BG Financial Group, Inc. - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20529

FORM 10-Q

MARK ONE

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

o TRANSITION REPORT UNDER SECTION 13 OR 15(d)

OF THE EXCHANGE ACT

FOR THE TRANSITION PERIOD

FROM TO

COMMISSION FILE NUMBER 000-50771

BG FINANCIAL GROUP, INC.

(Exact Name of Registrant as Specified in Charter)

Tennessee			20-0307691
(State or Other Jurisdiction of			(I.R.S. Employer
Incorporation or Organization)			Identification Number)

3095 East Andrew Johnson Highway, Greeneville, Tennessee			37745
(Address of Principal Executive Offices)			(Zip Code)

Registrant’s telephone number, including area code: (423) 636-1555

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 ý NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)

YES o NO ý

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

Common Stock, $1.00 par value, outstanding: 2,306,775 at May 1, 2005

BG FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

	As of			As of
	March 31, 2005			December 31, 2004
ASSETS

Cash and due from banks	$	4,936,747		$	5,538,897
Federal funds sold	8,849,873			7,619,619
Cash and cash equivalents	13,786,620			13,158,516
Federal Home Loan Bank stock, at cost	229,000			226,500
Loans, net of allowance for loan losses of $1,335,599 in 2005 and $1,607,559 in 2004	69,080,761			72,355,286
Premises and equipment, net	3,896,515			3,895,500
Accrued income receivable	393,962			389,308
Deferred tax benefit	575,772			601,307
Foreclosed assets	476,662			489,649
Prepaid expenses	167,236			58,302
Total Assets	$		88,606,528	$	91,174,368

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Deposits:
Noninterest-bearing
Demand	$	6,337,971		$	6,755,994
Interest-bearing
Money market, interest checking and savings	17,040,234			16,046,823
Time deposits	52,709,618			55,584,410
Total Deposits	76,087,823			78,387,227
Accrued interest	193,590			202,564
Other liabilities	124,716			482,134
Federal Home Loan Bank advances	4,314,787			4,359,346
Total Liabilities	80,720,916			83,431,271

STOCKHOLDERS’ EQUITY
Stock:
Preferred stock, no par value; authorized 1,000,000 shares; none issued and outstanding	—			—
Common stock, $0.333 par value; authorized 6,000,000 shares; issued and outstanding 2,306,775 shares at March 31, 2005 and 2,306,775 shares at December 31, 2004	768,925			768,925
Additional paid-in capital	6,920,322			6,920,322
Retained earnings	196,365			53,850
Total Stockholders’ Equity	7,885,612			7,743,097
Total Liabilities and Stockholders’ Equity	$	88,606,528		$	91,174,368

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

BG FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended
	March 31, 2005			March 31, 2004

Interest and dividend income:
Loans, including fees	$	1,250,563		$	1,315,745
Dividends on Federal Home Loan Bank stock	2,513			9,749
Federal funds sold and other	53,866			13,480
Total interest and dividend income	1,306,942			1,338,974

Interest expense:
Deposits	432,357			325,149
Borrowed funds	35,275			35,962
Total interest expense	467,632			361,111
Net interest income before provision for loan losses	839,310			977,863

Provision for (benefit from) loan losses	(131,647		)	66,717
Net interest income after provision for loan losses	970,957			911,146

Noninterest income:
Service charges on deposit accounts	53,820			75,651
Fees from origination of mortgage loans	21,836			28,965
Investment sales commissions	16,660			31,449
Other	4,709			16,483
Total noninterest income	97,025			152,548

Noninterest expenses:
Compensation and benefits	499,075			329,130
Occupancy expenses	119,225			82,089
Marketing	26,978			22,082
Data processing	45,156			47,774
Other operating expenses	210,618			146,035
Total noninterest expense	901,052			627,110
Income before income taxes	166,930			436,584

Income tax expense (benefit)	24,415			169,778

Net income	$	142,515		$	266,806

Earnings per share	$	.06		$	.12

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

BG FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended
	March 31, 2005				March 31, 2004

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$		142,515		$	266,806
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for loan losses	(131,647			)	66,717
Depreciation	76,418				53,062
Realized gain (loss) on sales of foreclosed assets	(3,913			)	(500			)
Deferred income tax benefit	25,535				(6,775			)
Net change in:
Accrued income receivable	(4,654			)	(79,368			)
Other assets	(110,055			)	98,411
Other liabilities	(365,269			)	132,838
Net cash provided (used) by operating activities	(371,070			)	531,191

CASH FLOWS FROM INVESTING ACTIVITIES:
Federal Home Loan Bank stock purchases	(2,500			)	(1,700			)
Proceeds from sales of foreclosed assets	125,888				2,700
Loan originations and principal collections, net	3,406,171				(4,667,045			)
Additions to foreclosed assets	(108,988			)	(30,219			)
Additions to premises and equipment	(77,432			)	(236,107			)
Net cash provided (used) by investing activities	3,343,139				(4,932,371			)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits	575,388				654,337
Net change in certificates of deposit	(2,874,794			)	5,214,843
Federal Home Loan Bank advances	—				276,460
Federal Home Loan Bank repayments	(44,559			)	(36,560			)
Net cash provided (used) by financing activities	(2,343,965			)	6,106,080

Net change in cash and cash equivalents	628,104				1,704,900

Cash and cash equivalents at beginning of year	13,158,516				12,298,970

Cash and cash equivalents at end of year	$	13,786,620			$		14,003,870

SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid on deposits and borrowed funds	$	476,605			$		268,396
Income taxes paid	$	126,000			$		7,960

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

BG FINANCIAL GROUP, INC. AND SUBSIDIARY

Greeneville, Tennessee

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Nature of Business:

BG Financial Group, Inc. (the “Company”) is a bank holding company whose business is conducted by its wholly-owned subsidiary, Bank of Greeneville (the “Bank”). Bank of Greeneville is engaged in the business of originating loans within its lending area, Greeneville and Greene County in Tennessee. The Bank obtains deposits both inside and outside of its primary lending area. The Company was organized in October, 2003. The Company had minimal assets, liabilities or operations until January, 2004, when it acquired the Bank in a Plan of Share Exchange whereby the shareholders exchanged their shares of ownership in the Bank for shares of ownership in the Company on a one-for-one basis. As a part of the Plan of Share Exchange, the Bank became a wholly owned subsidiary of the Company.

The following is a description of the significant policies used in the preparation of the accompanying consolidated financial statements.

Basis of Presentation:

These consolidated financial statements include the accounts of the BG Financial Group, Inc. Significant intercompany transactions and accounts are eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission(“SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (none of which were other than normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and note thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Certain amounts from prior period financial statements have been reclassified to conform to current year’s presentation.

Use of Estimates:

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant management accounting estimate is the appropriate level for the allowance for loan losses. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Note 2. Stock Options and Awards

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123.” This Statement amends Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2003 and are included below.

The Company applies APB Opinion 25 and related interpretations in accounting for the stock option plan. All option grants carry exercise prices equal to or above the fair value of the common stock on the date of the grant. Accordingly, no compensation cost has been recognized. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

	Three-Month Period
	Ended March 31
	2005		2004

Net income, as reported	$	142,515	$	266,806

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	41,901		15,300

Pro forma net income	$	100,614	$	251,506

Earnings per share
Basic — as reported	$	.06	$	.12

Basic — pro forma	$	.04	$	.11

Diluted — as reported	$	.06	$	.11

Diluted — pro forma	$	.04	$	.11

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

Impact of Inflation

The financial statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.

Critical Accounting Estimates

The Company follows generally accepted accounting principles that are recognized in the United States, along with general practices within the banking industry. In connection with the application of those principles and practices, we have made judgments and estimates which, in the case of our allowance for loan and lease losses (ALLL), are material to the determination of our financial position and results of operation.

Recent Accounting Pronouncements

In March 2004, the SEC issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments. Current accounting guidance requires the commitment to originate mortgage loans to be held for sale be recognized on the balance sheet at fair value from inception through expiration or funding. SAB 105 requires that the fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. SAB 105 is effective for commitments to originate mortgage loans to be held for sale that are entered into after March 31, 2004. Its adoption did not have a material impact on the consolidated financial position or results of operations of the Company.

In March 2004, the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force reached a consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than temporary unless: (i) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment’s cost and its fair value. The recognition and measurement provisions were initially effective for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. However, in September 2004, the effective date of these provisions was delayed until the finalization of a FASB Staff Position (FSP) to provide additional implementation guidance. Due to the recognition and measurement provisions being suspended and the final rule delayed, the Company is not able to determine whether the adoption of these new provisions will have a material impact on the consolidated financial position or results of income.

Statement of Position 03-03, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-03) addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes loans acquired in purchase business combinations and applies to all nongovernmental entities, including not-for-profit organizations. The SOP does not apply to loans originated by the entity. The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. Early adoption is encouraged. Specific transition guidance applies to certain loans that currently are within the scope of Practice Bulletin 6, Amortization of Discounts on Certain Acquired Loans. Its adoption is not expected to have material impact on the consolidated financial position or results of operations of the Company.

In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), which revised SFAS No. 123, “Accounting for Stock-Based Compensation. This statement supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The revised statement addresses the accounting for share-based payment transactions with employees and other third parties eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of income. The revised statement is effective as of the first interim period beginning after June 15, 2005. The Company is currently evaluating the provisions of SFAS No. 123R and will adopt it on July 1, 2005 as required.

Forward-Looking Statements

Management’s discussion of the Company and management’s analysis of the Company’s operations and prospects, and other matters, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of federal and state securities laws. Although the Company believes that the assumptions underlying such forward-looking statements contained in this Report are reasonable, any of the assumptions could be inaccurate and, accordingly, there can be no assurance that the forward-looking statements included herein will prove to be accurate. The use of such words as “expect,” “anticipate,” “forecast,” and comparable terms should be understood by the reader to indicate that the statement is “forward-looking” and thus subject to change in a manner that can be unpredictable. Factors that could cause actual results to differ from the results anticipated, but not guaranteed, in this Report, include (without limitation) economic and social conditions, competition for loans, mortgages, and other financial services and products, changes in interest rates, unforeseen changes in liquidity, results of operations, and financial conditions affecting the Company’s customers, and other risks that cannot be accurately quantified or completely identified. Many factors affecting the Company’s financial condition and profitability, including changes in economic conditions, the volatility of interest rates, political events and competition from other providers of financial services simply cannot be predicted. Because these factors are unpredictable and beyond the Company’s control, earnings may fluctuate from period to period. The purpose of this type of information is to provide readers with information relevant to understanding and assessing the financial condition and results of operations of the Company, and not to predict the future or to guarantee results. The Company is unable to predict the types of circumstances, conditions and factors that can cause anticipated results to change. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of changed or unanticipated events, circumstances or results.

General

On January 23, 2004, BG Financial Group, Inc. (“Company”), a bank holding company, acquired all of the outstanding shares of Bank of Greeneville (“Bank”) in a one for one share exchange. The Bank is a Tennessee-chartered, FDIC-insured, non-Member commercial bank offering a wide range of banking services, including checking, savings, and money market deposit accounts, certificates of deposit and loans for consumers, commercial and real estate purposes, and is the principal business of the Company. The Company and the Bank are located at 3095 East Andrew Johnson Highway, Greeneville, Tennessee 37745.

Liquidity

At March 31, 2005, the Company had liquid assets of approximately $13.7 million in the form of cash and federal funds sold compared to approximately $13.2 million on December 31, 2004. Management believes that the liquid assets are adequate at March 31, 2005. Additional liquidity should be provided by the growth in deposit accounts and loan repayments. The Company also has the ability to purchase federal funds and is a member of the Federal Home Loan Bank of Cincinnati that will provide a credit line if necessary. Management is not aware of any trends, events or uncertainties that are reasonably likely to have a material impact on the Company’s short term or long term liquidity.

Results of Operations

The Company had net income of $142,515 or $.06 per share for the quarter ended March 31, 2005 compared to net income of $266,806 or $.12 per share for the quarter ended March 31, 2004 after employee salaries and other operating expenses.

Net Interest Income/Margin

Net interest income represents the amount by which interest earned on various assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of the Company’s earnings. Interest income for the three months ended March 31, 2005 was $1,306,942 compared to $1,338,974 for the same period in 2004, and total interest expense was $467,632 in 2005 compared to $361,111 in 2004 for those same periods.

Provision for Loan Losses

The provision for loan losses represents a charge to operations necessary to establish an allowance for possible loan losses, which in management’s evaluation, is adequate to provide coverage for estimated losses on outstanding loans and to provide for uncertainties in the economy. The provision for loan losses during the three-month period ended March 31, 2005 was $(131,647) as compared to $66,717 for the same three-month period ended March 31, 2004. The $(131,647) provision for the three months ending March 31, 2005 has a positive effect on income and represents an improvement in the overall quality of the loan portfolio, as well as a more detailed review of specific loans by management. This negative provision is due also in part to a reduction in the loan portfolio. During the three months ended March 31, 2005, loan charge-offs were $145,234. The recoveries for the three-month period ended March 31, 2005 were $4,921. The allowance for loan losses was $1,335,599 at March 31, 2005 as compared to $1,607,559 at December 31, 2004, a decrease of 17.0%. The 17.0% decrease in the allowance for loan losses is due mainly to improvement in the quality of the loan portfolio, the reduction of the loan portfolio size, and better collection efforts. The allowance was 1.90% of loans at March 31, 2005. Management believes the allowance for loan losses at March 31, 2005 to be adequate.

Provisions for Income Taxes

In 2002, the Company posted pre-tax income of $130,109 causing management to believe that it is more likely than not that it will generate future taxable income to utilize its net deferred tax asset. As a result, the valuation allowance was eliminated and a net deferred tax asset was recorded for the deductible temporary differences and carryforwards that are expected to be available to reduce future taxable income. The Company’s provision for income tax expense for the three months ended March 31, 2005 and 2004 was $24,415 and $169,778, respectively. Management believes the provision for income taxes at March 31, 2005 to be adequate

Noninterest Income

The Company’s noninterest income consists of service charges on deposit accounts and other fees and commissions. Total noninterest income for three months ended March 31, 2005 was $97,025 compared to $152,548 for the same period in 2004. The main reasons for the decrease were the decrease in investment sales commissions, and the decrease in service charges on deposits. Even though the Company experienced negative growth during the quarter ending March 31, 2005, management projects that other fees and commissions and service charges will increase in 2005 due to the anticipated growth of the Company for the remainder of the year.

Noninterest Expense

Noninterest expenses totaled $901,052 for the three months ended March 31, 2005 as compared to $627,110 for the three months ended March 31, 2004 and consisted of employee costs, occupancy expense and other operating expenses. Salaries and employee benefits (which increased from $329,130 for the three months ended March 31, 2004 when compared to $499,075 for the three months ended March 31, 2005 representing a 51.6% increase). This increase was due mainly to employment of new senior managers and operations personnel.

Financial Condition

Total assets at March 31, 2005, were $88,606,528, a decrease of $2,567,840 or 2.8% compared to 2004 year-end assets of $91,174,368. The decrease in total assets is mainly due to management’s aggressive efforts to improve the quality of the loan portfolio by recognizing trouble loans and taking appropriate action to have the loan either paid and moved or charged off. Deposits decreased to $76,087,823 at March 31, 2005, a decrease of $2,299,404 or 2.9% from $78,387,227 at December 31, 2004. The decrease in deposits was mainly due to management’s efforts through ALCO Committee meetings to best match liquidity and profitability. Securities were $229,000 at March 31, 2005 compared to $226,500 at December 31, 2004.

The Company places an emphasis on an integrated approach to its balance sheet management. Significant balance sheet components of investment securities, loans and sources of funds are managed in an integrated manner with the management of interest rate risk, liquidity, and capital. These components are discussed below.

Loans

Net loans outstanding totaled $69,080,761 at March 31, 2005 compared to $72,355,286 at December 31, 2004. Commercial and real estate negative loan growth accounted for almost all of the approximately $3.3 million decline for the first quarter of 2005.

Management feels the overall quality of loans remains solid. In the event that a loan is 90 days or more past due the accrual of income is generally discontinued when the full collection of principal or interest is in doubt unless the obligations are both well secured and in the process of collection. At March 31, 2005, total loans 90 days or more past due and still accruing interest were $0 while total loans 90 days or more past due and in non-accrual status equaled $2,560,097.

Securities

Federal Home Loan Bank (FHLB) stock at March 31, 2005 had an amortized cost of $229,000 and a market value of $229,000 as compared to an amortized cost of $226,500 and a market value of $226,500 at December 31, 2004. As a member of the FHLB, the Company is required to maintain stock in an amount equal to .15% of total assets. Federal Home Loan Bank stock is carried at cost under the available-for-sale category. Federal Home Loan Bank stock is maintained by the Company at par value of one hundred dollars per share.

Deposits

Total deposits, which are the principal source of funds for the Company, were $76,087,823 at March 31, 2005, compared to $78,387,227 at December 31, 2004 representing a decrease of 2.9%. As previously stated the decline in total deposits is mainly due to management’s efforts through ALCO committee meetings to best match liquidity and profitability. The Company has targeted local consumers, professional and commercial businesses as its central clientele, therefore, deposit instruments in the form of demand deposits, savings accounts, money market demand accounts, NOW accounts, certificates of deposit and individual retirement accounts are offered to customers. The Company established a line of credit with the Federal Home Loan Bank secured by a blanket-pledge of 1-4 family residential mortgage loans. At March 31, 2005 the Company had outstanding advances of $4,314,787 at the Federal Home Loan Bank.

Capital

Equity capital at March 31, 2005 was $7,885,612, an increase of $142,515 from $7,743,097 at December 31, 2004, due to a net profit of $142,515 for the first quarter of 2005.

At March 31, 2005, both the Company’s and Bank’s capital ratios were in excess of the regulatory minimums. Those ratios are as follows:

	Required Minimum Ratio		Bank		Company
Tier 1 Leverage ratio	4.00	%	8.81	%	8.78	%
Tier 1 risk-based capital ratio	4.00	%	10.59	%	10.71	%
Total risk-based capital ratio	8.00	%	11.85	%	11.97	%

Liability and Asset Management

The Company’s Asset/Liability Committee (“ALCO”) actively measures and manages interest rate risk using a process developed by the Company. The ALCO is also responsible for implementing the Company’s asset/liability management policies, overseeing the formulation and implementation of strategies to improve balance sheet positioning and earnings, and reviewing the Company’s interest rate sensitivity position.

The primary tool that management uses to measure short-term interest rate risk is a net interest income simulation model prepared by an independent correspondent institution. These simulations estimate the impact that various changes in the overall level of interest rates over one- and two-year time horizons would have on net interest income. The results help the Company develop strategies for managing exposures to interest rate risk.

Like any forecasting technique, interest rate simulation modeling is based on a large number of assumptions. In this case, the assumptions relate primarily to loan and deposit growth, asset and liability prepayments, interest rates and balance sheet management strategies. Management believes that both individually and in the aggregate the assumptions are reasonable. Nevertheless, the simulation modeling process produces only a sophisticated estimate, not a precise calculation of exposure.

At March 31, 2005, approximately 60% of the institution’s gross loans had adjustable rates. Based on the asset/liability modeling management believes that these loans reprice at a faster pace than liabilities held at the institution. Because the majority of the institutions liabilities are 12 months and under and the gap in repricing is asset sensitive management believes that a rising rate environment would have a positive impact on the Company’s net interest margin. Floors in the majority of the institutions adjustable rate assets also mitigate interest rate sensitivity in a decreasing rate environment.

Off-Balance Sheet Arrangements

The Company, at March 31, 2005, had outstanding unused lines of credit and standby letters of credit that totaled approximately $8,450,000. These commitments have fixed maturity dates and many will mature without being drawn upon, meaning that the total commitment does not necessarily represent the future cash requirements. The Company has the ability to liquidate Federal funds sold or, on a short-term basis, to purchase Federal funds from other banks and to borrow from the Federal Home Loan Bank. At March 31, 2005, the Company had established with correspondent banks the ability to purchase Federal funds if needed.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The information set forth on pages 8 through 13 of Item 2, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS is incorporated herein by reference.

Item 4. Controls and Procedures

a) Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer. The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure control and procedures were effective.

*PART I - FINANCIAL INFORMATION*

Item 1.		Financial Statements.

		The unaudited consolidated financial statements of the Registrant and its wholly owned subsidiary are as follows:
		Consolidated Balance Sheets - March 31, 2005 and December 31, 2004.
		Consolidated Statements of Income - For the three months ended March 31, 2005 and 2004.
		Consolidated Statements of Cash Flows - For the three months ended March 31, 2005 and 2004.
		Notes to Consolidated Financial Statements.
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.		Defaults Upon Senior Securities.

Item 4.		Submission of Matters to a Vote of Security Holders.
Item 5.		Other Information.
Item 6.		Exhibits.

Exhibit No.		Description
3.1*		Charter of BG Financial Group, Inc.
3.2*		Bylaws of BG Financial Group, Inc.
10.1*		Stock Option Agreement between BG Financial Group, Inc. and J.Robert Grubbs
10.2*		Stock Option Agreement between BG Financial Group, Inc and T. Don Waddell
31.1		Certification pursuant to Rule 13a-14a/15d-14(a)
31.2		Certification pursuant to Rule 13a-14a/15d-14(a)
32.1		Certification pursuant to Rule 18 USC Section 1350-Sarbanes-Oxley Act of 2002
32.2		Certification pursuant to Rule 18 USC Section 1350-Sarbanes-Oxley Act of 2002

DATE:	May 16, 2005	/s/ J. Robert Grubbs
		J. Robert Grubbs
		President & Chief Executive Officer

PART I - FINANCIAL INFORMATION