or 9%, for the nine months ended September 30, 2009 as higher-priced certificates of deposit matured and were replaced with lower rates and rates were lowered on all deposit transaction accounts due to the market decrease in rates.  Interest expense on Federal Home Loan Bank advances increased $168,986 due to growth of $7.1 million in the average balance from period to period.

The following table sets forth information related to our average balance sheet, average yields on assets, and average costs of liabilities for the nine months ended September 30, 2009 and 2008. We derived these yields and rates by dividing

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annualized income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated.

Average Balances, Income and Expenses, Yields and Rates for the Nine Months Ended September 30,

	2009						2008
	Average balance		Income/ expense		Yield /rate		Average balance		Income/ expense		Yield /rate
Interest-earning assets:
Federal funds sold	$	3,183,854	$	4,586	0.19	%	$	806,165	$	13,395	2.22	%
Investment securities and FHLB stock	24,121,725		920,433		5.10		20,430,230		847,479		5.54
Loans (1)	58,227,158		2,251,303		5.17		44,106,205		2,140,580		6.48
Total interest-earning assets	85,532,737		3,176,322		4.98	%	65,342,600		3,001,454		6.14	%
Non-earning assets	5,998,031						3,793,348
Total assets	$	91,530,768					$	69,135,948
Interest-bearing liabilities:
Interest checking	$	4,637,227	$	83,763	2.42	%	$	2,078,938	$	32,474	2.09	%
Savings and money market	18,662,679		263,691		1.89		12,794,778		282,345		2.95
Time deposits	40,334,158		962,969		3.19		33,448,151		1,130,309		4.51
Federal funds purchased	158,721		1,084		0.91		535,325		13,307		3.32
FHLB borrowings	14,257,198		336,751		3.16		7,131,551		167,765		3.14
Total interest-bearing liabilities	78,049,983		1,648,258		2.82	%	55,988,743		1,626,200		3.88	%
Non-interest bearing liabilities	3,377,836						3,919,997
Shareholders’ equity	10,102,949						9,227,208
Total liabilities and shareholders’ equity	$	91,530,768					$	69,135,948
Net interest spread					2.15	%					2.26	%
Net interest income/margin			$	1,528,064	2.39	%			$	1,375,254	2.81	%

(1)  Loan fees, which are immaterial, are included in interest income.  There were $2,362,104 in nonaccrual loans at September 30, 2009 and no nonaccrual loans at September 30, 2008.  Nonaccrual loans are included in the average balances above and income on nonaccrual loans is included on the cash basis for yield computation purposes.

Our consolidated net interest margin for the quarter ended September 30, 2009 was 2.39%, a decrease of 42 basis points from the net interest margin of 2.81% for the same period in 2008.  The average prime interest rate was 5.43% during the nine months ended September 30, 2008, while the average prime interest rate during the nine-month period ended September 30, 2009 was 3.25%. With a 218 basis point decrease in the average prime rate during the comparable periods, and with approximately 55% of our loan portfolio tied to the prime rate, we experienced an immediate decrease in loan yields as the prime rate decreases occurred as evidenced by the 131 basis point decline in loan yield over the comparable periods.  The cost of interest-bearing liabilities decreased 106 basis points as rates on transaction deposit accounts were reduced and as higher priced certificates of deposits matured and were replaced at lower interest rates.  Fixed maturity certificates of deposit are priced higher than core deposits and have stated maturity dates, so there is not an immediate decrease in the interest rates paid on these time deposits to offset the immediate decrease in loan yields.  The net interest margin is calculated by dividing annualized net interest income by year-to-date average earning assets. Our net interest spread was 2.15% and 2.26% for the nine months ended September 30, 2009 and 2008, respectively. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. In pricing deposits, we consider our liquidity needs, the direction and levels of interest rates and local market conditions.

Provision for Loan Losses

Our provision for loan losses for the nine months ended September 30, 2009 was $428,185 compared to $182,990 for the nine months ended September 30, 2008. This 134% increase was primarily due to continued growth in the loan portfolio as well as a general increase in the allowance for loan losses as a percentage of loans due to the current credit environment. Management evaluates the adequacy of the reserve for probable loan losses given the size, mix, and quality of the current loan portfolio.  Management also relies on our limited history of past-dues and charge-offs, as well as peer data to determine our loan loss allowance.  Refer to the discussion below under “Allowance for Loan Losses” for a description of the factors we consider in determining the amount of provision we expense each period in order to maintain an appropriate allowance for loan losses.

We increased our allowance as a percentage of outstanding loans to 1.41% at September 30, 2009 from 1.22% at September 30, 2008.

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Non-interest Income

Non-interest income totaled $276,013 for the nine months ended September 30, 2009, an increase of $190,313, or 222%, over $85,700 during the nine months ended September 30, 2008.  During the nine months ended September 30, 2009, we recognized $172,281 in gains on investment securities called or sold during the period, compared to $38,924 in gains for the nine months ended September 30, 2008. Mortgage loan fees increased to $39,096 for the nine-month period ended September, 30, 2009 from $5,245 in the comparable period in 2008 due to increased mortgage volume associated with the lower mortgage rate environment. Service charges on deposit accounts increased $14,131, or 34%, from $41,531 for the period ended September 30, 2008 to $55,662 for the comparable period in 2009 due to continued growth in deposits.

Non-interest Expenses

The following table sets forth our non-interest expenses for the nine month periods ended September 30, 2009 and 2008.

	Nine Months Ended September 30,
	2009		2008
Compensation and employee benefits	$	788,646	$	800,803
Occupancy and equipment	151,704		151,834
Data processing and related costs	183,064		158,460
Marketing, advertising and shareholder communications	32,517		28,035
Legal and audit	72,510		48,664
Other professional fees	31,997		31,075
Supplies, postage and telephone	29,354		26,689
Insurance	13,247		12,409
Credit related expenses	28,782		8,603
Courier and armored carrier service	9,655		14,235
Regulatory fees and FDIC insurance	138,196		39,162
Other	35,892		38,721
Total non-interest expense	$	1,515,564	$	1,358,690

Non-interest expenses were $1,515,564 for the nine months ended September 30, 2009 compared to $1,358,690 for the same period ended September 30, 2008, for an increase of 12%. The most significant increase was in regulatory fees and FDIC insurance, which increased from $39,162 for the nine months ended September 30, 2008 to $138,196 for the same period ended September 30, 2009.  The FDIC special assessment fee (charged to all federally-insured banks) of $41,840 as well as an increase in overall assessment rates to support economic recovery programs impacted this increase.  Our deposit growth also contributed to the increase in FDIC insurance assessments. Data processing costs increased from $158,460 for the nine months ended September 30, 2008 to $183,064 for the same period ended September 30, 2009.  This increase primarily represented our core processor charges, which are, in part, based on growth of the Bank’s deposit accounts. Legal and audit fees increased from $48,664 for the nine months ended September 30, 2008 to $72,510 for the same period ended September 30, 2009 due to increases in the costs for both auditor and legal reviews of SEC filings for 2009. Credit related expenses increased from $8,603 for the nine months ended September 30, 2008 to $28,782 for the same period ended September 30, 2009 due to attorney fees associated with loan-related collection and foreclosures efforts and real estate taxes paid on foreclosed properties.

Balance Sheet Review

General

At September 30, 2009, total assets were $102.2 million compared to $82.6 million at December 31, 2008, for an increase of $19.6 million, or 24%.  The increase in assets included volume increases in our loan and investment portfolios as well as our federal funds sold balances, all of which increased primarily from growth in local deposits.  Interest-earning assets comprised approximately 94% and 95% of total assets at September 30, 2009 and December 31, 2008, respectively. Gross loans totaled $59.7 million, an increase of $5.0 million, or 9%, from $54.7 million at December 31, 2008.  Investment securities and Federal Home Loan Bank stock amounted to $25.5 million at September 30, 2009.  At September 30, 2009, we had federal funds sold balances of $10.6 million compared to $2.2 million at December 31, 2008.

Deposits totaled $78.4 million at September 30, 2009, a $20.7 million, or 36%, increase from $57.7 million at December 31, 2008.  Federal Home Loan Bank advances totaled $12.5 million at September 30, 2009, a $2.0 million, or 14% decrease from $14.5 million at December 31, 2008.  Shareholders’ equity was $10.7 million at September 30, 2009, a $1.1 million, or 12% increase from $9.6 million at December 31, 2008.  The increase in shareholders’ equity was primarily attributable to our sale of preferred stock pursuant to our participation in the U.S. Treasury’s CPP as well as unrealized gains on available for sale investments.

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Investments

On September 30, 2009 and December 31, 2008, the fair values of our investment securities portfolio amounted to $24.7 million and $21.1 million and represented 26% and 27%, respectively, of interest-earning assets.  Unrealized gain, net of income tax, on available for sale investment securities amounted to $205,288 and unrealized losses, net of tax benefit, were $27,761 at September 30, 2009 and December 31, 2008, respectively.  Our portfolio consisted of U.S. government sponsored agencies, mortgage-backed agencies, taxable municipal securities and corporate (bank) bonds.  All of our investment securities are classified as available for sale. The amortized costs and the fair value of our investment securities are shown in the following table.

	September 30, 2009				December 31, 2008
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. Government sponsored agencies	$	12,570,660	$	12,756,174	$	7,519,147	$	7,630,533
Mortgage-backed agencies	2,554,383		2,606,833		8,342,833		8,477,722
Taxable municipal securities	6,025,429		6,111,642		925,359		900,650
Corporate bonds	3,259,370		3,246,236		4,403,823		4,140,195
Total	$	24,409,842	$	24,720,885	$	21,191,162	$	21,149,100

During the nine-month period ended September 30, 2009, we sold the following investment securities:  six mortgage-backed securities, two corporate bonds and two taxable municipal bonds.  Additionally, three agency bonds were called. The proceeds from these sales and calls were reinvested in agency bonds and taxable municipal bonds. Although the corporate (bank) bonds were considered investment grade at the time of sale, we had the opportunity to sell the bonds at a gain and believed disposal was prudent in light of the current market conditions.  The overall yield, average lives or risk-based asset ratios of our investment securities improved as a result of these transactions. The two out-of-state taxable municipal revenue bonds were swapped for South Carolina municipal general obligation bonds, which improved our risk-based asset percentages.  All sales and calls resulted in gains totaling $172,281 for the nine months ended September 30, 2009.

Our corporate (bank) bonds continue to be designated investment grade by Moody’s and Standard & Poors.  Three of our corporate bonds had been in unrealized loss positions for more than 12 months at September 30, 2009.  We believe, based on industry analyst reports and credit ratings, that deterioration in fair values of these bonds as well as other individual investment securities available for sale is attributed to changes in market interest rates and not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary. We have the ability and intent to hold these securities until such time as the value recovers or the securities mature.

Investment securities with market values of approximately $7.3 million and $10.1 million at September 30, 2009 and December 31, 2008, respectively, were pledged to secure public deposits and Federal Home Loan Bank advances.

At September 30, 2009 and December 31, 2008, we held non-marketable equity securities, which consisted of Federal Home Loan Bank stock of $799,300 and $755,900, respectively.  Federal Home Loan Bank stock purchases are required as the level of Federal Home Loan Bank advances increase.  No ready market exists for this stock and it has no quoted market value.  Redemptions of this stock have historically been at par value. Accordingly, this investment is carried at cost, which approximates fair market value.  The Federal Home Loan Bank may pay a dividend on its stock at their discretion.

Loans

Since loans typically provide higher interest yields than other interest-earning assets, it is our goal to ensure that the highest percentage of our earning assets is invested in our loan portfolio. Gross loans outstanding at September 30, 2009 and December 31, 2008 were $59.7 million and $54.7 million, respectively and represented 63% and 69% of interest-earning assets for each of the periods.  The loan portfolio increased $5.0 million during the first nine months of 2009.  This measured growth level is indicative of the slowdown in the economy as well as of our desire to manage our credit risk in the current economic environment.

The percentage of loans in each category remained relatively stable from December 31, 2008 to September 30, 2009, as shown in the table below.  Loans secured by real estate mortgages comprised approximately 83% of loans outstanding at September 30, 2009 and 82% at December 31, 2008. Most of our real estate loans are secured by residential and commercial properties. We do not generally originate traditional long-term residential mortgages, but we do issue traditional second mortgage residential real estate loans and home equity lines of credit. We obtain a security interest in real estate whenever possible, in

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addition to any other available collateral. This collateral is taken to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans we make to 80%.

Due to the short time our portfolio has existed, the loan mix shown below may not be indicative of the ongoing portfolio mix. Management believes that the loan portfolio is adequately diversified, although loans secured by real estate comprise the majority of our portfolio.

The following table summarizes the composition of our loan portfolio at September 30, 2009 and December 31, 2008.

	September 30, 2009					December 31, 2008
	Amount			Percentage of Total		Amount			Percentage of Total
Real Estate:
Construction and development and land	$	16,714,789		28.0	%	$	16,853,472		30.8	%
Commercial	18,664,230			31.3		14,971,240			27.4
Residential mortgages	7,172,861			12.0		6,188,461			11.3
Home equity lines	7,157,762			12.0		6,585,586			12.1
Total real estate	49,709,642			83.3	%	44,598,759			81.6	%
Commercial	8,747,563			14.7		8,916,006			16.3
Consumer	1,240,332			2.0		1,145,660			2.1
Gross loans	59,697,537			100.0	%	54,660,425			100.0	%
Less allowance for loan losses	(841,525		)			(665,442		)
Total loans, net	$	58,856,012				$	53,994,983

Construction and development and land loans represented approximately 28% and 31% of total loans at September 30, 2009 and December 31, 2008, respectively.  Loans secured by land represented approximately 74% of the construction and development and land category at September 30, 2009.  We have concentrations of credit, generally defined as more than 25% of Tier 1 capital and the allowance for loan losses, in the land loan category.  We believe that we have appropriate controls in place to monitor risks associated with these concentrations.

Loans originated as exceptions to our loan policy guidelines may pose additional credit risk to the Bank, if not monitored properly.  We regularly monitor and report to the board of directors all loans approved with loan policy exceptions.

Commercial real estate loans and construction and development loans generally entail additional risks as these loans typically involve larger balances to single borrowers or groups of related borrowers.  The repayment of these loans is typically dependent upon the successful operation of the real estate project.  These risks can be significantly affected by supply and demand in the market, and, as such, are subject to a greater extent to adverse conditions in the local economy.  In light of the current economic conditions and supply and demand associated with real estate in our market, these categories of our loan portfolio pose additional credit risk, and we have identified large performing loans, not considered impaired, within these categories, but with risk characteristics impacted by the current economic environment.  We have allocated an amount associated with significant individual credits not considered impaired, as a component of our overall allowance for loan losses.  In dealing with these risk factors, we generally limit our loans to our local real estate market or to borrowers with which we have experience.

Non-performing Loans, Impairment and Potential Problem Loans

We discontinue accrual of interest on a loan when we conclude that it is doubtful that we will be able to collect interest from the borrower. Generally, a loan will be placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when management believes, after considering the borrower’s financial condition,  economic and the borrower’s industry conditions, if applicable,  and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. A loan on nonaccrual status is considered a non-performing loan.  A payment of interest on a loan that is classified as nonaccrual will be recognized as income when received.  When a loan is placed on nonaccrual status, all previously accrued but unpaid interest is reversed and is deducted from reported interest income and earnings.  Once a loan is placed on nonaccrual status, no additional interest is accrued on the loan balance.  We had three loans 90 days or more past due and on nonaccrual status at September 30, 2009.

Impaired loans are generally nonperforming loans or loans which are 90 days or more delinquent as to principal and interest payments.  At September 30, 2009 we had identified impaired loans of $2,734,955 compared to $1,223,942 at December 

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31, 2008. Of the impaired loans identified at September 30, 2009, $2,362,104 was on non-accrual status. While two of these loans were less than 90 days past-due, management received information indicating that the borrowers are unable to repay the loan.  Interest reversed on these loans totaled $34,121. Based on our evaluation of the deteriorating financial condition of the borrowers and their inability to repay the loans, we considered these loans impaired under the criteria defined in FAS 114, “Accounting by Creditors for Impairment of a Loan”, at September 30, 2009. These loans are collateralized by various assets, including vacant land, residential lots, and commercial real estate. We have obtained or are in the process of obtaining updated appraisals on the collateral associated with these loans.  Based on information available to management at September 30, 2009, we have specifically allocated $240,000 of the allowance for loan losses to these impaired loans.  Management will continue to assess the collateral value associated with these loans.  There were no accruing loans which were contractually past due 90 days or more as to principal or interest payments.

We maintain a list of potential problem loans that are not in nonaccrual status and not considered impaired but that exhibit signs of credit issues.  We add loans to this list when we become aware of potential deterioration in the borrower’s ability to perform.  These loans are identified in order to closely monitor the status.  At September 30, 2009, we had identified potential problem loans totaling $637,000.

Allowance for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged to expense on our consolidated statements of income. The allowance for loan losses was $841,525 and $665,442 as of September 30, 2009 and December 31, 2008, respectively, and represented 1.41% of outstanding loans at September 30, 2009 and 1.22% as of December 31, 2008. The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our allowance for loan losses covers estimated credit losses on individually evaluated loans that are determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan portfolio. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. We believe we have an effective loan review system and loan grading system that is designed to identify, monitor and address asset quality problems in an accurate and timely manner.  Our determination of the allowance for loan losses is based on evaluations of the collectibility of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrowers’ ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons.

Due to our short operating history, the loans in our loan portfolio and our lending relationships are of very recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process known as seasoning. As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because our loan portfolio is new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels.  In recent months, many banks, including our Bank, have begun to see an overall decline in credit quality and have increased their allowance for loan losses accordingly. We continue to carefully monitor our loan portfolio for deterioration.  If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition. Periodically, we will adjust the amount of the allowance based on changing circumstances. We charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period.

In calculating the allowance for loan losses, we utilize a credit grading system, which we apply to each loan.  We calculate our general reserve based on historical and peer loss percentage allocations of each of the categories of unclassified loan types, including commercial, commercial real estate, construction and development, residential mortgages, home equity lines of credit and consumer loans.  The loss factors are adjusted for qualitative factors, including those described above. We also analyze individual significant credits not considered impaired and maintain a general unallocated reserve in accordance with December 2006 regulatory guidance in our assessment of the allowance for loan losses.  Significant individual credits criticized as special mention or classified as substandard or doubtful require individual analysis.  Loans in the substandard category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action such as declining or negative earnings trends and declining or inadequate liquidity or collateral.  Loans in the doubtful category exhibit the same weaknesses found in the substandard category, but the weaknesses are more pronounced.  These loans are not yet rated as loss because certain events may occur which could repay the debt. Loans classified as substandard, but not impaired, totaled $637,000 at September 30, 2009.  These loans were performing and were not past due 30 days or more at September 30, 2009, but these borrowers have exhibited past performance issues. In situations where a loan is considered impaired, the loans are excluded from the general reserve calculations and are assigned a specific reserve.  The specific reserve is based on our analysis of the most

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probable source of repayment which is usually the liquidation of the underlying collateral, but may also include discounted future cash flows.

We have retained an independent consultant to review our loan files on a test basis to assess the grading of samples of loans.  In addition, various regulatory agencies review our allowance for loan losses through their periodic examinations, and they may require us to record additions to the allowance for loan losses based on their judgment about information made available to them at the time of their examination.  Our losses will undoubtedly vary from our estimates, and there is the possibility that charge-offs in future periods will exceed the allowance for loan losses as estimated at any point in time.

We had no loans classified as doubtful at September 30, 2009 and December 31, 2008.  Charge-offs for the nine-month period ended September 30, 2009 were $252,102 compared to none for the same period in 2008.  There were no charge-offs during the third quarter of 2009.  Management pursues recoveries on loans charged-off; however, it is not possible at this time to determine the amount, if any, which may be recovered.  Activity in the allowance for loan losses account is shown below.

Beginning allowance for loan losses at December 31, 2008		$	665,442
Additions to allowance for loan losses charged to provision		428,185
Loans charged-off:
Commercial real estate		(113,749		)
Commercial		(136,542		)
Consumer	��	(1,811		)
Total loans charged-off		(252,102		)
Recoveries on loans previously charged-off		—
Ending allowance for loan losses at September 30, 2009		$	841,525

Other real estate

Loans transferred to other real estate totaled $2,110,341 at September 30, 2009 compared to none at December 31, 2008.  Other real estate is recorded at the lower of net principal loan balance outstanding or estimated fair market value less estimated selling costs.  Estimated fair market values are based on appraisals obtained at the time of acquisition of the properties by the bank.  Other real estate consisted of residential properties as well as vacant commercial-zoned land.  We obtained appraisals on each property at acquisition by the Bank.  Holding period costs are charged to expense as incurred.  Examples of holding period costs include real property taxes, maintenance and insurance.  We sold one residential property during the third quarter of 2009.

Deposits

Our primary source of funds for our loans and investments is our deposits.  Deposits increased $20.7 million, from $57.7 million at December 31, 2008 to $78.4 million at September 30, 2009.  The following table shows the composition of deposits at September 30, 2009 and December 31, 2008.

	September 30, 2009				December 31, 2008
	Amount		Percent of Total		Amount		Percent of Total
Non-interest bearing demand deposits	$	3,610,689	4.60	%	$	3,462,092	6.00	%
Interest bearing checking	6,090,446		7.77		3,040,574		5.27
Money market and savings	18,993,245		24.22		17,430,631		30.22
Time deposits less than $100,000	10,347,154		13.19		4,808,562		8.34
Time deposits $100,000 and over	17,350,360		22.12		10,180,358		17.65
Brokered time deposits, less than $100,000	22,034,000		28.10		18,756,000		32.52
Total	$	78,425,894	100.00	%	$	57,678,217	100.00	%

Core deposits, which exclude time deposits of $100,000 or more and brokered certificates of deposit, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $39.0 million and $28.7 million at September 30, 2009 and December 31, 2008, respectively. Our loan-to-deposit ratio was 76% and 95% at September 30, 2009 and December 31, 2008, respectively.  Local deposits increased $17.5 million, or 85% of the total deposit growth during the first nine months of 2009, and we were able to decrease our reliance on brokered deposits in the first nine months of 2009. Brokered

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deposits represented 28% and 33% at September 30, 2009 and December 31, 2008, respectively. All of our time deposits are certificates of deposits.

As a participant in the FDIC’s TLGP, our Bank incurred additional FDIC premium costs in 2009 associated with our participation.

Borrowings and lines of credit

At September 30, 2009, the Bank had short-term lines of credit with correspondent banks to purchase a maximum of $6.0 million in unsecured federal funds on a one to fourteen day basis for general corporate purposes. The interest rate on borrowings under these lines is the prevailing market rate for federal funds purchased. These accommodation lines of credit are renewable annually and may be terminated at any time at the correspondent banks’ sole discretion.  The Bank utilized these lines of credit in the first quarter of 2009 only. The average amount outstanding during the nine months ended September 30, 2009 was $159,000. No amounts were outstanding at any month-end during the nine months ended September 30, 2009 and the average interest rate paid on these borrowings was .91%.  The average amount outstanding during the year ended December 31, 2008 was $554,000 and the highest month-end amount outstanding during 2008 was $2.2 million and the average interest rate paid on these borrowings during the year was 2.94%.  There were no outstanding amounts on these lines of credit at September 30, 2009 and December 31, 2008.

We are also a member of the Federal Home Loan Bank.  At September 30, 2009 and December 31, 2008, we had $12.5 million and $14.5 million outstanding, respectively in Federal Home Loan Bank borrowings.  At September 30, 2009, we had borrowing capacity with the Federal Home Loan Bank of approximately $8.0 million based on a percentage of our total assets.  Average amounts outstanding were $14.3 million and the maximum amount outstanding was $14.5 million during the nine-month period ended September 30, 2009 at an average interest rate of 3.16%. The average amount outstanding during the year ended December 31, 2008 was $8.9 million and the maximum amount outstanding during the period was $14.5 million at an average interest rate of 3.23%.

Capital Resources

Total shareholders’ equity increased $1.1 million from $9.6 million at December 31, 2008 to $10.7 million at September 30, 2009 primarily due to our issuance of preferred stock of $1 million to the U. S. Treasury.   Common stock increased $40,491 due to stock options compensation expense accrued during the nine months ended September 30, 2009. We recorded an unrealized gain, net of income tax, of $233,049 on investment securities available for sale, which increased shareholders’ equity during the nine-month period.  Our net loss of $139,672 for the nine months ended September 30, 2009 and dividends declared of $27,553 on preferred stock decreased shareholders’ equity.

The Federal Reserve and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%.  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 we file periodic reports with the SEC, we believe that because our stock is not registered under Section 12 of the Securities Exchange Act and 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.  Regardless, our Bank is “well capitalized” under these minimum capital requirements as set per bank regulatory agencies.

Under the capital adequacy guidelines, regulatory capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type of asset. Tier 2 capital consists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations. We are also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.

At the bank level, we are subject to various regulatory capital requirements administered by the federal banking agencies. To be considered “adequately capitalized” under these capital guidelines, we must maintain a minimum total risk-based capital of

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8%, with at least 4% being Tier 1 capital. In addition, we must maintain 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 at least 6%, and a leverage ratio of at least 5%.

The following tables set forth the Bank’s capital ratios at September 30, 2009 and December 31, 2008.

					Well capitalized				Adequately capitalized
September 30, 2009	Actual				requirement				requirement
($ in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total risk-based capital	$	11,236	15.6	%	$	7,230	10.0	%	$	5,784	8.0	%
Tier 1 risk-based capital	10,395		14.4		4,338		6.0		2,892		4.0
Tier 1 leverage capital	10,395		10.6		4,883		5.0		3,906		4.0
					Well capitalized				Adequately capitalized
December 31, 2008	Actual				requirement				requirement
($ in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total risk-based capital	$	10,245	15.9	%	$	6,433	10.0	%	$	5,147	8.0	%
Tier 1 risk-based capital	9,580		14.9		3,860		6.0		2,573		4.0
Tier 1 leverage capital	9,580		11.9		4,023		5.0		3,218		4.0

As stated previously, in the first quarter of 2009 we elected to participate in the U.S. Treasury’s CPP under EESA.  Because we were required to raise substantially more capital in our initial offering than we could immediately utilize and are still a relatively new enterprise, our capital ratios are significantly above the well-capitalized designation as shown in the table above.  While we do not need capital, we believe that given the current economic and capital markets conditions and the impact on credit risk as well as any future capital needs, it was prudent for us to participate.  The maximum amount of capital, for which we were preliminarily approved, was $1,891,000 and we elected to participate in the CPP by selling to the Treasury preferred stock for the sum of $1 million.  We retained $100,000 in the holding company to cover dividend payments to the Treasury for approximately two years.  We injected $900,000 into the Bank and this additional bank capital is reflected in the capital ratios at September 30, 2009 shown above.

We believe that our capital is sufficient to fund the activities of the Bank and that the rate of asset growth will not negatively impact the capital base.   We have no plans for significant capital expenditures for the remainder of 2009.

Effect of Inflation and Changing Prices

The effect of relative purchasing power over time due to inflation has not been taken into account in our consolidated financial statements. Rather, our financial statements have been prepared on an historical cost basis in accordance with accounting principles generally accepted in the United States of America.

Unlike most industrial companies, our assets and liabilities are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on our performance than will the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. We attempt to manage the relationships between interest-sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation.

Off-Balance Sheet Risk

Through the Bank, we have made contractual commitments to extend credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to our clients at predetermined interest rates for a specified period of time. We evaluate each client’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.  At September 30, 2009, the Bank had unfunded commitments to extend credit of $5.4 million through various types of lending arrangements.

Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. A significant portion of the unfunded commitments relate to consumer equity lines of credit and commercial lines of credit. Based on historical experience, we anticipate that a portion of these lines of credit will not be funded.

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Except as disclosed in this document, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments that significantly impact earnings.

Liquidity

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.

At September 30, 2009, our liquid assets, consisting of cash and due from banks and federal funds sold amounted to $12.3 million, or approximately 12% of total assets. Our investment securities available for sale amounted to $24.7 million or approximately 24% of total assets. Unpledged investment securities of $17.4 million at September 30, 2009 traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. At September 30, 2009, $7.3 million of our investment securities were pledged to secure public entity deposits and as collateral for Federal Home Loan Bank borrowings.

Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash needs primarily through the liquidation of temporary investments and the generation of deposits. In addition, we will receive cash upon the maturities of loans and maturities, calls, sales and prepayments on investment securities. At September 30, 2009 we had no outstanding balances on our federal funds purchased lines of credit. Availability on federal funds purchased lines of credit from three correspondent banks was $6.0 million at September 30, 2009.  We are also a member of the Federal Home Loan Bank, from which applications for borrowings can be made.  The Federal Home Loan Bank requires that investment securities or qualifying mortgage loans be pledged to secure advances from them.  We are also required to purchase Federal Home Loan Bank stock in a percentage of each advance.  There was approximately $8.0 million in borrowing capacity available from the Federal Home Loan Bank based on total assets at September 30, 2009.  Federal Home Loan Bank borrowing capacity increases as our quarterly total assets increase and as long as we have sufficient collateral to pledge toward these advances.  We believe that our existing stable base of core deposits along with continued growth in our deposit base will enable us to successfully meet our long term liquidity needs.

Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates, which principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing activities. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business.

We actively monitor and manage our interest rate risk exposure principally by measuring our interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time.

Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available for sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in this same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. We generally would benefit from increasing market rates of interest when we have an asset-sensitive gap position and generally would benefit from decreasing market rates of interest when we are liability-sensitive.  The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those rates are viewed by us as significantly less interest-sensitive than market-based rates such as those paid on noncore deposits. Net interest income may be affected by other significant factors in a given interest rate environment, including changes in the volume and mix of interest-earning assets and interest-bearing liabilities.

At September 30, 2009 and December 31, 2008, we were liability-sensitive over a one-year timeframe.

Recently Issued Accounting Standards

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting and/or disclosure of financial information by the Company.

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In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162,” (“SFAS 168”).  SFAS 168 establishes the FASB Accounting Standards Codification TM (“Codification”) as the source of authoritative generally accepted accounting principles (“GAAP”) for nongovernmental entities.  The Codification does not change GAAP. Instead, it takes the thousands of individual pronouncements that currently comprise GAAP and reorganizes them into approximately 90 accounting Topics, and displays all Topics using a consistent structure.  Contents in each Topic are further organized first by Subtopic, then Section and finally Paragraph. The Paragraph level is the only level that contains substantive content. Citing particular content in the Codification involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure. FASB suggests that all citations begin with “FASB ASC,” where ASC stands for Accounting Standards Codification. Changes to the ASC subsequent to June 30, 2009 are referred to as Accounting Standards Updates (“ASU”).

In conjunction with the issuance of SFAS 168, the FASB also issued its first Accounting Standards Update No. 2009-1, “Topic 105 —Generally Accepted Accounting Principles” (“ASU 2009-1”) which includes SFAS 168 in its entirety as a transition to the ASC.  ASU 2009-1 is effective for interim and annual periods ending after September 15, 2009 and will not have an impact on the Company’s financial position or results of operations but will change the referencing system for accounting standards.  Certain of the following pronouncements were issued prior to the issuance of the ASC and adoption of the ASUs. For such pronouncements, citations to the applicable Codification by Topic, Subtopic and Section are provided where applicable in addition to the original standard type and number.

FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20,” (FASB ASC 325-40-65) (“FSP EITF 99-20-1”) was issued in January 2009.  Prior to the FSP, other-than-temporary impairment was determined by using either Emerging Issues Task Force (“EITF”) Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transferor in Securitized Financial Assets,” (“EITF 99-20”) or SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” (“SFAS 115”) depending on the type of security.  EITF 99-20 required the use of market participant assumptions regarding future cash flows regarding the probability of collecting all cash flows previously projected.  SFAS 115 determined impairment to be other than temporary if it was probable that the holder would be unable to collect all amounts due according to the contractual terms. To achieve a more consistent determination of other-than-temporary impairment, the FSP amends EITF 99-20 to determine any other-than-temporary impairment based on the guidance in SFAS 115, allowing management to use more judgment in determining any other-than-temporary impairment.  The FSP was effective for reporting periods ending after December 15, 2008.  Management has reviewed the Company’s security portfolio and evaluated the portfolio for any other-than-temporary impairments.

The FASB issued SFAS 166 (not yet reflected in FASB ASC), “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140,” (“SFAS 166”) in June 2009.  SFAS 166 limits the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking into consideration the transferor’s continuing involvement.  The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale.  The concept of a qualifying special-purpose entity is removed from SFAS 140 along with the exception from applying FIN 46(R).  The standard is effective for the first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter.  Earlier application is prohibited.  The Company does not expect the standard to have any impact on the Company’s financial statements.

SFAS 167 (not yet reflected in FASB ASC), “Amendments to FASB Interpretation No. 46(R),” (“SFAS 167”) was also issued in June 2009.  The standard amends FIN 46(R) to require a company to analyze whether its interest in a variable interest entity (“VIE”) gives it a controlling financial interest.  A company must assess whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to direct the activities of the VIE that significantly impact its economic performance.  Ongoing reassessments of whether a company is the primary beneficiary is also required by the standard.  SFAS 167 amends the criteria to qualify as a primary beneficiary as well as how to determine the existence of a VIE.  The standard also eliminates certain exceptions that were available under FIN 46(R).  SFAS 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter.  Earlier application is prohibited.  Comparative disclosures will be required for periods after the effective date.  The Company does not expect the standard to have any impact on the Company’s financial position.

The FASB issued ASU 2009—05, “Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value” in August, 2009 to provide guidance when estimating the fair value of a liability.  When a quoted price in an active market for the identical liability is not available, fair value should be measured using (a) the quoted price of an identical liability when traded as an asset; (b) quoted prices for similar liabilities or similar liabilities when traded as assets; or (c) another valuation technique consistent with the principles of Topic 820 such as an income approach or a market approach.  If a restriction exists that prevents the transfer of the liability, a separate adjustment related to the restriction is not required when estimating fair value.  The ASU was effective October 1, 2009 for the Company and will have no impact on financial position or operations.

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ASU 2009-12, “Fair Value Measurements and Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),” issued in September, 2009, allows a company to measure the fair value of an investment that has no readily determinable fair market value on the basis of the investee’s net asset value per share as provided by the investee. This allowance assumes that the investee has calculated net asset value in accordance with the GAAP measurement principles of Topic 946 as of the reporting entity’s measurement date.   Examples of such investments include investments in hedge funds, private equity funds, real estate funds and venture capital funds. The update also provides guidance on how the investment should be classified within the fair value hierarchy based on the value for which the investment can be redeemed.  The amendment is effective for interim and annual periods ending after December 15, 2009 with early adoption permitted.  The Company does not have investments in such entities and, therefore, there will be no impact to our financial statements.

ASU 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force” was issued in October, 2009 and provides guidance on accounting for products or services (deliverables) separately rather than as a combined unit utilizing a selling price hierarchy to determine the selling price of a deliverable.  The selling price is based on vendor-specific evidence, third-party evidence or estimated selling price.  The amendments in the Update are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 with early adoption permitted.  The Company does not expect the update to have an impact on its financial statements.

Issued October, 2009, ASU 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” amends ASC Topic 470 and provides guidance for accounting and reporting for own-share lending arrangements issued in contemplation of a convertible debt issuance.  At the date of issuance, a share-lending arrangement entered into on an entity’s own shares should be measured at fair value in accordance with Topic 820 and recognized as an issuance cost, with an offset to additional paid-in capital.  Loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs.  The amendments also require several disclosures including a description and the terms of the arrangement and the reason for entering into the arrangement.  The effective dates of the amendments are dependent upon the date the share-lending arrangement was entered into and include retrospective application for arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009.   The Company has no plans to issue convertible debt and, therefore, does not expect the update to have an impact on its financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective as of September 30, 2009. There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

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PART II — OTHER INFORMATION

Item 1.   Legal Proceedings.

There are no material pending legal proceedings to which we are a party or of which any of our property is 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.

Not applicable.

Item 6. Exhibits

31.1         Rule 13a-14(a) Certification of the Chief Executive Officer.

31.2         Rule 13a-14(a) Certification of the Chief Financial Officer.

32            Section 1350 Certifications.

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BANKGREENVILLE FINANCIAL CORPORATION

SIGNATURES

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

	BANKGREENVILLE FINANCIAL CORPORATION
	(Registrant)
Dated:  November 12, 2009	By:	/s/ Russel T. Williams
	Russel T. Williams
	Chief Executive Officer
	(Principal Executive Officer)
Dated:  November 12, 2009	By:	/s/ Paula S. King
	Paula S. King
	Chief Financial Officer
	(Principal Financial Officer)

BANKGREENVILLE FINANCIAL CORPORATION

EXHIBIT INDEX

Exhibit
Number	Description
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.