GRAND RIVER COMMERCE INC - FORM 10-K

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EXCEL - IDEA: XBRL DOCUMENT - GRAND RIVER COMMERCE INC	Financial_Report.xls
EX-32.1 - CERTIFICATIOIN - GRAND RIVER COMMERCE INC	v306791_ex32-1.htm
EX-31.2 - CERTIFICATIOIN - GRAND RIVER COMMERCE INC	v306791_ex31-2.htm
EX-31.1 - CERTIFICATIOIN - GRAND RIVER COMMERCE INC	v306791_ex31-1.htm
EX-10.13 - EXHIBIT 10.13 - GRAND RIVER COMMERCE INC	v306791_ex10-13.htm
EX-10.14 - EXHIBIT 10.14 - GRAND RIVER COMMERCE INC	v306791_ex10-14.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

S ANNUAL REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________to ___________.

Commission file number 333-147456

Grand River Commerce, Inc.

(Exact name of registrant as specified in its charter)

Michigan		20-5393246
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

4471 Wilson Ave., SW, Grandville, Michigan 49418		(616) 929-1600
(Address of principal executive offices) (ZIP Code)		Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes x No ¨

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 shorter period that the registrant as required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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).

x Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

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

The aggregate market value of the registrant’s outstanding common stock held by non-affiliates of the registrant as of June 30, 2011, was approximately $16.2 million, based on the last reported trade as of such date. This price reflects inter-dealer prices without retail mark up, mark down, or commissions, and may not represent actual transactions.

The number of common shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 1,700,120 shares of the Company’s Common Stock ($0.01 par value per share) were outstanding as of March 26, 2012.

Grand River Commerce, Inc.

table of contents

Part I
Item 1. Business.	2
Item 1A.Risk Factors.	21
Item 1B.Unresolved Staff Comments.	21
Item 2. Properties.	21
Item 3. Legal Proceedings.	21
Item 4. Mine Safety Disclosures.	21

Part II	21
Item 5.Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	21
Item 6. Selected Financial Data.	23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	23
Item 7A.Quantative and Qualitative Disclosures about Market Risk.	43
Item 8. Financial Statements and Supplementary Data.	43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	76
Item 9A(T).Controls and Procedures.	77
Item 9B.Other Information.	77

Part III	77
Item 10. Directors, Executive Officers and Corporate Governance.	77
Item 11. Executive Compensation.	78
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	78
Item 13. Certain Relationships, Related Transactions and Director Independence.	78
Item 14. Principal Accountant Fees and Services.	78

Part IV	78
Item 15. Exhibits and Financial Statement Schedules	78

Documents Incorporated by Reference

Part III. Items 10 through 14 incorporate by reference portions of the Company’s Definitive Proxy Statement for the Company’s Annual Meeting of Shareholders to be held May 24, 2012.

Part I

Forward-Looking Statements

This annual report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable laws, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Item 1.

Business.

References

As used in this annual report, the terms “we,” “us,” “our,” “GRCI” and “the Company” means Grand River Commerce, Inc. and its wholly-owned subsidiary, Grand River Bank, on a consolidated basis, unless otherwise indicated. As used in this annual report the term “the Bank” means Grand River Bank, a wholly-owned subsidiary of the Company. All dollar amounts in this annual report refer to U.S. dollars unless otherwise indicated.

Overview

General

Grand River Commerce, Inc., the parent company for its wholly-owned subsidiary Grand River Bank, was incorporated in August 2006 for the purpose of operating as a bank holding company. The Company and the Bank were incorporated under the laws of the state of Michigan. The Bank commenced banking operations on April 30, 2009. In January 2012, the Bank established a subsidiary, GRO Properties, LLC, to hold properties acquired by the Bank through foreclosure.

Our offices and the Bank are located at 4471 Wilson Ave SW, Grandville, Michigan. This facility is composed of two suites which total approximately 8,500 square feet and is currently subject to a 36 month lease which expires on December 31, 2013. Our telephone number is (616) 929-1600. Currently the Bank serves its market through a single location.

Grand River Bank is a Michigan state chartered community bank that provides banking services to small- to medium-sized commercial, professional and service companies and consumers, principally in Kent and Ottawa Counties. Our primary market area consists of the Grand Rapids area located in Kent County and the areas adjoining Grandville, some of which are located in Ottawa County. The economic base is growing in diversity and today includes the expanding industries of medical research, health care and alternative energy in addition to the automotive, furniture and related manufacturing industries which have historically been the economic foundation of the region. This growth is the result of private investment in the infrastructure of the local economy and a strong partnership between business and government in the area. In addition, the area is growing as an art and cultural center following the success of recent nationally recognized annual events such as Art Prize and Laughfest.

The Bank is a full-service banking institution that offers a variety of deposit, payment, credit and other financial services to all types of customers. These services include savings, time and demand deposit products as well as electronic banking services that include internet banking and remote deposit services for commercial customers. Loans, both commercial and consumer, are extended primarily on a secured basis to corporations, partnerships and individuals. The principal source of income for the Company and the Bank is interest and fee income earned on loans. Interest and fee income on loans accounted for 92% of income in 2011 and in 2010. The Company and the Bank have no foreign assets or income.

Lending Activities

General. We emphasize a range of lending services, including real estate, commercial, equity-line and consumer loans to individuals, small- to medium-sized businesses, and professional concerns that are located in or conduct a substantial portion of their business in the Bank’s market area. We compete for these loans with competitors who are well established in our service area and have greater resources and lending limits. As a result, in some instances, we may charge lower interest rates or structure more customized loan facilities to attract borrowers.

The national and super-regional banks in our service area will likely make proportionately more loans to medium- to large-sized businesses in comparison to the Bank. Many of the Bank’s commercial loans are made to small- to medium-sized businesses which may be less able to withstand competitive, economic, and financial conditions than larger borrowers.

Loan Approval and Review. Our loan approval policies provide for various levels of officer lending authority. When the amount of aggregate loans to a single borrower exceeds that individual officer’s lending authority, the loan request is considered and approved by an officer with a higher lending limit, the loan committee or the Board of Directors. We do not make loans to any officer or director of the Bank unless the loan is approved by the Board of Directors of the Bank (with the interested director recusing him or herself from the deliberation process and the vote) and is made on terms not more favorable to the person than would be available to a person not affiliated with the Bank as per the requirements of the Board of Governors of the Federal Reserve System Regulation O.

Loan Distribution. The percentage distribution of our loans following our three years of operation is as follows as of December 31:

	2011			2010			2009
	% of Total			% of Total			% of Total
Commercial		9.0	%		10.9	%		14.5	%
Commercial Real Estate		86.7			84.4			79.8
Consumer		4.3			4.7			5.7

Our loan distribution will depend on our customers and will likely vary over time. Current market conditions combined with the skills of our lending staff have presented the greatest opportunities for commercial real estate lending. Commercial and industrial loans are generally associated with business growth and expansion which is currently minimized in both the West Michigan marketplace as well as nationally. Additionally, competition for the demand that does exist for commercial and industrial loans is strong due to limitations on many local competitors’ ability to finance loans secured by commercial real estate.

Allowance for Loan Losses. We maintain an allowance for loan losses, which we establish through a provision for loan losses charged against income. We will charge-off loans against this allowance when we believe that the collectability of the principal is unlikely. The allowance is an estimated amount that we believe will be adequate to absorb losses inherent in the loan portfolio based on evaluations of its collectability. Our allowance for loan losses equals 1.13% of the actual outstanding balance of our loans as of December 31, 2011. Over time, we periodically determine the amount of the allowance based on our consideration of several factors, including:

an ongoing review of the quality, mix and size of our overall loan portfolio;

our historical loan loss experience and the experience of peer banks in our market;

evaluation of economic conditions and other qualitative factors;

specific problem loans and commitments that may affect the borrower’s ability to pay;

regular reviews of loan delinquencies and loan portfolio quality by our chief credit officer and internal audit staff, independent third-parties, and by our bank regulators; and

the value of collateral, including guarantees, securing the loans.

Lending Limits. The Bank’s lending activities are subject to a variety of lending limits imposed by federal law. In general, the Bank is subject to a legal limit on loans to a single borrower equal to 15% of the Bank’s capital and unimpaired surplus. This limit may be increased to 25% of the Bank’s capital and unimpaired surplus with 2/3 of the Board of Directors approving such limit. These limits will increase or decrease as the Bank’s capital increases or decreases. Unless the Bank is able to sell participations in our loans to other financial institutions, the Bank is not able to meet all of the lending needs of loan customers requiring aggregate extensions of credit above these limits.

Credit Risk. The principal credit risk associated with each category of loans is the creditworthiness of the borrower. Borrower creditworthiness is affected by general economic conditions and the strength of the manufacturing, health care and other services, and retail market segments. General economic factors affecting a borrower’s ability to repay include interest, inflation, employment rates, and the strength of local and national economy, as well as other factors affecting a commercial borrower’s customers, suppliers, and employees.

Commercial Loans. We make many types of loans available to business organizations and individuals on primarily a secured basis, including commercial, term, working capital, asset based, SBA loans, commercial real estate, lines of credit, and mortgages. We intend to focus our commercial lending efforts on companies with revenue of less than $20 million. Construction loans are also available for eligible individuals and contractors. The construction lending will be short-term, generally with maturities of less than twelve months, and be set up on a draw basis. Commercial loans primarily have risk that the primary source of repayment, the borrowing business, will be insufficient to service the debt. Often this occurs as the result of changes in local economic conditions or in the industry in which the borrower operates which impact cash flow or collateral value. While our Bank routinely takes real estate as collateral, our credit policy places emphasis on the cash flow characteristics of our borrowers. We expect that our commercial lending will be focused on small- to medium-size businesses located in or serving the primary service area. We consider “small businesses” to include commercial, professional including health care, and retail firms with annual sales of $20 million or less. Commercial lending will include loans to entrepreneurs, professionals and small- to medium-sized firms.

Small business products include:

working capital and lines of credit;

business term loans to purchase fixtures and equipment, site acquisition or business expansion;

inventory, accounts receivable lending; and

construction loans for both owner-occupied and non-owner occupied buildings.

Within small business lending, we also utilize government enhancements such as the U.S. Small Business Administration (“SBA”) programs. These loans will typically be partially guaranteed by the federal government. Government guarantees of SBA loans will not exceed 75% of the loan value, and will generally be less than 75% of the loan value.

Real Estate Loans. We expect that loans secured by first or second mortgages on real estate will make up a significant portion of the Bank’s loan portfolio. These loans generally fall into one of two categories: commercial real estate loans and construction development loans. These loans include commercial loans where the Bank takes a security interest in real estate out of abundance of caution and not as the principal collateral for the loan, but exclude home equity loans, which are classified as consumer loans. We expect to focus our real estate-related activity in four areas: (1) owner-occupied commercial real estate loans, (2) home equity loans, (3) conforming and non-conforming residential mortgages and (4) commercial investment property loans.

We offer fixed and variable rates on mortgages. These loans are made consistent with the Bank’s appraisal policy and with the ratio of the loan principal to the value of collateral as established by independent appraisal generally not to exceed 80%. We expect these loan to value ratios will be sufficient to compensate for fluctuations in real estate market value. Some loans may be sold in the secondary market in conjunction with performance management or portfolio management goals.

Real estate-related products include:

acquisition and development (A&D) loans for residential and multi-family construction loans;

construction and permanent lending for investor-owned property; and

construction and permanent lending for commercial (owner occupied) property.

Real estate loans are subject to the same general risks as other loans. Real estate loans are also sensitive to fluctuations in the value of the real estate securing the loan. On first and second mortgage loans, we do not advance more than regulatory limits. We require a valid mortgage lien on all real property loans along with a title lien policy which insures the validity and priority of the lien. We also require borrowers to obtain hazard insurance policies and flood insurance if applicable. Additionally, certain types of real estate loans have specific risk characteristics that vary according to the collateral type securing the loan and the terms and repayment sources for the loan.

Consumer Loans. We offer consumer loans to customers in our primary service area. Consumer lending products include:

installment loans (secured and unsecured); and

consumer real estate lending as discussed above.

Consumer loans are generally considered to have greater risk than first or second mortgages on residential real estate because the value of the secured property may depreciate rapidly, they are often dependent on the borrower’s employment status as the sole source of repayment, and some of them are unsecured. To mitigate these risks, we analyze selective underwriting criteria for each prospective borrower, which may include the borrower’s employment history, income history, credit bureau reports, or debt to income ratios. If the consumer loan is secured by property, such as an automobile loan, we also attempt to offset the risk of rapid depreciation of the collateral with a shorter loan amortization period. Despite these efforts to mitigate our risks, consumer loans have a higher rate of default than real estate loans. For this reason, we also attempt to reduce our loss exposure to these types of loans by limiting their sizes relative to other types of loans. We have no plans to engage in any sub-prime or speculative lending, including plans to originate loans with relatively high loan-to-value ratios.

Deposit Services

We offer a full range of deposit services that are typically available in most banks and savings and loan associations, including checking accounts, NOW accounts, Health Savings Accounts, commercial accounts, savings accounts, and time deposits accounts. The transaction accounts and time certificates are tailored to our primary service area at competitive rates. In addition, we offer certain retirement account services, including IRAs. We solicit these accounts from individuals, businesses, and other organizations.

Other Banking Services

We offer cashier’s checks, banking by mail, remote deposit capture, online banking, ATM/debit cards and United States Savings Bonds. We are associated with national ATM networks that may be used by the Bank’s customers throughout the country. We believe that by being associated with a shared network of ATMs, we are better able to serve our customers and will be able to attract customers who are accustomed to the convenience of using ATMs. We offer credit card services through a third party. We do not have trust powers and we do not offer non-traditional banking products.

Competition

The banking business is highly competitive. We compete as a financial intermediary with other commercial banks, savings banks, credit unions, finance companies, and money market mutual funds operating in our primary service area. Many of these institutions have substantially greater resources and lending limits than we will have, and many of these competitors offer services, including extensive and established branch networks and trust services that we either do not expect to provide or will not provide in the near term. Our competitors include large national, super regional and regional banks like Bank of America, PNC, Comerica Bank, Chemical Bank, Fifth Third and Huntington Bank, as well as established local community banks such as Macatawa Bank, Mercantile Bank and Founders Bank. Nevertheless, we believe that our management team, our focus on relationship banking, and the economic and demographic dynamics of our service area will allow us to gain a meaningful share of the area’s deposits and lending activities.

Effects of Compliance with Environmental Regulations

The nature of the business of the Bank is such that it may hold title, on a temporary or permanent basis, to parcels of real property. These can include properties owned for branch offices and other business purposes as well as properties taken in or in lieu of foreclosure to satisfy loans in default. Under current state and federal laws, present and past owners of real property may be exposed to liability for the cost of cleanup of environmental contamination on or originating from those properties, even if they are wholly innocent of the actions that caused the contamination. These liabilities can be material and can exceed the value of the contaminated property. Management is not presently aware of any instances where compliance with these provisions will have a material effect on the capital expenditures, earnings or competitive position of the Company or the Bank, or where compliance with these provisions will adversely affect a borrower's ability to comply with the terms of loan contracts. The Company does not currently own any real property.

Employees

As of December 2011, the Bank had approximately 19 full-time employees and 1 part-time employee. The Company believes that its relations with its employees are good.

Supervision and Regulation

Banking is a complex, highly regulated industry. Consequently, the growth and earnings performance of Grand River Commerce, Inc. and Grand River Bank can be affected, not only by management decisions in general and local economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. These authorities include, but are not limited to the Securities and Exchange Commission (SEC), the Board of Governors of the Federal Reserve System (Federal Reserve), the FDIC (Federal Deposit Insurance Corporation), OFIR (Michigan Office of Financial and Insurance Regulation), the IRS (Internal Revenue Service) and state taxing authorities. The effect of these statutes, regulations and policies and any changes to any of them can be significant and cannot be predicted.

The primary goals of the bank regulatory scheme are to maintain a safe and sound banking system and to facilitate the conduct of sound monetary policy. In furtherance of these goals, Congress has created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies and the banking industry. The system of supervision and regulation applicable to Grand River Commerce, Inc. and Grand River Bank establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC’s deposit insurance funds, the Bank’s depositors and the public, rather than the shareholders and creditors. The following is an attempt to summarize some of the relevant laws, rules and regulations governing banks and bank holding companies, but does not purport to be a complete summary of all applicable laws, rules and regulations governing banks and bank holding companies. The descriptions are qualified in their entirety by reference to the specific statutes and regulations discussed.

Grand River Commerce, Inc.

General. The Company, as the sole shareholder of the Bank, is a bank holding company. As a bank holding company, the Company is required to register with, and is subject to regulation by, the Federal Reserve under the Bank Holding Company Act, as amended (the “BHCA”). Under the BHCA, the Company is subject to periodic examination by the Federal Reserve and is required to file periodic reports of its operations and such additional information as the Federal Reserve may require.

The BHCA and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.

Source of Strength. Under the Federal Reserve’s “source of strength” doctrine, a bank holding company is required to act as a source of financial and managerial strength to any subsidiary bank. The holding company is expected to commit resources to support a subsidiary bank, including at times when the holding company may not be in a financial position to provide such support. A bank holding company’s failure to meet its source-of-strength obligations may constitute an unsafe and unsound practice or a violation of the Federal Reserve’s regulations, or both. The source-of-strength doctrine most directly affects bank holding companies in situations where the bank holding company’s subsidiary bank fails to maintain adequate capital levels. This doctrine was codified by the Dodd-Frank Act, but the Federal Reserve has not yet adopted regulations to implement this requirement. As discussed below, we could be required to guarantee the capital plan of the Bank if it becomes undercapitalized for purposes of banking regulations.

Certain acquisitions. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before (i) acquiring more than five percent of the voting stock of any bank or other bank holding company, (ii) acquiring all or substantially all of the assets of any bank or bank holding company, or (iii) merging or consolidating with any other bank holding company.

Additionally, the BHCA provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to create a monopoly or substantially lessen competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved and the convenience and needs of the community to be served. The Federal Reserve’s consideration of financial resources generally focuses on capital adequacy, which is discussed below. As a result of the Patriot Act, which is discussed below, the Federal Reserve is also required to consider the record of a bank holding company and its subsidiary bank(s) in combating money laundering activities in its evaluation of bank holding company merger or acquisition transactions.

Under the BHCA, if adequately capitalized and adequately managed, any bank holding company located in Michigan may purchase a bank located outside of Michigan. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Michigan may purchase a bank located inside Michigan. In each case, however, restrictions currently exist on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits.

Change in bank control. Subject to various exceptions, the BHCA and the Change in Bank Control Act of 1978, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. With respect to Grand River Commerce, control is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities.

Permitted activities. Generally, bank holding companies are prohibited under the BHCA, from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in any activity other than (i) banking or managing or controlling banks or (ii) an activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.

Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:

factoring accounts receivable;

making, acquiring, brokering or servicing loans and usual related activities;

leasing personal or real property;

operating a non-bank depository institution, such as a savings association;

trust company functions;

financial and investment advisory activities;

conducting discount securities brokerage activities;

underwriting and dealing in government obligations and money market instruments;

providing specified management consulting and counseling activities;

performing selected data processing services and support services;

acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and

performing selected insurance underwriting activities.

Despite prior approval, the Federal Reserve has the authority to require a bank holding company to terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates when the Federal Reserve believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. A bank holding company that qualifies and elects to become a financial holding company is permitted to engage in additional activities that are financial in nature or incidental or complementary to financial activity. The BHCA expressly lists the following activities as financial in nature:

lending, exchanging, transferring, investing for others, or safeguarding money or securities;

insuring, guaranteeing or indemnifying against loss or harm, or providing and issuing annuities, and acting as principal, agent or broker for these purposes, in any state;

providing financial, investment or advisory services;

issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;

underwriting, dealing in or making a market in securities;

other activities that the Federal Reserve may determine to be so closely related to banking or managing or controlling banks as to be a proper incident to managing or controlling banks;

foreign activities permitted outside of the United States if the Federal Reserve has determined them to be usual in connection with banking operations abroad;

merchant banking through securities or insurance affiliates; and

insurance company portfolio investments.

To qualify to become a financial holding company, Grand River Bank and any other depository institution subsidiary that we may own at the time must be well capitalized and well managed and must have a Community Reinvestment Act rating of at least satisfactory. Additionally, the Company is required to file an election with the Federal Reserve to become a financial holding company and to provide the Federal Reserve with 30 days’ written notice prior to engaging in a permitted financial activity. A bank holding company that falls out of compliance with these requirements may be required to cease engaging in some of its activities. The Federal Reserve serves as the primary “umbrella” regulator of financial holding companies, with supervisory authority over each parent company and limited authority over its subsidiaries. Expanded financial activities of financial holding companies generally will be regulated according to the type of such financial activity: banking activities by banking regulators, securities activities by securities regulators and insurance activities by insurance regulators. We remain a bank holding company but may at some time in the future elect to become a financial holding company.

Sound banking practice. Bank holding companies are not permitted to engage in unsound banking practices. For example, the Federal Reserve’s Regulation Y requires a holding company to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases in the preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. As another example, a holding company could not impair its subsidiary bank’s soundness by causing it to make funds available to non-banking subsidiaries or their customers if the Federal Reserve believed it not prudent to do so.

The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) expanded the Federal Reserve’s authority to prohibit activities of bank holding companies and their non-banking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations. FIRREA increased the amount of civil money penalties which the Federal Reserve can assess for activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1,000,000 for each day the activity continues. FIRREA also expanded the scope of individuals and entities against which such penalties may be assessed.

Anti-tying restrictions. Bank holding companies and affiliates are prohibited from tying the provision of services, such as extensions of credit, to other services offered by a holding company or its affiliates.

Dividends. Consistent with its policy that bank holding companies should serve as a source of financial strength for their subsidiary banks, the Federal Reserve has stated that, as a matter of prudence, Grand River Commerce, Inc. as a bank holding company, generally should not maintain a rate of distributions to shareholders unless its available net income has been sufficient to fully fund the distributions, and the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality and overall financial condition. In addition, we are subject to certain restrictions on the making of distributions as a result of the requirement that the Bank maintain an adequate level of capital as described below. As a Michigan corporation, we are restricted under the Michigan Business Corporation Act from paying dividends if we are unable to meet our current obligations or in doing so the total assets of the company plus the amount of the dividend become less than the liabilities rendering the company insolvent.

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 was enacted in response to public concerns regarding corporate accountability in connection with certain accounting scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.

The Sarbanes-Oxley Act includes specific additional disclosure requirements, requires the Securities and Exchange Commission and national securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules, and mandates further studies of certain issues by the Securities and Exchange Commission. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a Board of Directors and management and between a Board of Directors and its committees.

Grand River Bank

General. The Bank is a Michigan state-chartered bank, the deposit accounts of which are insured by the FDIC. As a state-chartered non-member bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the OFIR, as the chartering authority for state banks, and the FDIC, as administrator of the deposit insurance fund, and to the statutes and regulations administered by the OFIR and the FDIC governing such matters as capital standards, mergers, establishment of branch offices, subsidiary investments and activities and general investment authority. The Bank is required to file reports with the OFIR and the FDIC concerning its activities and financial condition and is required to obtain regulatory approvals prior to entering into certain transactions, including mergers with, or acquisitions of, other financial institutions.

Business Activities. The Bank’s activities are governed primarily by Michigan’s Banking Code of 1999 (the “Banking Code”) and the Federal Deposit Insurance Act, as amended (“FDIA”). The Gramm-Leach-Bliley Financial Services Modernization Act of 1999, expands the types of activities in which a holding company or national bank may engage. Subject to various limitations, the act generally permits holding companies to elect to become financial holding companies and, along with national banks, conduct certain expanded financial activities related to insurance and securities, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency activities; merchant banking activities; and activities that the Federal Reserve has determined to be closely related to banking. The Gramm-Leach-Bliley Act also provides that state chartered banks meeting the above requirements may own or invest in “financial subsidiaries” to conduct activities that are financial in nature, with the exception of insurance underwriting and merchant banking, although five years after enactment, regulators will be permitted to consider allowing financial subsidiaries to engage in merchant banking. Banks with financial subsidiaries must establish certain firewalls and safety and soundness controls, and must deduct their equity investment in such subsidiaries from their equity capital calculations. Expanded financial activities of financial holding companies and banks will generally be regulated according to the type of such financial activity: banking activities by banking regulators, securities activities by securities regulators, and insurance activities by insurance regulators. Under Section 487.14101 of the Michigan Banking Code, a Michigan state chartered bank, upon satisfying certain conditions, may generally engage in any activity in which a national bank can engage. Accordingly, a Michigan state chartered bank generally may engage in certain expanded financial activities as described above. The Bank currently has no plans to conduct any activities through financial subsidiaries.

Financial Reform - The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law on July 21, 2010 as a response to the recent recession, is the most sweeping change to financial regulation in the United States since the Great Depression and represents a significant change in the American financial regulatory environment affecting all Federal financial regulatory agencies and affecting almost every aspect of the nation's financial services industry. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things, will:

Centralize responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and enforcing compliance with federal consumer financial laws.

Restrict the preemption of state law by federal law and disallow subsidiaries and affiliates of national banks from availing themselves of such preemption.

Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies, which, among other things, will require a corporation to deduct, over three years beginning January 1, 2013, all trust preferred securities from the corporation’s Tier 1 capital. The federal banking agencies published a final rule regarding minimum leverage and risk-based capital requirements for banks and bank holding companies consistent with the requirements of Section 171 of the Dodd-Frank Act on June 14, 2011.

Require the Office of the Comptroller of the Currency to seek to make its capital requirements for national banks, countercyclical so that capital requirements increase in times of economic expansion and decrease in times of economic contraction.

Require financial holding companies, to be well capitalized and well managed as of July 21, 2011. Bank holding companies and banks must also be both well capitalized and well managed in order to acquire banks located outside their home state.

Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund (“DIF”) and increase the floor of the DIF.

Impose comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institution itself.

Require large, publicly traded bank holding companies, to create a risk committee responsible for the oversight of enterprise risk management.

Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions.

Make permanent the $250 thousand limit for federal deposit insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100 thousand to $250 thousand and provide unlimited federal deposit insurance until December 31, 2012 for noninterest bearing demand transaction accounts at all insured depository institutions.

Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. The Federal Reserve’s final rule repealing Regulation Q, Prohibition Against Payment of Interest on Demand Deposits, became effective on July 21, 2011.

Amend the Electronic Fund Transfer Act (“EFTA”) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. Provisions in the legislation that affect the payment of interest on demand deposits and interchange fees are likely to increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. Some of the rules that have been proposed and, in some cases, adopted to comply with the Dodd-Frank Act’s mandates are discussed further under “Regulatory Capital Requirements”.

Deposit Insurance. Substantially all of the deposits of Grand River Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating (“CAMELS rating”). The risk matrix utilizes four risk categories which are distinguished by capital levels and supervisory ratings.

In February 2009, the FDIC issued final rules to amend the DIF restoration plan, change the risk-based assessment system and set assessment rates for Risk Category 1 institutions beginning in the second quarter of 2009. For Risk Category 1 institutions that have long-term debt issuer ratings, the FDIC determines the initial base assessment rate using a combination of weighted-average CAMELS component ratings, long-term debt issuer ratings (converted to numbers and averaged) and the financial ratios method assessment rate (as defined), each equally weighted. The initial base assessment rates for Risk Category 1 institutions range from 12 to 16 basis points, on an annualized basis. After the effect of potential base-rate adjustments, total base assessment rates range from 7 to 24 basis points. The potential adjustments to a Risk Category 1 institution’s initial base assessment rate include (i) a potential decrease of up to 5 basis points for long-term unsecured debt, including senior and subordinated debt and (ii) a potential increase of up to 8 basis points for secured liabilities in excess of 25% of domestic deposits.

Newly insured institutions are defined as any bank or thrift that has not been chartered for at least five years. Effective January 1, 2010, any new institution in Risk Category I, regardless of whether it has CAMELS component ratings or not, is assessed at the maximum initial base assessment rate applicable to Risk Category I institutions. Beginning with the June 2010 invoice, the maximum initial base assessment rate for a Risk Category I newly insured institution continues until the institution has become an established federal depository institution.

In November 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform three-basis point increase in assessment rates effective on January 1, 2011. In December 2009, the Bank paid approximately $40,000 in prepaid risk-based assessments which was based on the Bank’s level of deposits in 2009, the year the bank commenced operations. Since the Bank’s deposits grew at a faster pace than the prepayment calculation accounted for, the majority of the prepayment was utilized in 2010. The balance remaining and included in accrued interest receivable and other assets was $0 as of December 31, 2011 and $2,000 as of December 31, 2010 on the accompanying consolidated balance sheets.

In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. Under the new restoration plan, the FDIC agreed to forego the uniform three-basis point increase in initial assessment rates that were scheduled to take place on January 1, 2011 and maintain the current schedule of assessment rates for all depository institutions. At least semi-annually, the FDIC will update its loss and income projections for the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required.

In November 2010, the FDIC issued a notice of proposed rulemaking to change the deposit insurance assessment base from total domestic deposits to average total assets minus average tangible equity, as required by the Dodd-Frank Act, effective April 1, 2011. The FDIC also issued a notice of proposed rulemaking to revise the deposit insurance assessment system for large institutions.

In February 2011, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) approved a final rule on Assessments, Dividends, Assessment Base and Large Bank Pricing. The final rule encompasses the November 2010 change to the assessment base and the October 2010 DIF restoration plan. The rule revises the assessment system applicable to large banks to eliminate reliance on debt issuer ratings and make it more forward looking. Dodd-Frank required that the base on which deposit insurance assessments are charged be revised from one based on domestic deposits to one based on assets.

The new large bank pricing system will result in higher assessment rates for banks with high-risk asset concentrations, less stable balance sheet liquidity, or potentially higher loss severity in the event of failure. Over the long term, large institutions that pose higher risk will pay higher assessments when they assume these risks rather than when conditions deteriorate.

The final rule also revised the assessment rate schedule effective April 1, 2011, and adopts additional rate schedules that will go into effect when the Deposit Insurance Fund (DIF) reserve ratio reaches various milestones. These future rate schedules should accomplish the goals of maintaining a positive fund balance, even during periods of large fund losses, and maintaining steady, predictable assessment rates throughout economic and credit cycles. The changes went into effect beginning with the second quarter of 2011 and were payable at the end of September 2011.

Our FDIC insurance expense totaled $61,000 in 2011 and $50,000 in 2010. FDIC insurance expense includes deposit insurance assessments and Financing Corporation (“FICO”) assessments related to outstanding FICO bonds. The FICO is a mixed-ownership government corporation established by the Competitive Equality Banking Act of 1987 whose sole purpose was to function as a financing vehicle for the now defunct Federal Savings & Loan Insurance Corporation.

Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

De Novo Bank Supervision. In August 2009, the FDIC published guidance that extended supervisory procedures for de novo banks from three years to seven years. Under this guidance, the Bank will be subject to the de novo supervisory procedures until April 2016. The effect of the extension is to lengthen the period of time that the Bank will be subject to increased capital requirements, which require the Bank to maintain a leverage ratio of at least 8.0%; to require prior regulatory approval of any material deviation from the Bank’s business plan until April 2016; and to subject the Bank to more frequent regulatory examinations. In August 2009, when the FDIC published the extended supervisory period for de novo banks, the Bank was operating under a three year business plan approved by the FDIC. The Bank is required to submit a new business plan to cover the period from April 30, 2012, to April, 30, 2016, the end of the Bank’s de novo supervisory period. See “Prompt Corrective Regulatory Action” below for more information.

Temporary Liquidity Guarantee Program. On November 21, 2008, the FDIC adopted final regulations implementing the Temporary Liquidity Guarantee Program (“TLGP”) pursuant to which depository institutions could elect to participate. Coverage under the TLGP was available to any eligible institution that did not elect to opt out of the TLGP on or before December 5, 2008. The Bank was not in existence at this time. However, the Bank did make application to participate in the Transaction Account Guarantee portion of the TLGP. Participating institutions were assessed a 10 basis point surcharge on the portion of eligible accounts that exceeds the general limit on deposit insurance coverage. Pursuant to the TLGP, the FDIC will (i) guarantee, through the earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008 and before June 30, 2009 (the “Debt Guarantee”), and (ii) provide full FDIC deposit insurance coverage for noninterest bearing deposit transaction accounts regardless of dollar amount for an additional fee assessment by the FDIC (the “Transaction Account Guarantee”).

On November 15, 2010, the FDIC published a final rule to provide temporary separate insurance coverage for noninterest-bearing transaction accounts. The November final rule defined noninterest-bearing transaction account as “a deposit or account maintained at an insured depository institution with respect to which interest is neither accrued nor paid. In the November final rule, the FDIC noted that, unlike the definition of noninterest bearing transaction account in the FDIC’s Transaction Account Guarantee Program (“TAGP”), the definition did not include NOW accounts (regardless of the interest rate paid on the account) or IOLTAs (“Interest on Lawyers Trust Account”).

On December 29, 2010, President Obama signed legislation passed by Congress to amend the Federal Deposit Insurance Act. This amendment will provide IOLTAs with the same temporary, unlimited insurance coverage afforded to noninterest-bearing transaction accounts under the Dodd-Frank Act. These amendments take effect December 31, 2010, and require the FDIC to “fully insure the net amount that any depositor at an insured depository institution maintains in a noninterest-bearing transaction account.” This unlimited insurance coverage will be in effect only through December 31, 2012.

Branching. Michigan chartered banks, such as the Bank, have the authority under Michigan law to establish branches throughout Michigan and in any state, the District of Columbia, any U.S. territory or protectorate, and foreign countries, subject to the receipt of all required regulatory approvals.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allows the FDIC and other federal bank regulators to approve applications for mergers of banks across state lines without regard to whether such activity is contrary to state law. Previously, each state could determine if it will permit out of state banks to acquire only branches of a bank in that state or to establish de novo branches. However, under the Dodd-Frank Act branching requirements have been relaxed and national and state banks will be able to establish branches in any state if that state would permit the establishment of the branch by a state bank charted in that state.

Loans to One Borrower. Under Michigan law, a bank’s total loans and extensions of credit and leases to one person is limited to 15% of the bank’s capital and surplus, subject to several exceptions. This limit may be increased to 25% of the bank’s capital and surplus upon approval by a 2/3 vote of its Board of Directors. Certain loans, including loans secured by bonds or other instruments of the United States and fully guaranteed by the United States as to principal and interest, are not subject to the limit just referenced. In addition, certain loans, including loans arising from the discount of nonnegotiable consumer paper which carries a full recourse endorsement or unconditional guaranty of the person transferring the paper, are subject to a higher limit of 30% of capital and surplus.

Enforcement. The OFIR and FDIC each have enforcement authority with respect to the Bank. The Commissioner of the OFIR has the authority to issue cease and desist orders to address unsafe and unsound practices and actual or imminent violations of law and to remove from office bank directors and officers who engage in unsafe and unsound banking practices and who violate applicable laws, orders, or rules. The Commissioner of the OFIR also has authority in certain cases to take steps for the appointment of a receiver or conservator of a bank.

The FDIC has similar broad authority, including authority to bring enforcement actions against all “institution-affiliated parties” (including shareholders, directors, officers, employees, attorneys, consultants, appraisers and accountants) who knowingly or recklessly participate in any violation of law or regulation or any breach of fiduciary duty, or other unsafe or unsound practice likely to cause financial loss to, or otherwise have an adverse effect on, an insured institution. Civil penalties under federal law cover a wide range of violations and actions. Criminal penalties for most financial institution crimes include monetary fines and imprisonment. In addition, the FDIC has substantial discretion to impose enforcement action on banks that fail to comply with its regulatory requirements, particularly with respect to capital levels. Possible enforcement actions range from requiring the preparation of a capital plan or imposition of a capital directive, to receivership, conservatorship, or the termination of deposit insurance.

Assessments and Fees. The Bank pays a supervisory fee to the OFIR of not less than $4,000 and not more than 25 cents for each $1,000 of total assets. This fee is invoiced prior to July 1 each year and is due no later than August 15. The OFIR imposes additional fees, in addition to those charged for normal supervision, for applications, special evaluations and analyses, and examinations. The Bank paid a supervisory fee of $11,000 in 2011 and a $7,000 fee for 2010.

Regulatory Capital Requirements. The Bank is required to comply with capital adequacy standards set by the FDIC. The FDIC may establish higher minimum requirements if, for example, a bank has previously received special attention or has a high susceptibility to interest rate risk. Banks with capital ratios below the required minimum are subject to certain administrative actions. More than one capital adequacy standard applies, and all applicable standards must be satisfied for an institution to be considered to be in compliance. There are three basic measures of capital adequacy: a total risk-based capital ratio, a Tier 1 risk-based capital ratio; and a leverage ratio.

The risk-based framework was adopted to assist in the assessment of capital adequacy of financial institutions by, (i) making regulatory capital requirements more sensitive to differences in risk profiles among organizations; (ii) introducing off-balance-sheet items into the assessment of capital adequacy; (iii) reducing the disincentive to holding liquid, low-risk assets; and (iv) achieving greater consistency in evaluation of capital adequacy of major banking organizations throughout the world. The risk-based guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning assets and off-balance sheet items to different risk categories. An institution’s risk-based capital ratios are calculated by dividing its qualifying capital by its risk-weighted assets.

Qualifying capital consists of two types of capital components: “core capital elements” (or Tier 1 capital) and “supplementary capital elements” (or Tier 2 capital). Tier 1 capital is generally defined as the sum of core capital elements less goodwill and certain other intangible assets. Core capital elements consist of (i) common shareholders’ equity, (ii) noncumulative perpetual preferred stock (subject to certain limitations), and (iii) minority interests in the equity capital accounts of consolidated subsidiaries. Tier 2 capital consists of (i) allowance for loan and lease losses (subject to certain limitations); (ii) perpetual preferred stock which does not qualify as Tier 1 capital (subject to certain conditions); (iii) hybrid capital instruments and mandatory convertible debt securities; (iv) term subordinated debt and intermediate term preferred stock (subject to limitations); and (v) net unrealized holding gains on equity securities.

The Bank must also meet a leverage capital requirement. In general, the minimum leverage capital requirement is not less than 4% of Tier 1 capital to total assets if a bank has the highest regulatory rating and is not anticipating or experiencing any significant growth. However, as a condition of the Bank’s charter it must maintain a minimum Tier 1 capital to total assets of 8% during its initial three years of operation, which period was subsequently extended to seven years of operation.

The Dodd-Frank Act requires the Federal Reserve, the OCC and the FDIC to adopt regulations imposing a continuing “floor” of the Basel I-based capital requirements in cases where the Basel II-based capital requirements and any changes in capital regulations resulting from Basel III (see below) otherwise would permit lower requirements. In December 2010, the Federal Reserve, the OCC and the FDIC issued a joint notice of proposed rulemaking that would implement this requirement.

In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as “Basel III”. Basel III, when implemented by the U.S. banking agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity.

The Basel III final capital framework, among other things, (i) introduces as a new capital measure “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expands the scope of the adjustments as compared to existing regulations.

When fully phased in on January 1, 2019, Basel III will require banks to maintain (i) as a newly adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and (iv) as a newly adopted international standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).

Basel III also provides for a “countercyclical capital buffer,” generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk, that would be a CET1 add-on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented (potentially resulting in total buffers of between 2.5% and 5%).

The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The implementation of the Basel III final framework will commence January 1, 2013. On that date, banking institutions will be required to meet the following minimum capital ratios:

	3.5% CET1 to risk-weighted assets.

	4.5% Tier 1 capital to risk-weighted assets.

	8.0% Total capital to risk-weighted assets.

The Basel III final framework provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.

Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2014 and will be phased-in over a five-year period (20% per year). The implementation of the capital conservation buffer will begin on January 1, 2016 at 0.625% and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

Notwithstanding its release of the Basel III framework as a final framework, the Basel Committee is considering further amendments to Basel III, including the imposition of additional capital surcharges on globally systemically important financial institutions. In addition to Basel III, the Dodd-Frank Act requires or permits the Federal banking agencies to adopt regulations affecting banking institutions’ capital requirements in a number of respects, including potentially more stringent capital requirements for systemically important financial institutions. Accordingly, the regulations ultimately applicable to the Company may be substantially different from the Basel III final framework as published in December 2010. Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Company’s net income and return on equity.

Prompt Corrective Regulatory Action. The FDIC is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, a bank is considered “well capitalized” if its risk-based capital ratio is at least 10%, its Tier 1 risk-based capital ratio is at least 6%, its leverage ratio is at least 5%, and the bank is not subject to any written agreement, order, or directive by the FDIC.

A bank generally is considered “adequately capitalized” if it does not meet each of the standards for well-capitalized institutions, and its risk-based capital ratio is at least 8%, its Tier 1 risk-based capital ratio is at least 4%, and its leverage ratio is at least 4% (or 3% if the institution receives the highest rating under the Uniform Financial Institution Rating System). A bank that has a risk-based capital ratio less than 8%, or a Tier 1 risk-based capital ratio less than 4%, or a leverage ratio less than 4% (3% or less for institutions with the highest rating under the Uniform Financial Institution Rating System) is considered to be “undercapitalized.” A bank that has a risk-based capital ratio less than 6%, or a Tier 1 capital ratio less than 3%, or a leverage ratio less than 3% is considered to be “significantly undercapitalized,” and a bank is considered “critically undercapitalized” if its ratio of tangible equity to total assets is equal to or less than 2%.

The FDIC generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be “undercapitalized.” An “undercapitalized” institution must develop a capital restoration plan and its parent holding company must guarantee that institution’s compliance with such plan. The liability of the parent holding company under any such guarantee is limited to the lesser of five percent of the institution’s assets at the time it became “undercapitalized” or the amount needed to bring the institution into compliance with all capital standards. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent’s general unsecured creditors. If a depository institution fails to submit an acceptable capital restoration plan, it shall be treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. Finally, the FDIC requires the various regulatory agencies to set forth certain standards that do not relate to capital. Such standards relate to the safety and soundness of operations and management and to asset quality and executive compensation, and permit regulatory action against a financial institution that does not meet such standards.

If an insured bank fails to meet its capital guidelines, it may be subject to a variety of other enforcement remedies, including a prohibition on the taking of brokered deposits and the termination of deposit insurance by the FDIC. Bank regulators continue to indicate their desire to raise capital requirements beyond their current levels.

Subject to a narrow exception, the FDIC is required to appoint a receiver or conservator for a bank that is “critically undercapitalized.” In addition, a capital restoration plan must be filed with the FDIC within 45 days of the date a bank receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by each company that controls a bank that submits such a plan, up to an amount equal to 5% of the bank’s assets at the time it was notified regarding its deficient capital status. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions, and expansion. The FDIC could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

Payment of Dividends by the Bank. There are state and federal requirements limiting the amount of dividends which the Bank may pay. Generally, a bank’s payment of cash dividends must be consistent with its capital needs, asset quality, and overall financial condition. Due to FDIC requirements, it is expected that the Bank will not be permitted to make dividend payments to the Company during the first three (3) years of the Bank’s operations. Additionally, OFIR and the FDIC have the authority to prohibit the Bank from engaging in any business practice (including the payment of dividends) which they consider to be unsafe or unsound.

Under Michigan law, the payment of dividends is subject to several additional restrictions. The Bank cannot declare or pay a cash dividend or dividend in kind unless the Bank will have a surplus amounting to not less than 20% of its capital after payment of the dividend. The Bank will be required to transfer 10% of net income to surplus until its surplus is equal to its capital before the declaration of any cash dividend or dividend in kind. In addition, the Bank may pay dividends only out of net income then on hand, after deducting its losses and bad debts. These limitations can affect the Bank’s ability to pay dividends.

Loans to Directors, Executive Officers, and Principal Shareholders. Under FDIC regulations, the Bank’s authority to extend credit to executive officers, directors, and principal shareholders is subject to substantially the same restrictions set forth in Federal Reserve Regulation O. Among other things, Regulation O (i) requires that any such loans be made on terms substantially similar to those offered to nonaffiliated individuals, (ii) places limits on the amount of loans the Bank may make to such persons based, in part, on the Bank’s capital position, and (iii) requires that certain approval procedures be followed in connection with such loans.

Certain Transactions with Related Parties. Under Michigan law, the Bank may purchase securities or other property from a director, or from an entity of which the director is an officer, manager, director, owner, employee, or agent, only if such purchase (i) is made in the ordinary course of business, (ii) is on terms not less favorable to the Bank than terms offered by others, and (iii) the purchase is authorized by a majority of the Board of Directors not interested in the sale. The Bank may also sell securities or other property to its directors, subject to the same restrictions (except in the case of a sale by the Bank, the terms may not be more favorable to the director than those offered to others).

In addition, the Bank is subject to certain restrictions imposed by federal law on extensions of credit to the Company, on investments in the stock or other securities of the Company, and on the acceptance of stock or other securities of the Company as collateral for loans. Various transactions, including contracts, between the Bank and the Company must be on substantially the same terms as would be available to unrelated parties.

Standards for Safety and Soundness. The FDIC has established safety and soundness standards applicable to the Bank regarding such matters as internal controls, loan documentation, credit underwriting, interest-rate risk exposure, asset growth, compensation and other benefits, and asset quality and earnings. If the Bank were to fail to meet these standards, the FDIC could require it to submit a written compliance plan describing the steps the Bank will take to correct the situation and the time within which such steps will be taken. The FDIC has authority to issue orders to secure adherence to the safety and soundness standards.

Reserve Requirement. Under a regulation promulgated by the Federal Reserve, depository institutions, including the Bank, are required to maintain cash reserves against a stated percentage of their transaction accounts. Effective October 9, 2008, Federal Reserve Banks are now authorized to pay interest on such reserves. The current reserve requirements are as follows:

for transaction accounts totaling $10.7 million or less, a reserve of 0%; and

for transaction accounts in excess of $10.7 million up to and including $58.8 million, a reserve of 3%; and

for transaction accounts totaling in excess of $58.8 million, a reserve requirement of 10% of that portion of the total transaction accounts greater than $58.8 million.

The dollar amounts and percentages reported here are all subject to adjustment by the Federal Reserve. As of December 31, 2011, the Bank had no reserve requirement.

Privacy. Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing personal financial information with nonaffiliated third parties except for third parties that market the institutions’ own products and services. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing through electronic mail to consumers.

Anti-terrorism Legislation. In the wake of the tragic events of September 11, 2001, President Bush signed into law on October 26, 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001. Also known as the “Patriot Act,” the law enhances the powers of the federal government and law enforcement organizations to combat terrorism, organized crime and money laundering. The Patriot Act significantly amends and expands the application of the Bank Secrecy Act, including enhanced measures regarding customer identity, new suspicious activity reporting rules and enhanced anti-money laundering programs.

Under the Patriot Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. For example, the enhanced due diligence policies, procedures and controls generally require financial institutions to take reasonable steps:

to conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction;

to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions;

to ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank and the nature and extent of the ownership interest of each such owner; and

to ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information.

Under the Patriot Act, financial institutions must also establish anti-money laundering programs. The Patriot Act sets forth minimum standards for these programs, including: (i) the development of internal policies, procedures and controls; (ii) the designation of a compliance officer; (iii) an ongoing employee training program; and (iv) an independent audit function to test the programs.

In addition, the Patriot Act requires the bank regulatory agencies to consider the record of a bank in combating money laundering activities in their evaluation of bank merger or acquisition transactions. Regulations proposed by the U.S. Department of the Treasury to effectuate certain provisions of the Patriot Act provide that all transaction or other correspondent accounts held by a U.S. financial institution on behalf of any foreign bank must be closed within 90 days after the final regulations are issued, unless the foreign bank has provided the U.S. financial institution with a means of verification that the institution is not a “shell bank.” Proposed regulations interpreting other provisions of the Patriot Act are continuing to be issued.

Under the authority of the Patriot Act, the Secretary of the Treasury adopted rules on September 26, 2002 increasing the cooperation and information sharing among financial institutions, regulators and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Under these rules, a financial institution is required to:

expeditiously search its records to determine whether it maintains or has maintained accounts, or engaged in transactions with individuals or entities, listed in a request submitted by the Financial Crimes Enforcement Network (“FinCEN”);

notify FinCEN if an account or transaction is identified;

designate a contact person to receive information requests;

limit use of information provided by FinCEN to: (1) reporting to FinCEN, (2) determining whether to establish or maintain an account or engage in a transaction and (3) assisting the financial institution in complying with the Bank Secrecy Act; and

maintain adequate procedures to protect the security and confidentiality of FinCEN requests.

Under the new rules, a financial institution may also share information regarding individuals, entities, organizations and countries for purposes of identifying and, where appropriate, reporting activities that it suspects may involve possible terrorist activity or money laundering. Such information-sharing is protected under a safe harbor if the financial institution: (i) notifies FinCEN of its intention to share information, even when sharing with an affiliated financial institution; (ii) takes reasonable steps to verify that, prior to sharing, the financial institution or association of financial institutions with which it intends to share information has submitted a notice to FinCEN; (iii) limits the use of shared information to identifying and reporting on money laundering or terrorist activities, determining whether to establish or maintain an account or engage in a transaction, or assisting it in complying with the Security Act; and (iv) maintains adequate procedures to protect the security and confidentiality of the information. Any financial institution complying with these rules will not be deemed to have violated the privacy requirements discussed above.

The Secretary of the Treasury also adopted a rule on September 26, 2002 intended to prevent money laundering and terrorist financing through correspondent accounts maintained by U.S. financial institutions on behalf of foreign banks. Under the rule, financial institutions: (i) are prohibited from providing correspondent accounts to foreign shell banks; (ii) are required to obtain a certification from foreign banks for which they maintain a correspondent account stating the foreign bank is not a shell bank and that it will not permit a foreign shell bank to have access to the U.S. account; (iii) must maintain records identifying the owner of the foreign bank for which they may maintain a correspondent account and its agent in the United States designated to accept services of legal process; (iv) must terminate correspondent accounts of foreign banks that fail to comply with or fail to contest a lawful request of the Secretary of the Treasury or the Attorney General of the United States, after being notified by the Secretary or Attorney General.

Proposed Legislation and Regulatory Action. New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating in the United States. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Concentrated Commercial Real Estate Lending Regulations. The Federal Reserve, the FDIC and the OCC promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multifamily and non-farm residential properties and loans for construction, land development, and other land represent 300% or more of total capital and the Bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. If a concentration is present, management must employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and increasing capital requirements. We cannot guarantee that any risk management practices we implement will be effective to prevent losses relating to our commercial real estate portfolio. Management will continue to undertake controls to monitor the Bank’s commercial real estate lending, but we cannot predict the extent to which this guidance will continue to impact our operations or capital requirements.

Regulation Z. On April 5, 2011, the Federal Reserve’s Final Rule on Loan Originator Compensation and Steering (Regulation Z) became final. Regulation Z is more commonly known as regulation that implements the Truth in Lending Act. Regulation Z address two components of mortgage lending, i.e., loans secured by a dwelling, and implements restrictions and guidelines for: (a) prohibited payments to loan originators and (b) prohibitions on steering. Under Regulation Z, a creditor is prohibited from paying, directly or indirectly, compensation to a mortgage broker or any other loan originator that is based on a mortgage transaction's terms or conditions, except the amount of credit extended, which is deemed not to be a transaction term or condition. In addition, Regulation Z prohibits a loan originator from “steering” a consumer to a lender or a loan that offers less favorable terms in order to increase the loan originator’s compensation, unless the loan is in the consumer's interest. Regulation Z also contains a record-retention provision requiring that, for each transaction subject to Regulation Z, the financial institution must maintain records of the compensation it provided to the loan originator for that transaction as well as the compensation agreement in effect on the date the interest rate was set for the transaction. These records must be maintained for two years.

UDAP and UDAAP. Recently, banking regulatory agencies have increasingly used a general consumer protection statute to address “unethical” or otherwise “bad” business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act—the primary federal law that prohibits unfair or deceptive acts or practices and unfair methods of competition in or affecting commerce (“UDAP” or “FTC Act”). “Unjustified consumer injury” is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with the UDAP law. However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices” (“UDAAP”), which has been delegated to the CFPB for supervision. The CFPB has published its first Supervision and Examination Manual that addresses compliance with and the examination of UDAAP.

Effect of Governmental Monetary Policies. The commercial banking business is affected not only by general economic conditions but also by the fiscal and monetary policies of the Federal Reserve. Some of the instruments of fiscal and monetary policy available to the Federal Reserve include changes in the discount rate on member bank borrowings, the fluctuating availability of borrowings at the “discount window,” open market operations, the imposition of and changes in reserve requirements against banks’ deposits and assets of foreign branches, the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates, and the placing of limits on interest rates that banks may pay on time and savings deposits. Such policies influence to a significant extent the overall growth of bank loans, investments, and deposits and the interest rates charged on loans or paid on time and savings deposits. We cannot predict the nature of future fiscal and monetary policies and the effect of such policies on the future business and our earnings.

All of the above laws and regulations add significantly to the cost of operating Grand River Commerce, Inc. and Grand River Bank and thus have a negative impact on our profitability. We would also note that there has been a tremendous expansion experienced in recent years by certain financial service providers that are not subject to the same rules and regulations as Grand River Commerce and Grand River Bank. These institutions, because they are not so highly regulated, have a competitive advantage over us and may continue to draw large amounts of funds away from traditional banking institutions, with a continuing adverse effect on the banking industry in general.

Available Information

We file annual, quarterly and currents reports and other information with the Securities and Exchange Commission. You may read and copy any document we file at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public at the Securities and Exchange Commission’s web site at http://www.sec.gov. Our web site is http://www.grandriverbank.com. Except as explicitly provided, information on any web site is not incorporated into this Form 10-K or our other securities filings and is not a part of them.

Item 1A.

Risk Factors.

Not applicable.

Item 1B.

Unresolved Staff Comments.

None.

Item 2.

Properties.

The Bank opened for business on April 30, 2009 with one location at 4471 Wilson Avenue, Grandville, Michigan, which is located approximately five miles southwest of the Grand Rapids city limit and eight miles from downtown Grand Rapids, Michigan. On December 10, 2010, we renewed our three year lease agreement, commencing on January 1, 2011, with three options to renew for three years each. On October 24, 2011, we entered into an agreement to lease additional space in the same building commencing on November 1, 2011 to run concurrent with the existing lease agreement. The rent under the terms of the lease is $6,100 per month, subject to a 2% cumulative upward adjustment in each subsequent year. At this time, the Bank does not intend to own any of the properties from which it will conduct banking operations. The Bank does not own or operate any ATM machines.

Item 3.

Legal Proceedings.

In the ordinary course of operations, we may be a party to various legal proceedings from time to time. We do not believe that there is any pending or threatened proceeding against us, which, if determined adversely, would have a material effect on our business, results of operations, or financial condition.

Item 4.

Mine Safety Disclosures.

Not applicable.

Part II

Item 5.

Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

We are currently quoted on the OTC Bulletin Board under the symbol “GNRV” and have a sponsoring broker-dealer to match buy and sell orders for our common stock. Although we are quoted on the OTC Bulletin Board, the trading market of our common stock on the OTC Bulletin Board is limited and lacks the depth, liquidity, and orderliness necessary to maintain a liquid market. There is currently no established public trading market in our common stock. Because there has not been an established market for our common stock, we may not be aware of all prices at which our common stock has been traded. Based on information available to us from a limited number of sellers and purchasers of our common stock who have engaged in privately negotiated transactions of which we are aware, there were a limited number of stock trades in 2011 that ranged from $8.00 to $9.50 per share. We have no current plans to seek listing on any stock exchange, and we do not expect to qualify for listing on NASDAQ or any other exchange in the near future.

The following table sets forth the high and low bid prices as quoted on the OTC Bulletin Board during the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commissions, and may not represent actual transactions.

	2011				2010
	High		Low		High		Low
First quarter	$	9.50	$	9.50	$	10.00	$	9.00
Second quarter		9.50		9.50		9.25		9.25
Third quarter		8.30		8.00		9.50		9.50
Fourth quarter		8.00		8.00		9.00		8.10

Common Stock

As of December 31, 2011, and 2010, 1,700,120 shares of common stock of the Company were issued and outstanding, and there were approximately 786 shareholders of record. All of our outstanding common stock was issued in connection with our initial public offering, which was completed on April 30, 2009. The price per share in our initial public offering was $10.00.

Dividends

We have not declared or paid any cash dividends on our common stock since our inception. For the foreseeable future we do not intend to declare cash dividends. We intend to retain earnings to grow our business and strengthen our capital base. Our ability to pay dividends depends on the ability of our subsidiary, the Bank, to pay dividends to us. Initially, the Company expects that the Bank will retain all of its earnings to support its operations and to expand its business. Additionally, the Company and the Bank are subject to significant regulatory restrictions on the payment of cash dividends. In light of these restrictions and the need to retain and build capital, neither the Company nor the Bank plans to pay dividends until the Bank becomes profitable and recovers any losses incurred during its initial operations. The payment of future dividends and the dividend policies of the Company and the Bank will depend on the earnings, capital requirements and financial condition of the Company and the Bank, as well as other factors that its respective Boards of Directors consider relevant. For additional discussion of legal and regulatory restrictions on the payment of dividends, see “Part I – Item 1. Business – Supervision and Regulation.”

Securities Authorized For Issuance Under Equity Compensation Plans

The Company has adopted a stock incentive plan which provides for the issuance of options to purchase shares of our common stock to officers and directors, the details of which are outlined in Note 8 and Note 9 of the Consolidated Financial Statements. Approval of this plan was granted at the Company’s 2010 Annual Meeting of Shareholders.

The following table identifies our equity compensation plans as of December 31, 2011.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a)		Weighted average exercise price of outstanding options, warrants, and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in (a))
Equity compensation plans approved by security holders		101,500	$	10.00		98,500
Total		101,500	$	10.00		98,500

Recent Sales of Unregistered Securities.

None.

Item 6.

Selected Financial Data.

Not applicable.

Item 7.

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

The purpose of the following discussion is to address information relating to the financial condition and results of operations of the Company that may not be readily apparent from the consolidated financial statements and accompanying notes included in this Report. This discussion should be read in conjunction with the information provided in the Company’s consolidated financial statements and the notes thereto.

Introduction

The following discussion describes our results of operations for 2011 and also analyzes our financial condition as of December 31, 2011. Like most community banks, we derive most 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 the majority of we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, 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. 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.

We have included a number of tables to assist in our description of these measures. For example, the “Average Balances” table shows the average balance in 2011 of each category of our assets and liabilities, as well as the yield we earned or the rate we paid with respect to each category. A review of this table shows that our loans typically provide higher interest yields than do other types of interest earning assets, which is why we intend to channel a substantial percentage of our earning assets into our loan portfolio. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included an “Interest Sensitivity Analysis Table” to help explain this. Finally, we have included a number of tables that provide detail about our investment securities, our loans and our deposits.

Naturally, 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 “Provision and Allowance for Loan Losses” 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 customers. We describe the various components of this noninterest income, as well as our noninterest expenses, in the “Noninterest Income” and “Noninterest Expense” sections.

Basis of Presentation

The following discussion should be read in conjunction with our consolidated financial statements and the related notes and the other information included elsewhere in this report. The financial information provided below has been rounded in order to simplify its presentation. However, the ratios and percentages provided below are calculated using the detailed financial information contained in the consolidated financial statements and the related notes included elsewhere in this report.

General

Grand River Commerce, Inc. is a bank holding company headquartered in Grandville, Michigan. Our bank subsidiary, Grand River Bank, opened for business on April 30, 2009. In addition, the Bank formed in January 2012 a wholly owned subsidiary, GRO Properties, LLC to hold properties acquired by the Bank through foreclosure. The principal business activity of the Bank is to provide commercial banking services in Kent and Ottawa Counties, Michigan and our surrounding market areas. Our deposits are insured by the FDIC.

Until the Bank opened, our principal activities related to the organization of the Company and the Bank, the conducting of our initial public offering, the pursuit of approvals from the Michigan Office of the Financial and Insurance Regulation (“OFIR”) for our application to charter the Bank, the pursuit of approvals from the FDIC for our application for insurance of the deposits of the Bank, and the pursuit of approvals from the Federal Reserve to become a bank holding company. The organizational costs incurred during the period from our inception on August 15, 2006 through April 30, 2009, related primarily to consulting fees paid to proposed management, occupancy and interest expenses which totaled $1.8 million. We completed the initial public offering of our common stock on April 30, 2009 in which we sold a total of 1,700,120 shares of common stock at $10.00 per share. Offering costs of $1.6 million, which consisted primarily of legal, marketing and consulting fees, were netted against proceeds. We capitalized the Bank with $12,690,000 of the proceeds from the initial stock offering.

Subsequent Events

Effective February 1, 2012, Patrick K. Gill became the new President and Chief Executive Officer of the Bank, following David Blossey’s departure. Mr. Gill, age 60, has over 30 years of experience in the banking industry. He previously served as the President and Chief Executive Officer of OAK Financial and its subsidiary, Byron Bank, until it was acquired by Chemical Bank in 2010. Before joining OAK Financial, Mr. Gill was President and Chief Executive Officer of Pavilion Bancorp, Inc. and its subsidiary, the Bank of Lenawee (now First Federal Bank of the Midwest), headquartered in Adrian, Michigan. Mr. Gill also served as Chairman of the Bank of Washtenaw, an Ann Arbor, Michigan-based de novo formed by Pavilion.

Mr. Gill’s employment agreement with the Bank is for a thirty-six (36) month term. During this term, Mr. Gill is entitled to an initial base salary of $200,000 per year. Mr. Gill is also entitled to participate in a management bonus program (currently there are none), our benefits programs, and receive certain other perquisites and reimbursements. In addition, Mr. Gill was awarded options to purchase 25,000 shares of the Company’s common stock at a price of $10.00 per share.

Summary of Significant Accounting Policies

Our consolidated financial statements are prepared based on the application of certain accounting policies. Certain of these policies require numerous estimates and strategic or economic assumptions, which are subject to valuation, may prove inaccurate and may significantly affect our reported results and financial position for the period or in future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded at, or adjusted to reflect, fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on our future financial condition and results of operations.

Following is a summary of the significant accounting policies of material estimates of the Company and the Bank.

Allowance for Loan Losses. Currently, the Bank is required by its banking charter to maintain an allowance for loan losses at least equal to 1.00% of the outstanding loan balance. The allowance for loan losses is established to provide for inherent losses which are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in addition to the minimum amount required under regulatory guidelines, the nature and volume of the loan portfolio and the historical losses of peer group institutions, 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.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reason for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and industrial and commercial real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price if obtainable, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.

At December 31, 2011, the Company considers the allowance for loan losses of $769,000 or 1.13% of the outstanding loan balance, to be adequate to cover potential losses inherent in the loan portfolio. Our evaluation considers such factors as changes in the composition and volume of the loan portfolio, the impact of changing economic conditions on the credit worthiness of our borrowers, changing collateral values and the overall quality of the loan portfolio.

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 its consolidated financial statements and income tax returns, and income tax 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. A valuation allowance for deferred tax assets is required when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realization of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future income (in the near-term based on current projections), and tax planning strategies.

The tax returns submitted by us or the income tax reported on the consolidated financial statements may 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 in order to ultimately realize deferred income tax assets. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not have any amounts accrued for interest or penalties at either December 31, 2011 or December 31, 2010.

Share-Based Compensation. The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. The Company estimates the per share fair value of option grants on the date of grant using the Black-Scholes option pricing model using assumptions for the expected dividend yield, expected stock price volatility, risk-free interest rate and expected option term. These assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. The Black-Scholes option pricing model also contains certain inherent limitations when applied to options that are not traded on public markets. The per share fair value of options is highly sensitive to changes in assumptions. In general, the per share fair value of options will move in the same direction as changes in the expected stock price volatility, risk-free interest rate and expected option term, and in the opposite direction as changes in the expected dividend yield. For example, the per share fair value of options will generally increase as expected stock price volatility increases, risk-free interest rate increases, expected option term increases and expected dividend yield decreases. The use of different assumptions or different option pricing models could result in materially different per share fair values of options.

Financial Condition at December 31, 2011

Total Assets

At December 31, 2011, we had total assets of $79.6 million, an increase of $27.8 million, or 54% from $51.8 million at December 31, 2010. The increase is due primarily to a $24.4 million increase in loans, net of allowance for loan losses, since December 31, 2010. Other increases in assets include cash and equivalents of $2.4 million and securities available-for-sale of $870,000 from December 31, 2010. Total assets as of December 31, 2011, consisted of cash and deposits due from banks of $6.1 million, federal funds sold of $841,000, securities available-for-sale of $4.7 million, premises and equipment of $241,000, net loans of $67.4 million, restricted stock of $81,000 and accrued interest receivable and other assets of $286,000. Assets were funded primarily through deposits of $69.0 million, and shareholders’ equity of $10.4 million. Asset growth is expected to continue as the Bank continues to deploy its capital into interest earning assets. However, the rate of growth will decrease as the base level of assets increases.

Loans

Net loans were $67.4 million at December 31, 2011 compared to $43.0 million as of December 31, 2010, excluding loans held for sale. Since loans typically provide higher interest yields than other types of interest-earning assets, a large percentage of our earning assets are invested in our loan portfolio. Average loans outstanding for the year ended December 31, 2011 were $52.6 million compared to $28.6 million for the year ended December 31, 2010. Before the allowance for loan losses and unearned fees, gross loans excluding mortgage loans held for sale outstanding at December 31, 2011, were $68.2 million, representing 86% of our total assets.

At December 31, 2011, our loan portfolio consisted of $3.4 million of construction and land development loans, $55.9 million in commercial real estate loans, $6.1 million in commercial and industrial loans, and $2.8 million in mortgage and consumer loans compared to December 31, 2010, when our loan portfolio consisted of $6.0 million of construction and land development loans, $31.9 million in commercial real estate loans, $4.7 million in commercial and industrial loans, and $854,000 in mortgage and consumer loans. The volume of construction loans will fluctuate as loans complete the construction phase and move into permanent financing. Management expects loans to continue to grow as capital is deployed and excess cash is invested in higher yielding assets per the business plan.

As of December 31, 2011, the Company has unfunded loan commitments totaling approximately $12.4 million compared to $8.6 million as of December 31, 2010. The increase is due to overall growth in loan activity. While the Company has no guarantee these commitments will actually be funded, management has no reason to believe a significant portion of these commitments will not become assets of the Company.

The allowance for loan losses was $769,000 and $458,000 as of December 31, 2011 and 2010, respectively. As of December 31, 2011 the Company had $690,000 in nonaccrual loans representing one loan relationship. As of December 31, 2010, the Company had no nonaccrual or non-performing loans or loans considered to be impaired. The allowance for loan losses as a percent of total loans was approximately 1.13% at December 31, 2011. The allowance for loan losses as a percent of total loans was approximately 1.05% at December 31, 2010.

Future increases in the allowance for loan losses may be necessary based on the growth of the loan portfolio, the change in composition of the loan portfolio, possible future increases in non-performing loans and charge-offs, and the impact of the deterioration of the real estate and economic environments in our lending area. Although the Company uses the best information available, the level of allowance for loan losses remains an estimate that is subject to significant judgment and short-term change.

The principal component of our loan portfolio is loans secured by real estate mortgages. Most of our real estate loans are secured by commercial property. We originate traditional long term residential mortgages, traditional second mortgage residential real estate loans and home equity lines of credit as well. We obtain a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to increase the likelihood of the ultimate repayment of the loan.

The following table summarizes the composition of the outstanding balances of our loan portfolio, as of December 31 (Dollars in thousands):

	2011					2010					2009
			% of					% of					% of
	Amount		Total			Amount		Total			Amount		Total
Commercial and industrial	$	6,161		9.0	%	$	4,723		10.9	%	$	1,939		14.5	%
Commercial real estate
Commercial		55,853		81.9			31,896		73.3			9,532		71.4
Construction and development		3,264		4.8			4,846		11.1			1,126		8.4
Total commercial real estate		59,117		86.7			36,742		84.4			10,658		79.8
Consumer
Consumer- residential and other		2,840		4.2			854		2.0			532		4.0
Construction		88		0.1			1,171		2.7			222		1.7
Total consumer		2,928		4.3			2,025		4.7			754		5.7
Gross loans		68,206		100	%		43,490		100	%		13,351		100	%
Less allowance for loan losses		769					458					134
Total loans, net	$	67,437				$	43,032				$	13,217

The majority of the Bank’s loan portfolio is comprised of commercial real estate and commercial and industrial loans. Commercial real estate loans represented 86.7% and 84.4% of total loans at December 31, 2011 and 2010, respectively while commercial and industrial loans represent 9.0% and 10.9% of total loans at December 31, 2011 and 2010, respectively.

As of December 31, 2011 and 2010, loans secured by real estate constituted 91% and 89%, respectively, of the total loan portfolio. While this exceeds the 10% threshold for determining a concentration of credit risk within an industry, we do not consider this to be a concentration with adverse risk characteristics given the diversity of borrowers within the real estate portfolio and other sources of repayment. An industry for this purpose is defined as a group of counterparties that are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The loan portfolio does not include concentrations of credit risk in loan products that permit the deferral of principal payments or payments that are smaller than normal interest accruals (negative amortization); loans with high loan-to-value ratios; and loans, such as option adjustable-rate mortgages, that may expose the borrower to future increases in repayments that are in excess of increases that would result solely from increases in market interest rates.

During 2011, the balance of loans in the construction and land development and commercial real estate categories has decreased somewhat due to decreased activity. The Bank limits construction loans for non-owner occupied real estate and loans of a speculative nature in its loan policy as these types of loans are considered higher risk.

Under guidance by the federal banking regulators, banks which have concentrations in construction, land development or commercial real estate loans (other than loans for majority owner occupied properties) would be expected to maintain higher levels of risk management and, potentially, higher levels of capital. The banking regulators have established guidance limits of 100% and 300% of total risk-weighted capital for construction and land development, and non-owner occupied commercial real estate loans, respectively. It is possible that we may be required to maintain higher levels of capital than we would otherwise be expected to maintain as a result of our levels of construction, development and commercial real estate loans, which may require us to obtain additional capital. These ratios as of December 31, 2011 were 32% for construction and land development loans and 377% for non-owner occupied commercial real estate loans.

The Company monitors the level of construction and land development, and non-owner occupied commercial real estate loans in relation to its total risk-weighted capital on at least a quarterly basis and has implemented enhanced monitoring and due diligence as required by the regulatory guidance. This monitoring and reporting includes detailed analysis of commercial real estate market trends, stress testing the commercial real estate portfolio and establishment of a contingency plan to reduce concentrations if conditions should deteriorate. Due to the time at which the Bank opened, management believes the risks normally associated with this type of lending have been reduced due to real estate values being at historic lows combined with conservative underwriting standards. At present, our loan policy has a maximum limit for loans secured by construction and land development loans of 100% of total risk-weighted capital and for loans secured by non-owner occupied commercial real estate of 500% of total risk-weighted capital.

See Note 3 to the 2011 consolidated financial statements (the "consolidated financial statements") for additional disclosures related to loan approval and underwriting standards.

Loan Origination/Risk Management. The Bank has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. See the accompanying notes to consolidated financial statements included elsewhere in this report for further details of the Bank’s policies and procedures related to loan origination and risk management.

Commercial Real Estate Loans. Commercial real estate loans totaled $59.1 million at December 31, 2011, increasing $22.4 million, or 60.1%, compared to $36.7 million at December 31, 2010. The majority of this portfolio consists of commercial real estate mortgages, which includes both permanent and intermediate term loans. The Bank’s primary focus for the commercial real estate portfolio has been growth in loans secured by both owner and nonowner occupied properties. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Consequently, these loans must undergo the analysis and underwriting process of a commercial and industrial loan, as well as that of a real estate loan.

The Company has a concentration of loans secured by commercial real estate. The following tables summarize the Company’s commercial real estate loan portfolio, as segregated by the type of property securing the credit. Property type concentrations are stated as a percentage of year-end total commercial real estate loans as of December 31, 2011 and 2010:

	2011			2010

Property Type:
Industrial		13.0	%		13.2	%
Multi-family / Student Housing		20.3			19.9
Professional / Medical Office		24.3			23.1
Residential 1-4 Family		6.7			5.6
Retail		30.5			31.1
Other		5.2			7.1

Total loans		100.0	%		100.0	%

Commercial and Industrial Loans. Commercial and industrial loans increased $1.4 million, or 30.4%, from $4.7 million at December 31, 2010 to $6.2 million at December 31, 2011. The Company’s commercial and industrial loans are a diverse group of loans to small and medium-sized businesses. The purpose of these loans varies from supporting seasonal working capital needs to term financing of equipment. The majority of these loans are secured by the assets being financed with collateral margins that are consistent with the Company’s loan policy guidelines.

Maturities and Sensitivity of Loans to Changes in Interest Rates

The information in the following table is based on the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties.

The following table summarizes the loan maturity distribution by type and related interest rate characteristics at December 31, 2011 (dollars in thousands):

			After one
	One year		but within		After five
	or less		five years		years		Total
Commercial and industrial	$	2,358	$	3,333	$	470	$	6,161
Commercial real estate
Commercial		5,136		41,958		8,759		55,853
Construction and development		2,989		275		—		3,264
Total commercial real estate		8,125		42,233		8,759		59,117
Consumer
Consumer –residential and other		—		1,125		1,715		2,840
Construction		60		28		—		88
Total consumer		—		1,153		1,715		2,928
Gross loans	$	10,543	$	46,719	$	10,944	$	68,206

Loans maturing- after one year with:

Fixed interest rate		$	40,817
Floating interest rates		$	16,846

Provision and Allowance for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged to expense in our 2011 and 2010 consolidated statements of operations. The allowance for loan losses was $769,000 and $458,000 as of December 31, 2011 and 2010, respectively. The increase is due primarily to growth in the loan portfolio as the allowance for loan losses is based on outstanding loans. The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectable. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions regarding the current portfolio and economic conditions, which we believe to be reasonable, but which may or may not prove to be accurate. Over time, we will periodically determine the amount of the allowance based on our consideration of several factors, including an ongoing review of the quality, mix and size of our overall loan portfolio, our historical loan loss experience, evaluation of economic conditions and other qualitative factors, specific problem loans and commitments that may affect the borrower’s ability to pay. Periodically, we will adjust the amount of the allowance based on changing circumstances. We will charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses. Charge-offs of loans in future periods may exceed the allowance for loan losses as estimated at any point in time and provisions for loan losses may not be significant to a particular reporting period.

Management maintains the allowance at a level at which it believes adequately provides for losses inherent in the loan portfolio. Management focuses on early identification of problem credits through ongoing reviews by management and the independent loan review function. In order to better identify the risk in total commercial loans, management has created separate loan categories for various classifications of commercial real estate loans and commercial and industrial loans to more closely monitor factors that could affect these portfolios including economic factors, competition and the regulatory environment. Based on the current state of the economy and a recent review of the loan portfolio, management believes that the allowance for loan losses as of December 31, 2011 is adequate. As charge-offs, changes in the level of nonperforming loans, and changes within the composition of the loan portfolio occur, the provision and allowance for loan losses will be reviewed by the Bank's management and adjusted as necessary.

(dollars in thousands)	December 31,
	2011		2010		2009
Balance at beginning of year	$	458	$	134	$	—

Recoveries—commercial and industrial		—		—		—

Recoveries—commercial real estate		—		—		—
Recoveries—consumer		—		—		—
Recoveries—unallocated		—		—		—

Total recoveries		—		—		—

Charge-offs—commercial and industrial		—		—		—

Charge-offs—commercial real estate		—		—		—
Charge-offs—consumer		—		—		—
Charge-offs—unallocated		—		—		—

Total charge-offs		—		—		—

Net charge-offs		—		—		—

Provision charged to operating expenses		311		324		134

Balance at end of year	$	769	$	458	$	134

Nonperforming Assets

The Bank has not charged off any loans since commencing operations. There were $690,000 in nonaccrual or nonperforming loans at December 31, 2011, resulting from one loan relationship, and no accruing loans which were contractually past due 90 days or more as to principal or interest payments. 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 economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. Payments on loans classified as nonaccrual are applied first to principal until such time as all principal is satisfied. A payment of interest on a loan that is classified as nonaccrual will be recognized as income when received. There were no nonperforming assets at December 31, 2010.

Subsequent to December 31, 2011, the Bank commenced foreclosure proceedings against the borrower of the $690,000 nonaccrual loans.

Investments

At December 31, 2011, the $4.7 million in our investment securities portfolio represented approximately 6.0% of our total assets. We held U.S. Government agency securities, mortgage-backed securities, and restricted equity securities. We have invested in agency bonds for purposes of liquidity management and to take advantage of somewhat higher yields.

The restricted equity securities are comprised of stock in the Federal Home Loan Bank of Indianapolis. As a condition of its membership in the Federal Home Loan Bank of Indianapolis, the Bank is required to hold stock equivalent to a percentage of its assets plus a percentage of outstanding advances.

Contractual maturities and yields on our investment securities available-for-sale are shown in the following table at fair value. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

The following table sets forth our interest rate sensitivity at December 31, 2011 (dollars in thousands):

	Less than one year				One year to five years					Five years to ten years					Over ten years					Total
	Amount		Yield		Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available for Sale, Cost
U.S. Government agencies	$	—	—	%	$	1,998		0.82	%	$	—		—	%	$	—		—	%	$	1,998		0.82	%
Mortgage-backed securities issued by U.S. Government agencies		—	—	%		—		—	%		600		2.31	%		2,066		3.17	%		2,666		2.98	%
Total	$	—	—	%	$	1,998		0.82	%	$	600		2.31	%	$	2,066		3.17	%	$	4,664		2.03	%

The following table sets forth our interest rate sensitivity at December 31, 2010 (dollars in thousands):

	Less than one year				One year to five years					Five years to ten years					Over ten years					Total
	Amount		Yield		Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available for Sale, Cost
U.S. Government agencies	$	—	—	%	$	1,485		1.30	%	$	—		—	%	$	—		—	%	$	1,485		1.30	%
Mortgage-backed securities issued by U.S. Government agencies		—	—	%		—		—	%		825		2.39	%		1,484		3.27	%		2,309		2.96	%
Total	$	—	—	%	$	1,485		1.30	%	$	825		2.39	%	$	1,484		3.27	%	$	3,794		2.30	%

The following table sets forth our interest rate sensitivity at December 31, 2009 (dollars in thousands):

	Less than one year				One year to five years					Five years to ten years					Over ten years					Total
	Amount		Yield		Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available for Sale, Cost
U.S. Government agencies	$	—	—	%	$	1,000		0.99	%	$	—		—	%	$	—		—	%	$	1,000		0.99	%
Mortgage-backed securities issued by U.S. Government agencies		—	—	%		—		—	%		510		2.78	%		976		3.05	%		1,486		2.96	%
Total	$	—	—	%	$	1,000		0.99	%	$	510		2.78	%	$	976		3.05	%	$	2,486		2.16	%

Other investments consisted of Federal Home Loan Bank stock with a cost of $80,500 and $33,400 at December 31, 2011 and 2010, respectively.

The amortized costs and the fair value of our investments are shown in the following table (dollars in thousands):

	December 31, 2011				December 31, 2010				December 31, 2009
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for Sale
US Government agencies	$	1,999	$	1,998	$	1,500	$	1,485	$	1,000	$	1,000
Residential mortgage-backed securities issued by U.S. Government agencies		2,590		2,666		2,302		2,309		1,485		1,486
	$	4,589	$	4,664	$	3,802	$	3,794	$	2,485	$	2,486

Cash and Cash Equivalents

Cash and cash equivalents increased to $6.9 million at December 31, 2011, from $4.4 million at December 31, 2010. The increase in cash and cash equivalents is a result of overall planned growth in deposits which have yet been deployed into loans.

Premises and Equipment

During 2011, the Company incurred capitalized expenditures of approximately $132,000 compared to approximately $11,000 in 2010. The Company’s 2011 capital expenditures consisted primarily of leasehold improvements and purchases of furniture and equipment related to the additional leased space and equipment utilized in the ordinary course of our banking business. The Company has no significant commitments for capital expenditures at December 31, 2011.

Deposits and Other Interest-Bearing Liabilities

The principal sources of funds for the Company are core deposits (demand deposits, interest-bearing transaction accounts, money market accounts, savings deposits and certificates of deposit) from the Company's market area. Core deposits, which exclude time deposits of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets. The Company's deposit base includes transaction accounts, time and savings accounts and other accounts that customers use for cash management purposes and which provide the Company with a source of fee income and cross-marketing opportunities as well as a lower-cost source of funds.

The table shows the balance outstanding and the average rates paid on deposits held by us as of the following:

(dollars in thousands)	December 31, 2011					December 31, 2010					December 31, 2009
	Amount		Rate			Amount		Rate			Amount		Rate
Noninterest bearing demand deposits	$	9,520		—	%	$	4,534		—	%	$	4,279		—	%
Interest bearing checking		6,097		0.91	%		4,162		0.82	%		3,461		0.84	%
Savings		24,179		1.23	%		9,780		1.22	%		2,074		0.98	%
Time deposits less than $100,000		16,576		1.81	%		14,395		2.07	%		4,086		2.17	%
Time deposits greater than $100,000		12,637		2.06	%		7,771		2.12	%		3,564		2.05	%
Total deposits	$	69,009		1.51	%	$	40,642		1.74	%	$	17,464		1.54	%

Our core deposits were 81.7%, 80.9% and 79.6% of total deposits at December 31, 2011, 2010, and 2009 respectively. The increase is due to planned growth in deposits overall and reductions in the level of time deposits as a percentage of total deposits.

Approximately 42.3% and 54.5% of the Company's deposits at December 31, 2011 and 2010, respectively, are made up of time deposits, which are generally the most expensive form of deposit because of their fixed rate and term. Time deposits in denominations of $100,000 or more can be more volatile and more expensive than time deposits of less than $100,000. However, because the Bank focuses on relationship banking, and most of these deposits are obtained from the local community, historical experience has been that large time deposits have not been more volatile or significantly more volatile or expensive than smaller denomination certificates. In the fourth quarter of 2011, management approved to expand the Company's funding sources and added $3.0 million of brokered deposits, which were still outstanding as of December 31, 2011. These funds were obtained at interest rates lower than local market interest rates. However, the amount of brokered deposits the Bank is allowed to utilize is limited per the Bank’s business plan. While sometimes requiring higher interest rates, brokered deposits carry lower acquisition costs (marketing, overhead costs) and can be obtained when required at the maturity dates desired. All of the brokered deposits are fully insured by the FDIC. This insurance and the capital position of the Company reduce the likelihood of large deposit withdrawals for reasons other than interest rate competition. Our loan-to-deposit ratio was 98.8% at December 31, 2011 compared to 107% at December 31, 2010.

The maturity of our time deposits over $100,000 at December 31, 2011 is set forth in the following table (dollars in thousands):

Three months or less	$	859
Over three through six months		1,308
Over six through twelve months		5,211
Over twelve months		5,259
Total	$	12,637

Capital Resources

The ability of the Company to grow is dependent on the availability of capital with which to meet regulatory capital requirements, discussed below. To the extent the Company is successful it may need to acquire additional capital through the sale of additional common stock, other qualifying equity instruments, subordinated debt or other qualifying capital instruments. Additional capital may not be available to the Company on a timely basis or on attractive terms.

Total shareholders’ equity was $10.4 million at December 31, 2011 compared to $11.0 million at December 31, 2010. Shareholders’ equity is comprised of proceeds from the completion of our initial public offering in 2009, which raised $13.6 million net of offering expenses, reduced by losses consisting of organization and start-up expenses aggregating $3.4 million. Of the proceeds, $12.7 million was used to capitalize the Bank. We retained the remaining offering proceeds at the Company to provide additional capital for investment in the Bank, if needed, or to fund other activities which are considered appropriate investments of capital at some point in the future. Equity was further reduced by the net loss of $765,000 for 2011 and $1.4 million for 2010.

The Federal Reserve and bank regulatory agencies require bank holding companies and depository institutions to maintain regulatory capital requirements at adequate levels based on a percentage of assets and off-balance sheet exposures. Under the Federal Reserve’s guidelines, we believe we are a “small bank holding company,” and thus qualify for an exemption from the consolidated risk-based and leverage capital adequacy guidelines applicable to bank holding companies with assets of $500 million or more. Regardless, we still maintain levels of capital on a consolidated basis that qualify us as “well capitalized” under the Federal Reserve’s capital guidelines.

Nevertheless, the Bank is subject to regulatory 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.

Under the capital adequacy guidelines, the Bank is required to maintain a certain level of Tier 1 and total risk-based capital to risk-weighted assets. At least half of the Bank’s total risk-based capital must be comprised of Tier 1 capital, which consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. The remainder may consist of Tier 2 capital, which is subordinated debt, other preferred stock and the general reserve for loan losses, subject to certain limitations. 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. The Bank is also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.

To be considered “adequately capitalized” under the various regulatory capital requirements administered by the federal banking agencies the Bank must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In addition, the Bank must maintain a minimum Tier 1 leverage ratio of at least 4%. To be considered “well-capitalized,” the Bank 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%. For the first seven years of operation, during the Bank’s “de novo” period, the Bank is required to maintain a leverage ratio of at least 8%. The Bank exceeded its minimum regulatory capital ratios as of December 31, 2011, as well as the ratios to be considered “well capitalized.”

The following table sets forth the Bank’s various capital ratios at December 31, 2011.

Total risk-based capital	16.01	%
Tier 1 risk-based capital	14.85	%
Leverage capital	13.15	%

We believe that our capital is sufficient to fund the activities of the Bank in its initial years of operation.

Return on Equity and Assets

The following table shows the return on average assets (net loss divided by average total assets), return on average equity (net loss divided by average equity), and equity to assets ratio (average equity divided by average total assets) for the year ended December 31, 2011. Since our inception, we have not paid cash dividends.

Return on average assets	(1.18	)%
Return on average equity	(7.11	)%
Equity to assets ratio	13.01	%

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 consolidated financial statements have been prepared on an historical cost basis in accordance with generally accepted accounting principles.

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.

Off-Balance Sheet Risk

Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At December 31, 2011, we had issued but unused commitments to extend credit of $12.4 million through various types of lending arrangements which represents an increase of $3.8 million over December 31, 2010. The increase is due to planned growth and the timing delay between commitment and funding and, therefore, may fluctuate significantly at any given time.

We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.

Results of Operations for the Year Ended December 31, 2011

Net Loss

We incurred a net loss of approximately $765,000 in 2011 as compared to a net loss of $1.4 million in 2010. Basic and diluted loss per share was $0.45 for 2011, and $0.80 for 2010. The decrease in our loss for the year ended December 31, 2011 as compared to December 31, 2010 is a result of the growth in net interest income associated with the growth in earning assets over the prior year as the Bank continues to grow according to plan.

Net Interest Income

Net interest income for 2011 was $2.2 million, which represented a $900,000 increase over 2010. Total interest income for the period was $2.9 million and was offset by interest expense of $716,000. The components of interest income were loans, including fees, of $2.7 million, investment income of $108,000 and federal funds sold and interest earned on excess balances of correspondent accounts of $17,000. Interest income was $1.7 million in 2010 which was comprised of $1.6 million in interest and fee income on loans, $89,000 in investment income and $15,000 in federal funds sold and interest earned on excess balances of correspondent accounts. Interest expense for 2011 of $716,000 was comprised primarily of interest paid on deposit accounts. For 2010, interest expense totaled $427,000 which was comprised primarily of interest paid on deposit accounts.

Average Balances, Income and Expenses, and Rates

The following table sets forth certain information related to our average balance sheet and our average yields on assets and average costs of liabilities for 2011, 2010 and 2009. The yields are calculated by dividing income or expense by the average balance of the corresponding asset or liability. Average balances have been derived from the daily balances throughout the period indicated as of December 31, 2011, 2010 and 2009 (dollars in thousands).

	2011							2010							2009
	Average		Income/		Yield/			Average		Income/		Yield/			Average		Income/		Yield/
	Balance		Expense		Rate			Balance		Expense		Rate			Balance		Expense		Rate

Earning assets:

Federal funds sold and interest bearing balances due from banks	$	7,353	$	17		0.23	%	$	7,216	$	15		0.21	%	$	14,992	$	25		0.25	%
Investment securities⁽⁴⁾		5,065		108		2.13			3,867		89		2.30			1,191		8		1.04
Loans⁽¹⁾⁽³⁾		52,590		2,747		5.22			28,574		1,554		5.44			3,825		182		7.13
		65,008		2,872		4.42			39,657		1,658		4.18			20,008		215		1.59
Nonearning assets		32							300							829
Total assets	$	65,040						$	39,957						$	20,837

Interest-bearing liabilities:
Interest-bearing checking	$	5,329		49		0.91		$	4,116		34		0.82		$	1,931		11		0.84
Savings		19,162		236		1.23			3,751		46		1.22			1,257		8		0.98
Time deposits		22,876		431		1.88			16,611		347		2.09			3,297		47		2.12
Total interest-bearing deposits		47,367		716		1.51			24,478		427		1.74			6,485		66		1.54
Borrowings⁽²⁾		14		—		1.01			1		—		1.02			552		17		3.02

Total interest-bearing liabilities		47,381		716		1.51			24,479		427		1.74			7,037		83		1.65
Noninterest- bearing liabilities		6,900							3,845							1,411
Shareholders' equity		10,759							11,633							12,389
Total liabilities and shareholders' equity	$	65,040						$	39,957						$	20,837
Net interest spread						2.91	%						2.44	%						(0.04	)%
Net interest income/ margin⁽⁴⁾			$	2,156		3.32	%			$	1,231		3.10	%			$	132		0.98	%

⁽¹⁾ There were no loans in nonaccrual status in 2010 or 2009 and one loan relationship in nonaccrual status in 2011.

⁽²⁾ Borrowings represent over night Federal Funds Purchased through a correspondent bank to test the lines in both 2011 and 2010. Borrowings in 2009 represent a line of credit utilized by the Company during its development stage.

⁽³⁾Loan fees are included in interest income.

⁽⁴⁾The Company has sustained a taxable loss, so the Company has not been able to realize any tax benefit from tax-exempt securities.

Our net interest spread and net interest margin were 2.91% and 3.32%, respectively, in 2011 compared to 2.44% and 3.10% in 2010. 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. The net interest margin is calculated as net interest income divided by average earning assets. The largest component of average earning assets during in 2011 and 2010 was loans. The largest component of average earning assets during 2009 was federal funds sold and interest bearing balances due from banks.

The average balance of interest earning assets grew by $25.4 million and the rate earned increased 24 basis points to 4.42% as the Bank continued to grow higher yielding assets. The average balance of loans increased $24.0 million in 2011 when compared to 2010. This increase in volume caused interest income on loans to increase $1.2 million in 2011 compared to 2010. The increase was partially offset by a decrease in the average rate earned on loans resulting from the overall change in size and mix of the portfolio and the continued low interest rate environment. The average balance of total securities grew by $1.2 million and the rate decreased 17 basis points to 2.13% in 2011 compared to the prior year. The average balance increase, coupled with the lower average rate earned on taxable securities, caused interest income from securities to increase approximately $19,000 in 2011 compared to 2010. The average balance and rate of Federal funds sold and interest bearing due from bank accounts remained relatively unchanged in 2011 compared to 2010.

The average balance of interest-bearing deposits increased $22.9 million in 2011 compared to 2010. The effect of this increase, somewhat offset by a 23 basis point decrease in the average rate paid, caused interest expense to be $289,000 higher in 2011 than in the prior year. Interest bearing checking and savings products grew by $16.6 million and time deposits grew by $6.3 million in 2011. The average balance of borrowings increased slightly in 2011 over 2010 but the rate remained relatively unchanged and had no impact on interest expense. Borrowing expense in 2011 and 2010 was the result of the Bank testing borrowing lines of credit, therefore there was no interest expense impact. The overall effect of the changes in interest bearing deposit expense was a decrease of 23 basis points in the rate paid on interest bearing liabilities to 1.51% in 2011. The increase in the volume of interest bearing liabilities was the result of planned growth while the decrease in the rate paid on interest bearing liabilities is the result of continued low interest rates in the market.

Our net interest spread and net interest margin were 2.44% and 3.10%, respectively, in 2010 compared to (0.04)% and 0.98% in 2009. The largest component of average earning assets during 2010 was loans as compared to 2009 when cash and cash equivalents comprised the largest component of average earning assets.

The average balance of interest earning assets grew by $19.6 million and the rate earned increased 259 basis points to 4.18% as the Bank continued to grow higher yielding assets. The average balance of loans increased $24.7 million in 2010 when compared to 2009. This increase in volume caused interest income on loans to increase $1.8 million in 2010 compared to 2009. The increase was partially offset by a decrease in the average rate earned on loans resulting from the overall change in size and mix of the portfolio. The average balance of total securities grew by $2.7 million and the rate increased 126 basis points to 2.30% in 2010 compared to the prior year. The average balance increase, coupled with the higher average rate earned on taxable securities, caused interest income from securities to increase approximately $81,000 in 2010 compared to 2009. The average balance of Federal funds sold and interest bearing due from bank accounts decreased by $7.8 million. This decrease combined with a slight decrease in the rate of interest earned resulted in a decline in interest income of $9,700 in 2010 compared to 2009. This was due to the Bank utilizing these funds to increase the volume of investment securities and loan balances.

The average balance of interest-bearing deposits increased $18.0 million in 2010 compared to 2009. The effect of this increase along with a 20 basis point increase in the average rate paid caused interest expense to be $361,000 higher in 2010 than in the prior year. Interest bearing checking and savings products grew by $4.7 million and time deposits grew by $13.3 million in 2010. The average balance of borrowings decreased $551,000 and the rate declined 200 basis points resulting in a decrease in interest expense on borrowings of $17,000. Borrowing expense in 2009 was related to borrowings for pre-opening and start up activities of the Bank. In 2010, borrowing expense was the result of the Bank testing borrowing lines of credit. The overall effect of the increase in interest bearing deposit expense and the decrease in borrowing expense in 2010 was an increase of 9 basis points in the rate paid on interest bearing liabilities to 1.74%.

Rate/Volume Analysis (dollars in thousands):

	Year ended December 31,
	2011 over 2010
	Total		Volume		Rate
Increase (decrease) in interest income⁽¹⁾
Federal funds sold and interest- bearing balances due from banks	$	2	$	—	$	2
Investment Securities		19		25		(6	)
Loans		1,193		1,253		(60	)

Net change in interest income		1,214		1,278		(64	)

Increase (decrease) in interest expense
Interest-bearing checking		15		11		4
Savings		190		190		—
Time deposits		84		109		(26	)
Borrowings		—		—		—

Net change in interest expense		289		310		(22	)

Net change in net interest income	$	925	$	968	$	(42	)

⁽¹⁾

The volume variance is computed as the change in volume (average balance) multiplied by the previous year's interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year's volume (average balance). The variance related to the change in mix is spread proportionately between the volume and rate variance.

	Year ended December 31,
	2010 over 2009
	Total			Volume			Rate			Days
Increase (decrease) in interest income⁽¹⁾
Federal funds sold and interest- bearing balances due from banks	$	(10	)	$	(19	)	$	(3	)	$	12
Investment Securities		81			28			49			4
Loans		1,373			1,764			(482	)		91

Net change in interest income		1,444			1,773			(436	)		107

Increase (decrease) in interest expense
Interest-bearing checking		23			19			(1	)		5
Savings		37			25			8			4
Time deposits		301			286			(9	)		24
Borrowings		(17	)		(17	)		—			—

Net change in interest expense		344			313			(2	)		33

Net change in net interest income	$	1,100		$	1,460		$	(434	)	$	74

⁽¹⁾

The volume variance is computed as the change in volume (average balance) multiplied by the previous year's interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year's volume (average balance). The days variance is the adjustment for 2009 being a partial year of operations.

Management anticipates that the level of net interest income will continue to grow in 2012 as the Bank continues to expand according to its business plan. Growth in earning assets may prove to be somewhat more difficult in 2012 given the increased ability of competitors in the local market to increase lending activities. If general market interest rates continue to remain at relatively low levels, the impact on the Company’s net interest spread could be negatively affected as new activity, maturities, and payments may have differing impacts on interest-earning assets and interest-bearing liabilities.

Interest Rate Sensitivity

We monitor and manage the pricing and maturity of our assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on our net interest income. The principal monitoring technique employed by us is the measurement of our interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate re-pricing within a given period of time. Interest rate sensitivity can be managed by re-pricing 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 re-pricing in this same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates.

The following table sets forth our interest rate sensitivity at December 31, 2011.

(dollars in thousands)	Within three months			After three but within twelve months			After one but within five years			After five years			Total
Interest-earning assets:
Federal funds sold	$	841		$	—		$	—		$	—		$	841
Interest-bearing accounts		5,991			—			—			—			5,991
Investment securities		—			—			1,998			2,666			4,664
Loans		25,991			1,399			31,434			9,382			68,206
Total earning assets	$	32,823		$	1,399		$	33,432		$	12,048		$	79,702

Interest-bearing liabilities:
NOW accounts	$	6,097		$	—		$	—		$	—		$	6,097
Regular savings		24,179			—			—			—			24,179
Time deposits		2,540			14,340			12,333			—			29,213
Total interest-bearing liabilities	$	32,816		$	14,340		$	12,333		$	—		$	59,489

Period gap	$	103		$	(12,941	)	$	21,100		$	12,047		$	20,309
Cumulative gap		103			(12,838	)		8,262			20,309			20,309
Ratio of cumulative gap total assets		0.20	%		(24.78	)%		15.95	%		39.20	%		39.20	%

The following table sets forth our interest rate sensitivity at December 31, 2010.

(dollars in thousands)	Within three months			After three but within twelve months			After one but within five years			After five years			Total
Interest-earning assets:
Federal funds sold	$	551		$	—		$	—		$	—		$	551
Interest-bearing accounts		3,729			—			—			—			3,729
Investment securities		—			—			1,485			2,309			3,794
Loans, including loans held for sale		22,946			1,766			13,227			5,641			43,580
Total earning assets	$	27,226		$	1,766		$	14,712		$	7,950		$	51,654

Interest-bearing liabilities:
NOW accounts	$	4,162		$	—		$	—		$	—		$	4,162
Regular savings		9,780			—			—			—			9,780
Time deposits		2,819			6,990			12,357			—			22,166
Total interest-bearing liabilities	$	16,761		$	6,990		$	12,357		$	—		$	36,108

Period gap	$	10,466		$	(5,224	)	$	2,370		$	7,944		$	15,556
Cumulative gap		10,466			5,242			7,612			15,556			15,556
Ratio of cumulative gap total assets		20.20	%		10.12	%		14.69	%		30.03	%		30.03	%

The above tables reflect the balances of interest-earning assets and interest-bearing liabilities at the earlier of their re-pricing or maturity dates. Overnight Federal Funds are reflected at the earliest pricing interval due to the immediately available nature of the instruments. Debt securities are reflected at each instrument’s ultimate maturity date. Interest-bearing liabilities with no contractual maturity, such as savings deposits and interest-bearing transaction accounts, are reflected in the earliest re-pricing period due to contractual arrangements which give us the opportunity to vary the rates paid on those deposits within a thirty-day or shorter period. Fixed rate time deposits, principally certificates of deposit, are reflected at their contractual maturity date.

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 our gap position is liability-sensitive. We were cumulatively liability sensitive through the first twelve months of operation but cumulatively asset sensitive beyond one year. However, gap analysis is not a precise indicator of interest sensitivity position. The analysis presents only a static view of the timing of maturities and re-pricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally and that management may or may not elect to execute on the re-pricing opportunities. Net interest income may be impacted by other significant factors in a given interest rate environment, including changes in the volume and mix of earning assets and interest-bearing liabilities.

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 consolidated statements of operations during 2011 and 2010. 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. Please see the discussion below under “Provision and Allowance for Loan Losses” for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance.

Our provision for loan losses was $311,000 and $324,000 for 2011 and 2010, respectively. Management continues to review and evaluate the adequacy of the reserve for possible loan losses given the size, mix, and quality of the current loan portfolio.

Noninterest Income

Total noninterest income for the twelve month period ended December 31, 2011, was $99,000. The noninterest income earned in 2011 was predominately gain on sale of loans held for sale of $70,000, service charges on deposit accounts of $10,000 and $19,000 of other miscellaneous income. For 2010, the noninterest income of $37,000 was comprised by $25,000 of gain on the sale of mortgage loans held for sale, service charges on deposit accounts of $5,000 and other miscellaneous income of $7,000. The increase in gain on sale of loans was the result of increased activity in mortgage refinancing due to low market rates and additions to staff in the mortgage lending department. As the volumes of loans and deposits increase, the Company expects our noninterest income to increase as well.

Noninterest Expenses

The following table sets forth our noninterest expense at December 31, 2011 and 2010 (dollars in thousands):

	December 31,				Change - Increase/(Decrease)
	2011		2010		2011 v 2010
Noninterest expenses
Salaries and benefits	$	1,616	$	1,359	$	257
Occupancy and equipment		183		164		19
Share based payment awards		50		49		1
Training and travel		39		48		(9	)
Data processing and computer support		147		121		26
Advertising and marketing		48		45		3
Audit and other professional		244		209		35
Printing, postage and office supplies		46		37		9
Legal		76		96		(20	)
Loan processing		28		18		10
Loan collection		33		—		33
Insurance		92		74		18
Telephone and data communications		48		43		5
Other expense		59		42		17
Total noninterest expenses	$	2,709	$	2,305	$	404

Noninterest expenses for 2011 totaled $2.7 million, compared to $2.3 million for 2010. Salaries and employee benefits comprised the largest component of noninterest expense totaling $1.6 million for 2011, and $1.4 million for 2010. The increase is due primarily to an increase in staff. Included in salaries and employee benefits expense for 2011 was $29,000 of expense related to the issuance of stock options to directors of the Company, and $21,000 of expense related to the issuance of stock options to employees. This compares to $23,000 of expense related to the issuance of stock options to directors of the Company, and $26,000 of expense related to the issuance of options to employees during 2010.

Additional components of noninterest expense for 2011 include audit and professional fees of $244,000 which increased $35,000 from $209,000 in 2010. The increase in professional fees is due to additional costs related to expanded scope of compliance audits due to overall growth of the Bank. Other components of noninterest expense include occupancy and equipment expense of $183,000 in 2011 which increased $19,000 from $164,000 in 2010. The increase is primarily the result of increased depreciation on furniture and equipment purchased in 2011 as the result of planned growth. Legal fees in 2011 of $76,000 decreased $20,000 from $96,000 in 2010 due to planned reductions. Data processing and IT related services expenses of $147,000 in 2011 increased $26,000 from $121,000 in 2010 due primarily growth in volumes and increased services associated with these charges. Advertising and marketing expenses of $48,000 in 2011, increased by $3,000 from $45,000 in 2010. Insurance expense of $92,000 in 2011 increased $18,000 from $74,000 in 2010. This increase is due largely to increases in FDIC insurance resulting from the change in calculation method of FDIC insurance. Loan collection expense related to the Company’s impaired loan totaled $33,000. There were no loan collection expenses in 2010. Loan processing expense of $28,000 in 2011 increased by $10,000 from $18,000 in 2010 due primarily to an increase in the number of loans processed. Training and travel of $39,000 in 2011 decreased $9,000 from $48,000 in 2010 due to planned reductions.

If the Company continues to grow the banking operation pursuant to its business plan, management expects expenses to increase accordingly. Management anticipates that any increase in expenses will be offset by expected increases in revenue, assuming the Company is successful in implementing its business plan.

Income Tax Expense

No income tax expense or benefit was recognized during the years ended December 31, 2011 or 2010 due to the tax loss carry-forward position of the Company. An income tax benefit may be recorded in future periods, when the Company begins to become profitable and management believes that profitability will continue for the foreseeable future. No Federal income tax liability is expected for 2012. An income tax receivable of $1,300 represents the Company’s overpayment of Michigan Business Tax for 2010 and is included in interest receivable and other assets on the consolidated balance sheets. This receivable is not expected to be sufficient to offset the Company’s 2011 projected Michigan Business Tax; however, the Company intends to utilize other resources to meet its tax obligations as they become due.

Liquidity

Liquidity represents the ability of the Bank to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. For an operating Bank, liquidity represents the ability to provide steady sources of funds for loan commitments and investment activities, as well as to maintain sufficient funds to cover deposit withdrawals and payment of debt and operating obligations. 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.

The liquidity of a Bank allows it to provide funds to meet loan requests, to accommodate possible outflows of deposits, and to take advantage of other investment opportunities. Funding of loan requests, providing for liability outflows and managing interest rate margins require continuous analysis to attempt to match the maturities and re-pricing of specific categories of loans and investments with specific types of deposits and borrowings. Bank liquidity depends upon the mix of the banking institution’s potential sources and uses of funds. Our primary sources of funds are cash and cash equivalents, deposits, principal and interest payments on loans and investment maturities. While scheduled amortization of loans is a predictable source of funds, deposit flows are greatly influenced by general interest rates, economic conditions and competition. The Bank is a member of the Federal Home Loan Bank of Indianapolis which provides the Bank with a secured line of credit. Collateral will primarily consist of specific pledged loans and investment securities. Management has pledged loans and securities issued by U.S. government agencies in support of borrowings. The amount available to advance on the line is determined by the value of pledged collateral as determined by the Federal Home Loan Bank of Indianapolis. The Bank has also received approval to borrow from the Federal Reserve Discount Window on a collateralized basis. Collateral will consist of specific pledged loans. First Tennessee Bank, a correspondent bank, has approved a $2.0 million Federal funds line of credit on a secured basis. Securities have been pledged to First Tennessee Bank as of December 31, 2011 and 2010 with fair values of $2.2 million and $2.4 million, respectively, and the line is available for use. Lastly, the Bank has subscribed to a deposit listing service which allows the Bank to post its rates to other financial institutions. This facility has been utilized on a limited basis with $3.3 million and $3.6 million in outstanding deposits at December 31 2011 and 2010, respectively. Present sources of liquidity are considered sufficient to meet current commitments. At December 31, 2011, the Company had no borrowed funds outstanding.

In the normal course of business, the Bank routinely enters into various commitments, primarily relating to the origination of loans. At December 31, 2011, outstanding unused lines of credit totaled $6.6 million compared to $5.1 million at December 31, 2010. The Company expects to have sufficient funds available to meet current commitments in the normal course of business. As of December 31, 2011, the Bank had $5.8 million of outstanding unfunded loan commitments compared to $3.4 million as of December 31, 2010. A majority of these commitments are in the form of loan commitment letters which generally expire within 30 days of issue and represent commercial loans and lines of credit. The increases are due to planned growth and the timing delay between commitment and funding and, therefore, may fluctuate significantly at any given time.

Certificates of deposit scheduled to mature in one year or less approximates $16.9 million at December 31, 2011 compared to $9.8 million at December 31, 2010. Management estimates that a significant portion of such deposits will remain with the Bank.

Capital Expenditures

The Company’s capital expenditures have consisted primarily of leasehold improvements and purchases of furniture and equipment to be utilized in the ordinary course of our banking business. For 2011, the Company incurred capitalized expenditures of approximately $132,000 compared to $11,000 for 2010.

Item 7A.

Quantative and Qualitative Disclosures about Market Risk.

Because the Company is a smaller reporting company, disclosure under this item is not required.

Item 8.

Financial Statements and Supplementary Data.

The following consolidated financial statements of the Company accompanied by the report of our independent registered public accounting firm are set forth on pages 4 through 75 of this report:

Report of Independent Registered Public Accounting Firm	44
Consolidated Balance Sheets	45
Consolidated Statements of Operations	46
Consolidated Statements of Comprehensive Loss	47
Consolidated Statements of Shareholder’s Equity	48
Consolidated Statements of Cash Flows	49
Notes to Consolidated Financial Statements	50

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors

Grand River Commerce, Inc.

Grandville, Michigan

We have audited the accompanying consolidated balance sheets of Grand River Commerce, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity and cash flows the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Grand River Commerce, Inc. as of December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

	/s/ Rehmann Robson P.C.

Grand Rapids, Michigan
March 27, 2012

CONSOLIDATED FINANCIAL STATEMENTS

GRAND RIVER COMMERCE, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	December 31,
	2011			2010
ASSETS
Cash and cash equivalents
Cash	$	6,087		$	3,892
Federal funds sold		841			551
Total cash and cash equivalents		6,928			4,443

Investment securities, available-for-sale		4,664			3,794
Federal Home Loan Bank Stock, at cost		81			33
Mortgage loans held for sale		—			90
Loans
Total loans		68,206			43,490
Less: allowance for loan losses		769			458
Net loans		67,437			43,032
Premises and equipment		241			203
Interest receivable and other assets		286			212
TOTAL ASSETS	$	79,637		$	51,807

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities
Deposits
Noninterest bearing	$	9,520		$	4,534
Interest bearing		59,489			36,108
Total deposits		69,009			40,642

Interest payable and other liabilities		264			141
Total liabilities		69,273			40,783

Commitments and contingencies (Note 7, 13 and 15)

Shareholders’ equity
Common Stock, $0.01 par value, 10,000,000 shares authorized — 1,700,120 shares issued and outstanding at December 31, 2011 and 2010		17			17
Additional paid-in capital		15,048			14,998
Additional paid-in capital warrants		479			479
Accumulated deficit		(5,229	)		(4,464	)
Accumulated other comprehensive income (loss)		49			(6	)
Total shareholders’ equity		10,364			11,024

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	79,637		$	51,807

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

GRAND RIVER COMMERCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands)

	Year Ended December 31,
	2011			2010
Interest income
Loans, including fees	$	2,747		$	1,554
Securities		108			89
Federal funds sold and other income		17			15
Total interest income		2,872			1,658

Interest expense
Deposits		716			427
Borrowings		—			—
Total interest expense		716			427

Net interest income		2,156			1,231

Provision for loan losses		311			324
Net interest income after provision for loan losses		1,845			907

Noninterest income
Service charges and other fees		10			5
Gain on sale of mortgage loans		70			25
Other		19			7
Total noninterest income		99			37

Noninterest expenses
Salaries and benefits		1,616			1,359
Occupancy and equipment		183			164
Share based payment awards		50			49
Travel and training		39			48
Data processing and computer support		147			121
Advertising and marketing		48			45
Audit and other professional		244			209
Printing, postage and office supplies		46			37
Legal		76			96
Loan processing		28			18
Loan collection		33			—
Insurance		92			74
Telephone and data communications		48			43
Other		59			42

Total noninterest expenses		2,709			2,305

Net loss	$	(765	)	$	(1,361	)

Basic (loss) per share	$	(0.45	)	$	(0.80	)
Diluted (loss) per share	$	(0.45	)	$	(0.80	)

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

grand river commerce, inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Dollars in thousands)

	Year Ended December 31,
	2011			2010

Net loss	$	(765	)	$	(1,361	)
Other comprehensive income
Unrealized gains (losses) on securities available-for-sale		83			(10	)
Deferred income tax (expense) benefit		(28	)		3
Comprehensive loss	$	(710	)	$	(1,368	)

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

grand river commerce, inc.

CONSOLIDATED statementS of shareholders’ equity

(Dollars in Thousands)

					Additional					Accumulated
					Paid in					Other
	Common		Additional Paid		Capital		Accumulated			Comprehensive
	Stock		in Capital		Warrants		Deficit			Income			Total

Balances, January 1, 2010	$	17	$	14,949	$	479	$	(3,103	)	$	1		$	12,343
Share based payment awards under equity compensation plan		—		49		—		—			—			49
Comprehensive loss		—		—		—		(1,361	)		(7	)		(1,368	)

Balances, December 31, 2010		17		14,998		479		(4,464	)		(6	)		11,024

Share based payment awards under equity compensation plan		—		50		—		—			—			50
Comprehensive loss		—		—		—		(765	)		55			(710	)

Balances, December 31, 2011	$	17	$	15,048	$	479	$	(5,229	)	$	49		$	10,364

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

GRAND RIVER COMMERCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

	Year Ended December 31,
	2011			2010
Cash flows from operating activities
Net loss	$	(765	)	$	(1,361	)
Adjustments to reconcile net loss to net cash used in operating activities
Share based payment compensation		50			49
Provision for loan losses		311			324
Net amortization on investment securities		14			16
Originations of loans held for sale		(4,880	)		(1,955	)
Proceeds from loan sales		5,040			2,306
Deferred income tax (benefit) expense		(28	)		3
Net realized gain on sale of loans		(70	)		(25	)
Depreciation		94			89
Net change in:
Interest receivable and other assets		(74	)		(91	)
Interest payable and other liabilities		123			32
Net cash used in operating activities		(185	)		(613	)

Cash flows from investing activities
Loan principal originations and collections, net		(24,716	)		(30,139	)
Activity in available-for-sale securities
Maturities and prepayments		4,699			3,175
Purchase of securities		(5,500	)		(4,508	)
Purchase of Federal Home Loan Bank stock		(48	)		(32	)
Purchase of equipment		(132	)		(11	)
Net cash used in investing activities		(25,697	)		(31,515	)

Cash flows provided by financing activities
Acceptances of and withdrawals of deposits, net		28,367			23,178

Net increase (decrease) in cash and cash equivalents		2,485			(8,950	)

Cash and cash equivalents, beginning of the year		4,443			13,393

Cash and cash equivalents, end of the year	$	6,928		$	4,443

Supplemental cash flows information:
Cash paid for interest	$	710		$	415

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

Grand River Commerce, Inc.

Notes to Consolidated Financial Statements

Note 1:

Organization, Business and Summary of Significant Accounting Principles

Nature of Organization and Basis of Presentation

Grand River Commerce, Inc. (“GRCI”) was incorporated under the laws of the State of Michigan on August 15, 2006, to organize a de novo Bank in Michigan. GRCI’s fiscal year ends on December 31. Upon receiving regulatory approvals to commence business in April 2009, GRCI capitalized Grand River Bank, a de novo Bank, (the “Bank”) which also has a December 31 fiscal year end. The Bank is a wholly-owned subsidiary of GRCI.

The Bank is a full-service commercial Bank headquartered in Grandville, Michigan serving the communities of Grandville, Grand Rapids and the surrounding areas in Kent and Ottawa Counties, Michigan, with a broad range of commercial and consumer banking services to small- and medium-sized businesses, professionals, and local residents who it believes will be particularly responsive to the style of service which the Bank provides.

Active competition, principally from other commercial banks, savings banks and credit unions, exists in all of the Bank’s primary markets. The Bank’s results of operations can be significantly affected by changes in interest rates or changes in the automotive and agricultural industries which comprise a significant portion of the local economic environment.

The Bank’s primary deposit products are interest and noninterest bearing checking accounts, savings accounts and time deposits and its primary lending products are real estate mortgages, commercial and consumer loans. The majority of the Bank’s loan portfolio is comprised of commercial real estate and commercial and industrial loans. Commercial real estate loans represented 86.7% and 84.4% of total loans at December 31, 2011 and 2010, respectively while commercial and industrial loans represent 9.0% and 10.9% of total loans at December 31, 2011 and 2010, respectively. The Bank has a concentration in loans secured by real estate; however, management believes that the Bank does not have significant concentrations with respect to any one industry, customer, or depositor.

The Bank is a state chartered bank and is a member of the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to the regulations and supervision of the FDIC and state regulators and undergoes periodic examinations by these regulatory authorities. GRCI is also subject to regulations of the Federal Reserve governing bank holding companies.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of GRCI and the Bank (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, share-based compensation, and the valuation of deferred tax assets. In connection with the determination of the allowance for loan losses management obtains independent appraisals for significant properties.

Management believes that the allowance for losses on loans is adequate to absorb losses inherent in the portfolio. As there is no historical loss information to recognize losses on loans, future additions to the allowance may be necessary based on changes in local economic conditions.

In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for losses on loans may change materially in the near term.

Summary of Significant Accounting Policies

Accounting policies used in preparation of the accompanying consolidated financial statements are in conformity with accounting principles generally accepted in the United States. The principles which materially affect the determination of the financial position and results of operations of the Company and its subsidiary bank are summarized below.

Fair Values of Financial Instruments

Fair value refers to the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants in the market in which the reporting entity transacts such sales or transfers based on the assumptions market participants would use when pricing an asset or liability. Assumptions are developed based on prioritizing information within a fair value hierarchy that gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data, such as the reporting entity's own data (Level 3). A description of each category in the fair value hierarchy is as follows:

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets which the Company can participate.

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement, and include inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

For a further discussion of Fair Value Measurement, refer to Note 6 to the consolidated financial statements.

Cash and Cash Equivalents

For the purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks, and federal funds sold, all of which mature within ninety days. Generally, federal funds are sold for a one-day period. The Company maintains deposit accounts in various financial institutions which generally do not exceed the FDIC insured limits. Management does not believe the Company is exposed to any significant interest, credit, or other financial risk of these deposits.

Investment Securities

Debt securities that management has the positive intent and the Company has the ability to hold-to-maturity are classified as securities held-to-maturity and are recorded at amortized cost. Securities not classified as securities held-to-maturity, including equity securities with readily, determinable fair values, are classified as securities available-for-sale and are recorded at fair value, with unrealized gains and losses excluded from earnings and reported as a component of other comprehensive income (loss). Purchase premiums and discounts are recognized in interest income using methods approximating the interest method over the terms of the securities. Realized gains and losses on the sale of securities are included in earnings on the trade date using the specific identification method.

Investment securities are reviewed quarterly for possible other-than-temporary impairment (“OTTI”). In determining whether an other-than-temporary impairment exists for debt securities, management must assert that: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Declines in the fair value of held-to-maturity and available-for-sale debt securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the impairment is related to credit risk. The amount of the impairment related to other risk factors (interest rate and market) is recognized as a component of other comprehensive income.

Federal Home Loan Bank Stock

Restricted stock consists of Federal Home Loan Bank (FHLB) stock, which represents an equity interest in this entity and is recorded at cost plus the value assigned to dividends. This stock does not have a readily determinable fair value because ownership is restricted and lacks a market.

Mortgage Loans Held for Sale

Mortgage loans originated and held for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Estimated fair value is determined using forward commitments to sell loans to permanent investors, or current market rates for loans of similar quality and type. Net unrealized losses, if any, are recognized in a valuation allowance by charges to earnings. Discounts or premiums on loans held for sale are deferred until the related loan is sold. Loans held for sale are sold with servicing rights released.

Loans are considered sold when the Company surrenders control over the transferred assets to the purchaser, with standard representations and warranties. At such time, the loan is removed from the loan portfolio and a gain or loss is recorded on the sale. Gains and losses on loan sales are determined based on the difference between the carrying value of the assets sold, the estimated fair value of any assets or liabilities that are newly created as a result of the transaction and the proceeds from the sale.

Loans

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses, and unamortized premiums or discounts on purchased loans. Interest is credited to income on a daily basis based upon the principal amount outstanding. Management estimates that direct costs incurred in originating loans classified as held-to-maturity approximate the origination fees generated on these loans. Therefore, net deferred loan origination fees on loans classified as held-to-maturity are not included on the accompanying consolidated balance sheets.

Interest income on all classes of loans is discontinued when management believes, after consideration of economic and business conditions and collection efforts,that the borrowers’ financial condition is such that collection of interest is doubtful. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to nonaccrual status in accordance with the Company’s policy, typically after 90 days of non-payment.

All interest accrued but not received for loans placed on nonaccrual in the current year is reversed against interest income. Interest accrued but not received for loans placed on nonaccrual due from prior years is charged against the allowance for loan losses. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Troubled Debt Restructurings

A loan or lease is accounted for as a troubled debt restructuring if management, for economic or legal reasons related to the borrower’s financial condition, grants a significant concession to the borrower that would not otherwise be considered. A troubled debt restructuring may involve the receipt of assets from the debtor in partial or full satisfaction of the loan or lease, or a modification of terms such as a reduction of the stated interest rate or balance of the loan or lease, a reduction of accrued interest, an extension of the maturity date at a stated interest rate lower than the current market rate for a new loan with similar risk, or some combination of these concessions. Troubled debt restructurings generally remain categorized as nonperforming loans until a six-month payment history has been maintained.

Allowance for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collection of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance for loan losses is evaluated by management on a regular basis and is maintained at a level believed to be adequate by management to absorb loan losses based upon evaluations of known and inherent risks in the loan portfolio.

Due to our limited operating history, the loans in our loan portfolio and our lending relationships are of 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 consists of loans issued primarily in the past twenty-seven months, 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. 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. Management’s periodic evaluation of the adequacy of the allowance is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. All loans are subject to individual impairment evaluation should the facts and circumstances pertinent to a particular loan suggest that such evaluation is necessary. Factors considered by management in determining impairment include, among others, payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The specific allowance established for these loans is based on a thorough analysis of the most probable source of repayment, including the present value of the loan’s expected future cash flows, the loan’s estimated market value, or the estimated fair value of the underlying collateral. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan's effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers all other loans not identified as impaired and is based on average historical loss experience of peers in our market adjusted for qualitative factors since the Bank does not have any historical loss experience on which to base its analysis. In calculating the historical component of the allowance, management aggregates loans into one of three portfolio segments: Real Estate, Commercial and Industrial and Consumer and Other. The average historical loss experience of the peer group is adjusted for management's estimate of the impact of other factors based on the risks present for each portfolio segment. These other factors include consideration of the following: the overall level of credit concentrations, loan concentrations within a portfolio segment, recent levels and trends in delinquencies, identification of certain loan types with higher risk than other types, growth in the loan portfolio and other economic and industry factors. The occurrence of certain events could result in changes to the loss factors. Accordingly, these loss factors are reviewed periodically and modified as necessary.

Unallocated allowance relates to inherent losses that are not otherwise evaluated in the first two elements. The qualitative factors associated with unallocated allowance are subjective and require a high degree of management judgment. These factors include the inherent imprecision in mathematical models and credit quality statistics, recent economic uncertainty, losses incurred from recent events, and lagging or incomplete data.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when 1) the assets have been legally isolated from the Company, 2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and 3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. The Company has no substantive continuing involvement related to these loans.

The Bank sold residential mortgage loans to an unrelated third party with proceeds of $5.0 million and $2.3 million in 2011 and 2010, respectively, which resulted in gains of $70,000 and $25,000 for 2011 and 2010, respectively.

Foreclosed Real Estate

Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less estimated selling costs at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. As of December 31, 2011 and 2010, the Company had no foreclosed real estate properties.

Premises and Equipment

Equipment is carried at cost less accumulated depreciation. Depreciation is computed principally by the straight line method based upon the estimated useful lives of the assets, which range generally from 3 to 9 years. Major improvements are capitalized and appropriately amortized based upon the useful lives of the related assets or the expected terms of the leases, if shorter, using the straight line method. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur. Management annually reviews these assets to determine whether carrying values have been impaired.

Income Taxes

Deferred income tax assets and liabilities are computed annually for differences between the financial statement and federal income tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the period in which the differences are expected to affect taxable income. Deferred income tax benefits result from net operating loss carry forwards. Valuation allowances are established, when necessary, to reduce the deferred tax assets to the amount expected to be realized. As a result of the Company commencing operations in the second quarter of 2009, any potential deferred tax benefit from the anticipated utilization of net operating losses generated during the development period and the first years of operations has been completely offset by a valuation allowance. Income tax expense is the tax payable or refundable for the period plus, or minus the change during the period in deferred tax assets and liabilities. Additionally, the Company has a deferred tax liability recognized in connection with the unrealized gain on available-for-sale securities which is reported in “interest payable and other liabilities” section of the consolidated balance sheets.

Share-Based Compensation

The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. An expense equal to the fair value of the awards over the requisite service period of the awards is recognized in the consolidated statements of operations. The Company estimates the per share fair value of option grants on the date of grant using the Black-Scholes option pricing model using assumptions for the expected dividend yield, expected stock price volatility, risk-free interest rate and expected option term. These assumptions are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. The Black-Scholes option pricing model also contains certain inherent limitations when applied to options that are not traded on public markets. The per share fair value of options is highly sensitive to changes in assumptions. In general, the per share fair value of options will move in the same direction as changes in the expected stock price volatility, risk-free interest rate and expected option term, and in the opposite direction as changes in the expected dividend yield. For example, the per share fair value of options will generally increase as expected stock price volatility increases, risk-free interest rate increases, expected option term increases and expected dividend yield decreases. The use of different assumptions or different option pricing models could result in materially different per share fair values of options.

Advertising Costs

All advertising and marketing costs, amounting to approximately $48,000 and $45,000 in 2011 and 2010, respectively, are expensed as incurred.

Comprehensive Income (Loss)

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income (loss). Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section in the consolidated balance sheets. Such items, along with net income (loss), are components of accumulated other comprehensive income (loss).

Net Loss per Share

Basic and diluted loss per share have been computed by dividing the net loss by the weighted-average number of common shares outstanding for the year. Weighted-average common shares outstanding in 2011 and 2010 totaled 1,700,120. Common stock equivalents consisting of Common Stock Options and Common Stock Purchase Warrants as described in Notes 8 and 9 are anti-dilutive and are therefore excluded.

Off-Balance Sheet Credit Related Financial Instruments

In the ordinary course of business the Bank enters into off balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit and standby letters of credit. Such financial instruments are considered to be guarantees; however, as the amount of the liability related to such guarantees on the commitment date is considered insignificant, the commitments are generally recorded only when they are funded.

Reclassifications

Certain amounts as reported in the 2010 consolidated financial statements have been reclassified to conform to the 2011 presentation.

Effects of Newly Issued Effective Accounting Standards

Accounting Standards Update (ASU) No. 2010-06: “Improving Disclosures about Fair Value Measurement.” In January 2010, ASU No. 2010-06 amended Accounting Standards Codification (ASC) Topic 820 “Fair Value Measurements and Disclosures” to add new disclosures for: (1) significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers and (2) presenting separately information about purchases, sales, issuances and settlements for Level 3 fair value instruments (as opposed to reporting activity as net).

ASU No. 2010-06 also clarified existing disclosures by requiring reporting entities to provide fair value measurement disclosures for each class of assets and liabilities and to provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The new authoritative guidance was effective for interim and annual periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements, which was effective for interim and annual periods beginning after December 15, 2010. The new guidance did not have a significant impact on the Company’s consolidated financial statements.

ASU No. 2011-01: “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.” In January 2011, ASU No. 2011-01 amended ASC Topic 310, “Receivables” to temporarily delay the effective date of new disclosures related to troubled debt restructurings as required in ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”, which was initially intended to be effective for interim and annual periods ending after December 15, 2010. The effective date of the new disclosures about troubled debt restructurings was delayed to coordinate with the newly issued guidance for determining what constitutes a troubled debt restructuring (ASU No. 2011-02). The new disclosures were effective for interim and annual periods beginning on or after June 15, 2011 and increased the level of reporting disclosures related to troubled debt restructurings.

ASU No. 2011-02: “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” In April 2011, ASU No. 2011-02 amended ASC Topic 310, “Receivables” to clarify authoritative guidance as to what loan modifications constitute concessions, and would therefore be considered a troubled debt restructuring. Classification as a troubled debt restructuring will automatically classify such loans as impaired. ASU No. 2011-02 clarifies that:

If a debtor does not otherwise have access to funds at a market rate for debt with similar risk characteristics as the modified debt, the modification would be considered to be at a below-market rate, which may indicate that the creditor has granted a concession.

A modification that results in a temporary or permanent increase in the contractual interest rate cannot be presumed to be at a rate that is at or above a market rate and therefore could still be considered a concession.

A creditor must consider whether a borrower’s default is “probable” on any of its debt in the foreseeable future when assessing financial difficulty.

A modification that results in an insignificant delay in payments is not a concession.

In addition, ASU No. 2011-02 clarifies that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on modification of payables (ASC Topic 470, “Debt”) when evaluating whether a modification constitutes a troubled debt restructuring. The new authoritative guidance was effective for interim and annual periods beginning on or after June 15, 2011 and did not have a significant impact on the Company’s consolidated financial statements (see Note 3 – Loans and Allowance for Loan Losses).

ASU No. 2011-08: “Testing Goodwill for Impairment” In September 2011, ASU No. 2011-08 amended ASC Topic 350, “Goodwill and Other” to simplify the testing of goodwill impairments. This update will allow for a qualitative assessment of goodwill to determine whether or not it is necessary to perform the two-step impairment test described in ASC Topic 350. While the new authoritative guidance is effective for fiscal years beginning after December 15, 2011, the Company elected to early adopt the guidance as of December 31, 2011. The new guidance did not have any impact on the Company’s consolidated financial statements.

Pending Accounting Standards Updates

ASU No. 2011-03: “Reconsideration of Effective Control for Repurchase Agreements” In April 2011, ASU No. 2011-03 amended ASC Topic 310, “Transfers and Servicing” to eliminate from the assessment of effective control, the criteria calling for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed upon terms, even in the event of the transferee's default. The assessment of effective control should instead focus on the transferor’s contractual rights and obligations. The new authoritative guidance is effective for interim and annual periods beginning on or after December 15, 2011 and is not expected to impact the Company’s consolidated financial statements.

ASU No. 2011-04: “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” In May 2011, ASU No. 2011-04 amended ASC Topic 820, “Fair Value Measurement” to align fair value measurements and disclosures in U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The ASU changes the wording used to describe the requirements in GAAP for measuring fair value and disclosures about fair value.

The ASU clarifies the application of existing fair value measurements and disclosure requirements related to:

The application of highest and best use and valuation premise concepts.

Measuring the fair value of an instrument classified in a reporting entity’s stockholders’ equity.

Disclosure about fair value measurements within Level 3 of the fair value hierarchy.

The ASU also changes particular principles or requirements for measuring fair value and disclosing information measuring fair value and disclosures related to:

Measuring the fair value of financial instruments that are managed within a portfolio.

Application of premiums and discounts in a fair value measurement.

The new authoritative guidance is effective for interim and annual periods beginning on or after December 15, 2011 and is not expected to have a significant impact on the Company’s consolidated financial statements.

ASU No. 2011-05: “Presentation of Comprehensive Income” In June 2011, ASU No. 2011-05 amended ASC Topic 220, “Comprehensive Income” to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. In addition, to increase the prominence of items reported in other comprehensive income, and to facilitate the convergence of GAAP and IFRS, the FASB eliminated the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity.

The new authoritative guidance is effective for interim and annual periods beginning on or after December 15, 2011 and is not expected to have a significant impact on Company’s consolidated financial statements since the Company has always elected to present a separate statement of comprehensive income.

Note 2: Investment Securities

The amortized cost and fair value of investment securities classified as available-for-sale, including gross unrealized gains and losses, are summarized as follows (dollars in thousands):

December 31, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government agencies	$	1,999	$	—	$	1	$	1,998
Mortgage-backed securities issued by U.S. government agencies		2,590		76		—		2,666
Total	$	4,589	$	76	$	1	$	4,664

December 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government agencies	$	1,500	$	—	$	15	$	1,485
Mortgage-backed securities issued by U.S. government agencies		2,302		10		3		2,309
Total	$	3,802	$	10	$	18	$	3,794

The amortized cost and fair value of available-for-sale investment securities at December 31, 2011, by contractual maturity are shown below (dollars in thousands):

	Amortized Cost		Fair Value
US government agencies
Within 1 year		$—		$—
Over 1 year through 5 years		1,999		1,998
After 5 years through 10 years		—		—
Total U.S. government agencies		1,999		1,998
Mortgage-backed securities		2,590		2,666
Total	$	4,589	$	$4,664

Expected maturities may differ from contractual maturities because issuers have the right to call or prepay obligations. Because of their variable monthly payments, mortgage-backed securities are not reported in a specific maturity group.

There were no sales of securities in 2011 or 2010.

Securities pledged to the FHLB as of December 31, 2011 and 2010 had fair values of $1.5 million and were pledged to secure available borrowings of $650,000 under a line of credit with the remaining value available to secure future advances. Securities pledged to First Tennessee Bank as of December 31, 2011 and 2010 had fair values of $2.2 million and $2.4 million respectively, and were pledged to secure the available Federal funds line of credit of $2.0 million. There have been no borrowings from the FHLB and no Federal funds advances, other than for testing purposes, since inception.

Securities with unrealized losses, not recognized in income, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, are as follows (dollars in thousands):

	2011				2010
	Less than Twelve Months				Less than Twelve Months
	Gross Unrealized		Fair		Gross Unrealized		Fair
	Losses		Value		Losses		Value
U.S. government agencies	$	1	$	1,498	$	15	$	1,485
Mortgage-backed securities		—		—		3		678
Total	$	1	$	1,498	$	18	$	2,163

Management has asserted that it does not have the intent to sell securities in an unrealized loss position and that it is more likely than not the Bank will not have to sell the securities before recovery of its cost basis; therefore, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2011 or 2010.

Note 3: Loans and Allowance for Loan Losses

The components of the outstanding loan balances are summarized as follows as of December 31 (dollars in thousands):

	2011		2010
Commercial and industrial	$	6,161	$	4,723
Commercial real estate
Commercial		55,853		31,896
Construction and land development		3,264		4,846
Total commercial real estate		59,117		36,742
Consumer
Consumer residential and other		2,840		854
Construction		88		1,171
Total consumer		2,928		2,025
Gross loans		68,206		43,490
Less allowance for loan losses		769		458
Total loans, net	$	67,437	$	43,032

Changes in the allowance for loan losses are as follows for the year ended December 31 (dollars in thousands):

	2011		2010
Balance, beginning of the year	$	458	$	134
Provision for loan losses		311		324
Loans charged-off		—		—
Recoveries		—		—
Balance, end of the year	$	769	$	458

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method used (dollars in thousands):

Allowance for Loan Losses for the Year Ended December 31, 2011
Allowance for loan losses:	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Beginning balance	$	51	$	396	$	11	$	—	$	458

Charge-offs		—		—		—		—		—

Recoveries		—		—		—		—		—

Provision		14		272		25		—		311

Ending balance	$	65	$	668	$	36	$	—	$	769

Ending balance: Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—

Ending balance: Collectively evaluated for impairment	$	65	$	668	$	36	$	—	$	769

Allowance for Loan Losses for the Year Ended December 31, 2010
Allowance for loan losses:	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Beginning balance	$	19	$	108	$	7	$	—	$	134

Charge-offs		—		—		—		—		—

Recoveries		—		—		—		—		—

Provision		32		288		4		—		324

Ending balance	$	51	$	396	$	11	$	—	$	458

Ending balance: Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—

Ending balance: Collectively evaluated for impairment	$	51	$	396	$	11	$	—	$	458

Financing Receivables for the Year Ended December 31, 2011
	Commercial		Commercial
	and		Real
Financing Receivables:	Industrial		Estate		Consumer		Unallocated		Total
Individually evaluated for impairment	$	-	$	690	$	-	$	-	$	690
Collectively evaluated for impairment		6,161		58,427		2,928		-		67,516
Total ending balance	$	6,161	$	59,117	$	2,928	$	-	$	68,206

Financing Receivables for the Year Ended December 31, 2010
	Commercial		Commercial
	and		Real
Financing Receivables:	Industrial		Estate		Consumer		Unallocated		Total
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		4,723		36,742		2,025		-		43,490
Total ending balance	$	4,723	$	36,742	$	2,025	$	-	$	43,490

The Bank categorizes commercial loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Bank analyzes loans individually by classifying the loans as to credit risk.

Prime Rating-1. Borrower demonstrates exceptional credit fundamentals, including stable and predictable profit margins and cash flows, strong liquidity and a conservative balance sheet with superior asset quality. Historic and projected performance indicates that borrower is able to meet obligations under almost any economic circumstance.

High Quality-2. Borrower consistently and internally generates sufficient cash flow to fund debt service. Management has successful experience with this Bank or with similar business activities in a similar market. Current and projected trends are positive and superior. Management breadth and depth indicates high degree of stability.

Average Quality-3. Balance sheet is comprised of good capital base, acceptable leverage, and liquidity. Ratios are at or slightly above peers. Operation generates sufficient cash to fund debt service and some working assets or capital expansion. Loans have excellent collateral with standard advance rates. Current trends are positive or stable.

Acceptable Quality-4. Borrower generates sufficient cash flow to fund debt service, but most working assets and all capital expansion needs are funded by other sources. Borrower is able to meet interest payments but could not term out evergreen credit lines in a reasonable period of time. Earnings may be trending down; a loss may be shown indicating some volatility in earnings. However, management is acceptable and long term trends are positive or neutral. Borrower may be able to obtain similar financing from other institutions.

Watch-5. Borrowers may exhibit declining earnings, strained cash flow, increasing leverage, and weakening market position. They generally have limited additional debt capacity, modest coverage, and/or weakness in asset quality. Loans may be currently performing as agreed but could be adversely affected by factors such as deteriorating economic conditions, operating problems, pending litigation, or declining value of collateral. Management may be of good character, but weak. Borrower may have some limited ability to obtain similar financing with comparable or somewhat worse terms at other lending institutions.

Special Mention-6. Loans classified as special mention have a potential for weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard-7. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful-8. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss-9. Loans are considered uncollectible and of little or no value as a Bank asset. Such loans are charged off when classified as loss.

Pass. Meets the qualities of the definition of loan grades 1-5 listed above.

The Bank has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Bank’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. Rarely, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Bank’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Bank’s exposure to adverse economic events that affect any single industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Bank avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Bank also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At December 31, 2011, approximately 23.1% of the outstanding principal balance of the Bank’s commercial real estate loans was secured by owner-occupied properties, 44.4% by non-owner occupied properties, 17.6% by multi-family, 7.6% by 1-4 family residential properties and 7.3% by other types as compared to December 31, 2010 when approximately 26.4% of the outstanding principal balance of the Bank’s commercial real estate loans was secured by owner-occupied properties, 44.4% by non-owner occupied properties, 19.9% by multi-family, 5.6% by 1-4 family residential properties and 3.7% by other types.

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Bank may originate from time to time, the Bank generally requires the borrower to have had an existing relationship with the Bank and have a proven record of success. Commercial real estate construction and land development (“Construction”) loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

The Bank monitors and manages consumer loan risk through its policies and procedures. These policies and procedures are developed and modified, as needed by management. This activity, coupled with relatively small average loan amounts, minimizes risk. Underwriting standards for consumer real estate loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum combined loan-to-value percentage of 90%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements. The Bank recognizes the value of an independent loan review that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Bank’s policies and procedures.

The credit risk profile of the loan portfolio is presented in the following tables (dollars in thousands):

Loan Quality Indicators as of December 31, 2011:
							Commercial
			Commercial				Real Estate
			and		Commercial		Construction and
		Risk Rating Definitions	Industrial		Real Estate		Land Development
	1—2	High quality	$	1,608	$	5,915	$	—
	3	Average quality		2,284		20,835		200
	4	Acceptable Risk		2,238		28,182		3,064
	5	Watch		31		231		—
	6	Special Mention		—		—		—
	7	Substandard		—		690		—
	8	Doubtful		—		—		—
	9	Loss		—		—		—
	Total		$	6,161	$	55,853	$	3,264

Loan Quality Indicators as of December 31, 2010:
							Commercial
			Commercial				Real Estate
			and		Commercial		Construction and
		Risk Rating Definitions	Industrial		Real Estate		Land Development
	1—2	High quality	$	129	$	4,459	$	—
	3	Average quality		1,151		11,096		199
	4	Acceptable Risk		3,443		16,341		4,647
	5	Watch		—		—		—
	6	Special Mention		—		—		—
	7	Substandard		—		—		—
	8	Doubtful		—		—		—
	9	Loss		—		—		—
	Total		$	4,723	$	31,896	$	4,846

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. A loan is considered performing if loan payments are timely. The following table presents the recorded investment in consumer loans based on payment activity as of December 31, 2011 and 2010.

Consumer Loan Exposure
Loan Risk Profile as of December 31, 2011
	Consumer
	Residential		Consumer
Grade	and Other		Construction		Total

Performing	$	2,840	$	88	$	2,928
Nonperforming		—		—		—
Total	$	2,840	$	88	$	2,928

Consumer Exposure
Loan Risk Profile as of December 31, 2010
	Consumer
	Residential		Consumer
Grade	and Other		Construction		Total

Performing	$	854	$	1,171	$	2,025
Nonperforming		—		—		—
Total	$	854	$	1,171	$	2,025

As of December 31, 2011, the Bank had two commercial real estate loans with an aggregate outstanding balance of $690,000 classified as nonaccrual and impaired. The balance of impaired loans relates to one borrower and management does not believe the impairment to be associated with any particular aspect of the borrower’s industry or the local economy. There was no interest income recognized on this credit during impairment nor does the Bank have a valuation allowance associated with this credit. The Bank does not have any commitments to lend additional

funds to this borrower.

December 31, 2011 (dollars in thousands):

			Unpaid
Impaired without	Recorded		Principal		Valuation
recorded valuation allowance	Investment		Balance		Allowance
Commercial and industrial	$	-	$	-	$	-
Commercial real estate		690		690		-
Commercial real estate-construction and land development		-		-		-
Consumer residential and other		-		-		-
Consumer construction		-		-		-
Total impaired without a valuation allowance	$	690	$	690	$	-

Average of impaired loans without allocation
recorded over the year	2011		2010
Commercial and industrial	$	-	$	-
Commercial real estate		690		-
Commercial real estate-construction and land development		-		-
Consumer residential and other		-		-
Consumer construction		-		-
Total average impaired loans without valuation allowance recorded over the period	$	690	$	-

The Bank did not have any impaired loans recorded with a valuation allowance as of December 31, 2011 or 2010. The Bank did not recognize any interest income during impairment or recognize any cash basis interest income during 2011 or 2010.

The following table presents the recorded investments in nonaccrual and loans past due over 90 days still on accrual by class as of December 31, 2011 (dollars in thousands):

			Over 90 Days
	Nonaccrual		Accruing
Commercial and industrial	$	-	$	-
Commercial real estate		690		-
Commercial real estate-construction and land development		-		-
Consumer residential and other		-		-
Consumer construction		-		-
Total	$	690	$	-

There were no loans on nonaccrual or loans past due over 90 days and still accruing interest as of December 31, 2010.

The following table presents the aging of recorded investment in past due loans by class of loans as of December 31, 2011 (dollars in thousands):

			Greater				Loans
	30-90		than		Total		not
	Days		90 days		past due		past due		Total
Commercial and industrial	$	—	$	—	$	—	$	6,161	$	6,161
Commercial real estate		—		690		690		55,163		55,853
Commercial real estate-construction and land development		—		—		—		3,264		3,264
Consumer residential and other		—		—		—		2,840		2,840
Consumer construction		—		—		—		88		88
Total	$	—	$	690	$	690	$	67,516	$	68,206

December 31, 2010 (dollars in thousands):

			Greater				Loans
	30-90		than		Total		not
	Days		90 days		past due		past due		Total
Commercial and industrial	$	—	$	—	$	—	$	4,723	$	4,723
Commercial real estate		—		—		—		31,896		31,896
Commercial real estate-construction and land development		—		—		—		4,846		4,846
Consumer residential and other		—		—		—		854		854
Consumer construction		—		—		—		1,171		1,171
Total	$	—	$	—	$	—	$	43,490	$	43,490

As of December 31, 2011, the terms of two loans were modified and are considered troubled debt restructurings (“TDR”). These borrowings are with one customer currently aggregating $690,000. The terms of these loans have been restructured to allow the customer to mitigate foreclosure by reducing the loan payment requirement based upon the customer’s cash flows. As of December 31, 2011, these restructured loans were in default of the restructured terms. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

The Company has determined that these loans have sufficient collateral to mitigate any potential loss. Therefore, the Company has determined that no additional provision was required for loans whose terms have been modified in a troubled debt restructuring as of December 31, 2011.

The following table is a comparison of our troubled debt restructurings by class as of the date indicated (dollars in thousands):

	December 31, 2011						December 31, 2010
	Number of Contracts		Pre-restructuring Outstanding Recorded Investment		Post-restructuring Outstanding Recorded Investment		Number of Contracts		Pre-restructuring Outstanding Recorded Investment		Post-restructuring Outstanding Recorded Investment

Troubled debt restructurings Commercial mortgages		2	$	690	$	690		-	$	-	$	-

Note 4: Premises and Equipment

Major classifications of premises and equipment are summarized as follows at December 31 (dollars in thousands):

	2011			2010
Leasehold improvements	$	45		$	45
Furniture, fixtures and equipment		435			303
Accumulated depreciation		(239	)		(145	)
Premises and equipment, net	$	241		$	203

Depreciation expense was $94,000 and $89,000 for 2011 and 2010, respectively.

Note 5: Deposits

The components of the outstanding deposit balances are as follows as of December 31 (dollars in thousands):

	2011		2010
Noninterest bearing
Demand	$	9,520	$	4,534
Interest bearing
Checking		6,097		4,162
Savings		24,179		9,780
Time, under $100,000		16,576		14,395
Time, over $100,000		12,637		7,771
Total deposits	$	69,009	$	40,642

Interest expense on time deposits issued in denominations of $100,000 or more was $160,800 in 2011 and $154,100 in 2010.

Scheduled maturities of time deposits for each of the years succeeding December 31, 2011, are as follows (dollars in thousands):

Year		Amount
2012	$	16,880
2013		7,402
2014		973
2015		2,417
2016		1,541
Total	$	29,213

Note 6: Fair Value Measurement

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available-for-sale investment securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets and liabilities on a nonrecurring basis.

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments.

Cash and cash equivalents: The carrying amounts of cash and short-term instruments, including Federal Funds sold approximate fair values.

Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are unavailable, fair values are based on quoted market prices of comparable instruments or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss and liquidity assumptions. As such, we classify investments as Level 2.

FHLB stock: The redeemable carrying amount of these securities with limited marketability approximates their fair value.

Mortgage loans held for sale: Mortgage loans held for sale are carried at the lower of cost or fair value. Fair value is based on independent quoted market prices of the purchasers. Quoted market prices are based on what secondary markets are currently offering for portfolios with similar characteristics. As such, we classify those loans subjected to nonrecurring fair value adjustments as Level 2.

Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans (e.g., real estate mortgage, commercial, and installment) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The resulting amounts are adjusted to estimate the effect of declines, if any, in the credit quality of borrowers since the loans were originated. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposits: Demand, savings, and money market deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for variable rate certificates of deposit approximate their recorded carrying value. Fair values for fixed-rate certificates of deposit are estimated using discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Accrued interest: The carrying amounts of accrued interest approximate fair value.

Off-balance-sheet credit-related instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the counterparties’ credit standings. The Bank does not charge fees for lending commitments; thus it is not practicable to estimate the fair value of these instruments.

The preceding methods described may produce a fair value calculation that may not be indicative of the net realized value or reflective of the future fair values. Furthermore, although the Company believes its valuations methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions could result in a different fair value measurement.

Assets Recorded at Fair Value on a Recurring Basis

All of the Bank’s securities available-for-sale are classified within Level 2 of the valuation hierarchy as quoted prices for similar assets are available in an active market.

The following table presents the financial instruments carried at fair value on a recurring basis as of December 31, 2011 and 2010 (000s omitted), by valuation hierarchy level (as described above). The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values (dollars in thousands).

As of December 31, 2011	Level 1		Level 2		Level 3		Total
Securities available for sale
U.S. government agencies	$	—	$	1,998	$	—	$	1,998
Mortgage-backed securities		—		2,666		—		2,666
Total	$	—	$	4,664	$	—	$	4,664

As of December 31, 2010		Level 1		Level 2		Level 3		Total
Securities available for sale
U.S. government agencies	$	—	$	1,485	$	—	$	1,485
Mortgage-backed securities		—		2,309		—		2,309
Total	$	—	$	3,794	$	—	$	3,794

Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis:

The Bank also has assets that under certain conditions are subject to fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment. Assets measured at fair value on a non-recurring basis are as follows:

As of December 31, 2011	Level 1		Level 2		Level 3		Total
Impaired Loans
Commercial Real Estate	$	—	$	—	$	690	$	690

As of December 31, 2010, there were no assets or liabilities subject to fair value on a nonrecurring basis.

The following table provides a reconciliation of all assets measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2011 (dollars in thousands).

	Impaired Loans
Balance at December 31, 2010	$	—
Net transfers in		690
Change in valuation allowance		—
Balance at December 31, 2011	$	690

Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, the Company uses present value techniques and other valuation methods to estimate the fair values of its financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.

The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis on the Company’s consolidated balance sheets are as follows as of December 31 (dollars in thousands):

	2011				2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets

Cash and cash equivalents	$	6,928	$	6,928	$	4,443	$	4,443
Net loans		67,437		67,445		43,032		43,295
Federal Home Loan Bank Stock		81		81		33		33
Accrued interest receivable		198		198		143		143

Financial liabilities
Noninterest bearing deposits		9,520		9,520		4,534		4,534
Interest bearing deposits		59,489		59,626		36,108		36,151
Accrued interest payable		32		32		23		23

Note 7: Operating Lease

In November 2007, the Company began leasing the building used as its principle office. On December 10, 2010, the Company renewed this three year lease agreement, commencing on January 1, 2011, with three options to renew for three years. On October 24, 2011, the Company entered into an agreement to lease additional space in the same building commencing on November 1, 2011 to run concurrent with the existing lease agreement. The rent under the terms of the lease is $6,200 per month, subject to a 2% cumulative upward adjustment in each subsequent year. The Company recognizes the expense on a straight-line basis over the term of the agreement. The lease provides that the Company pays insurance and certain other operating expenses applicable to the leased premise. The lease also stipulates that the Company may use and occupy the premise only for the purpose of maintaining and operating a bank.

Note 8: Common Stock Options

On June 23, 2009, the Board of Directors of GRCI approved the adoption of the Grand River Commerce, Inc. 2009 Stock Incentive Plan (the “2009 Plan”) which provides for the reservation of 200,000 authorized shares of GRCI’s common stock, $0.01 par value per share, for issuance upon the exercise of certain common stock options, that may be issued pursuant to the terms of the 2009 Plan. The 2009 Plan was approved and adopted by our shareholders at our 2010 Annual Meeting.

A description of the terms and conditions of the 2009 Plan was included in GRCI’s prospectus, dated May 9, 2008, under the section entitled “Management - Stock Incentive Plan.” The prospectus was included in GRCI’s registration statement on Form S-1 (Registration No. 333-147456), as amended, as filed with the Securities and Exchange Commission. Assuming the issuance of all of the common shares reserved for stock options and the exercise of all of those options, the shares acquired by the option holders pursuant to their stock options would represent approximately 14.8% of the outstanding shares after exercise.

During the second quarter of 2009, GRCI awarded and issued options for the purchase of 100,000 shares of Company common stock. The total stock options outstanding at December 31, 2010 were 95,000, due to the cancellation of 5,000 stock options.

During the second quarter of 2011, GRCI awarded 16,500 additional options to acquire 16,500 common shares under the 2009 Plan. Director options totaling 10,000 shares were awarded to new directors and an additional 6,500 shares were awarded to employees. All such options expire in ten years and have a $10.00 per share strike price. Management options have a 5 year vesting period and Director options have a 3 year vesting period. During 2011, 10,000 options were cancelled due to forfeiture and these options were returned to the pool for future issuance under the 2009 Plan. The total stock options outstanding at December 31, 2011 and December 31, 2010 were 101,500 and 95,000, respectively. No options have been exercised as of December 31, 2011.

The Company measures the cost of employee services received in exchange for equity awards, including stock options, based on the grant date fair value of the awards. The cost is recognized as compensation expense over the vesting period of the awards. The Company estimates the fair value of all stock options on each grant date, using the Black-Scholes option pricing model.

The weighted average assumptions used in the Black-Scholes model for the shares issued in the second quarter of 2011 are noted in the following table. The Company uses expected data to estimate option exercise and employee termination within the valuation model. The risk-free rate for periods within the contractual term of the option is based on the U.S. Treasury yield curve in effect at the time of grant of the option.

Calculated volatility		10.86	%
Weighted average dividends		0.00	%
Expected forfeiture rate		4.43	%
Expected term (in years)		5 years
Risk-free interest rate		1.65	%
Weighted average fair value of options granted	$	1.06

A summary of option activity under the 2009 Plan is presented below for the year ended December 31:

	2011					2010
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding at January 1		95,000		$	10.00		100,000		$	10.00
Granted		16,500			10.00		—			—
Exercised		—			—		—			—
Expired or cancelled		(10,000	)		10.00		(5,000	)		—
Outstanding at December 31		101,500		$	10.00		95,000		$	10.00

There are 42,667 common stock options able to be exercised at December 31, 2011. The weighted-average grant-date calculated value approximated $243,000 for options granted during the second quarter of 2009 and $12,000 for options granted during the second quarter of 2011. As of December 31, 2011, there was approximately $83,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 2.4 years.

The following is a summary of the status of our nonvested shares and changes during the year ended December 31:

	2011					2010
				Weighted Average Grant Date					Weighted Average Grant Date
	Shares			Fair Value		Shares			Fair Value
Nonvested at January 1		71,998		$	2.21		100,000		$	2.21
Granted		16,500			1.06		—			—
Forfeited		(6,665	)		1.35		(5,000	)		—
Vested		(23,000	)		2.21		(23,002	)		2.21
Nonvested at December 31		58,833		$	1.99		71,998		$	2.21

Note 9: Common Stock Purchase Warrants

The Company measures the cost of equity instruments based on the grant-date fair value of the award (with limited exceptions). The Company estimates the fair value of all common stock purchase warrants on each grant date, using an appropriate valuation approach based on the Black-Scholes option pricing model.

In recognition of the substantial financial risks undertaken by the members of the Company’s organizing group, GRCI granted common stock purchase warrants to such organizers. As of December 31, 2011, GRCI had granted warrants to purchase an aggregate of 305,300 shares of common stock. These warrants are exercisable at a price of $10.00 per share, the initial offering price, and may be exercised within ten years from the date that the Bank opened for business. The warrants vested immediately.

In connection with the issuance of these warrants, the Company determined a share-based payment value, using the Black Scholes option-pricing model, of $479,000. This amount was charged entirely to the additional paid in capital of the 2009 common stock offering.

The fair value of each warrant issued was estimated on the date of grant using the Black Scholes option pricing model with the following weighted average assumptions.

Dividend yield or expected dividends	0.00	%
Risk free interest rate	2.02	%
Expected life	5 yrs
Expected volatility	12.00	%

No warrants were exercised in 2011 or 2010.

Note 10: Employee Benefit Plan

The Company has a Safe Harbor 401(k) plan covering all employees, which began in 2009. Contributions under the 401(k) plan are made by the employee with the Company contributing 100% of the employee deferral for the first 3% compensation and 50% of the deferral for the next 2% of the employee’s deferral. The cost of the plan amounted to $35,000 and $31,000 for 2011 and 2010, respectively.

Note 11: Short Term Borrowings

The Company has available a secured $2.0 million federal funds purchased line of credit with a correspondent bank, a $650,000 secured line of credit with the FHLB and a collateral based borrowing formula for FHLB Advances. Any FHLB obligations of the Bank would be secured by bank-owned securities held by the FHLB as a third-party safekeeping agent and by loans pledged to the FHLB and held by a third-party safekeeping agent. The Bank had pledged securities and loans that equate to an available borrowing limit of approximately $5.8 million as of December 31, 2011. The Company had no short term borrowings outstanding as of December 31, 2011 or 2010.

Note 12: Income Taxes

Deferred income tax assets and liabilities are computed annually for differences between the financial statement and federal income tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the period in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce the deferred tax assets to the amount expected to be realized. As a result of the Company commencing operations in the second quarter of 2009, any potential deferred tax benefit from the anticipated utilization of net operating losses generated during the development period has been completely offset by a valuation allowance. Income tax expense is the tax payable or refundable for the period plus, or minus the change during the period in deferred tax assets and liabilities.

Deferred taxes are comprised of the following at December 31 (dollars in thousands):

	2011			2010
Deferred tax assets
Allowance for loan losses	$	176		$	91
Start-up costs		500			541
Non-employee stock option plan		22			15
Net operating loss carryforwards		1,032			856
Other		18			2
Total deferred tax assets		1,748			1,505

Deferred tax liabilities
Depreciation		(5	)		(5	)
Allowance for loan losses		—			—
Accretion on securities		—			—
Total deferred tax liabilities		(5	)		(5	)

Net deferred tax assets		1,743			1,500

Less valuation allowance		1,743			1,500

Total	$	—		$	—

Additionally, the Company has a deferred tax liability related to unrealized gains on available-for-sale securities which is reported in the “interest payable and other liabilities” section of the consolidated balance sheets.

Reconciliation of federal income taxes at statutory rate (34%) to effective rate for the year end December 31 is as follows (dollars in thousands):

	2011			2010
Tax benefit at federal statutory rate	$	(260	)	$	(463	)
Other		17			11
Change in valuation allowance		243			452
Federal income taxes	$	—		$	—

The federal and state net operating loss carryforwards of $2.5 million will expire beginning in 2029 if not previously utilized.

The Company and its subsidiary are subject to U.S. federal income taxes. The Company is no longer subject to examination by the taxing authority before 2007. There are no material uncertain tax positions requiring the recognition in the Company’s consolidated financial statements. The Company does not expect to generate significant unrecognized tax benefits in the next twelve months. The Company recognizes interest and or penalties related to income tax matters in income tax expense. The Company did not have any amounts accrued for interest and penalties at December 31, 2011 and 2010, and is not aware of any claims for such amounts by federal income tax authorities.

Note 13: Minimum Regulatory Capital Requirements and Restrictions on Capital

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for the Bank, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting policies. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The prompt corrective action regulations provide four classifications; well capitalized, adequately capitalized, undercapitalized and critical undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The Company is restricted from paying dividends until such time as the Bank achieves profitability on a continuing basis and the Bank has sufficient capital to do so. The Bank is required to maintain a minimum ratio of Tier 1 capital to average assets of 8% for the first seven years of operation. The Bank was well capitalized as of December 31, 2011. There are no conditions or events that management believes have changed the Bank’s category.

The Bank’s actual capital amounts and ratios are presented in the following tables (dollars in thousands):

	Actual					Adequately Capitalized					Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2011
Total capital (to risk-weighted assets)	$	10,623		16.01	%	$	5,308		8.00	%	$	6,635		10.00	%
Tier 1 capital (to risk-weighted assets)		9,854		14.85			2,654		4.00			3,981		6.00
Tier 1 capital (to average assets)		9,854		13.15			2,997		4.00			3,746		5.00

December 31, 2010
Total capital (to risk-weighted assets)	$	10,889		26.00	%	$	3,350		8.00	%	$	4,187		10.00	%
Tier 1 capital (to risk-weighted assets)		10,431		24.91			1,675		4.00			2,513		6.00
Tier 1 capital (to average assets)		10,431		21.69			1,924		4.00			2,405		5.00

Consistent with its policy that bank holding companies should serve as a source of financial strength for their subsidiary banks, the Federal Reserve has stated that, as a matter of prudence, Grand River Commerce, a bank holding company, generally should not maintain a rate of distributions to shareholders unless its available net income has been sufficient to fully fund the distributions, and the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality and overall financial condition. In addition, the Company is subject to certain restrictions on the making of distributions as a result of the requirement that the Bank maintain an adequate level of capital as described above. As a Michigan company, we are restricted under the Michigan Business Company Act from paying dividends under certain conditions.

Note 14: Related Party Transactions

In the ordinary course of business, the Bank grants loans to certain directors, principals, officers and their affiliates. Loans and commitments to principal officers, directors and their affiliates are presented in the following table (dollars in thousands):

	December 31, 2011			December 31, 2010

Beginning balance	$	1,327		$	1,123
New loans and line advances		960			442
Repayments		(960	)		(238	)
Change in related parties		(1,327	)		—
Ending balance	$	—		$	1,327

Deposits from principal officers, directors and their affiliates as of December 31, 2011 and 2010 were approximately $1.2 million and $1.4 respectively.

Note 15: Off-Balance Sheet Activities

To meet the financing needs of its customers, the Bank is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments are comprised of unused lines of credit, overdraft lines and loan commitments. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Bank’s exposure to credit loss in the event of nonperformance by the other party is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making these commitments as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit is based on management’s credit evaluation of the borrower. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Risk to credit loss exists, up to the face amounts of these instruments, although material losses are not anticipated.

The contractual amount of financial instruments with off-balance sheet risk was as follows as of December 31 (dollars in thousands):

	2011				2010
	Fixed		Variable		Fixed		Variable
	Rate		Rate		Rate		Rate

Unfunded commitments under lines of credit and overdraft lines	$	1,412	$	5,148	$	1,191	$	3,955
Commitments to fund loans		3,206		2,626		1,373		2,075
Total	$	4,618	$	7,774	$	2,564	$	6,030

Unfunded commitments under commercial lines of credit, revolving home equity lines of credit and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. The commitments for equity lines of credit may expire without being drawn upon. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Bank is committed.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on management’s credit evaluation of the customer.

Note 16: Parent Company Only Financial Information

Following are the parent company only financial statements (dollars in thousands):

Balance Sheets	December 31,
	2011		2010
ASSETS
Cash and cash equivalents	$	467	$	580
Premises and equipment		2		3
Other assets		3		22
Investment in subsidiary		9,903		10,425
TOTAL ASSETS	$	10,375	$	11,030

LIABILITIES AND SHAREHOLDERS’ EQUITY

Other liabilities	$	11	$	6
Shareholders' equity		10,364		11,024
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	10,375	$	11,030

Statements of Operations	Year Ended December, 31
	2011			2010

Noninterest expenses
Salaries and benefits	$	88		$	73
Occupancy and equipment		1			7
Audit and other professional		21			20
Advertising and marketing		6			11
Legal		58			66
Other operating expenses		15			19
Total noninterest expenses		189			196

Equity in undistributed loss of subsidiary		576			1,165

Net loss	$	(765	)	$	(1,361	)

Statements of Cash Flows	December 31,
	2011			2010
Cash flows from operating activities
Net loss	$	(765	)	$	(1,361	)
Depreciation expense		1			2
Equity in undistributed loss of subsidiary		576			1,165
Share based compensation expense		50			49
Net change in:
Other assets		20			12
Other liabilities		5			3
Net cash used in operating activities		(113	)		(130	)


Cash and cash equivalents, beginning of year		580			710

Cash and cash equivalents, end of year	$	467		$	580

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A(T). Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report on Form 10-K, our principal executive officer and principal financial officer have evaluated the effectiveness of our “disclosure controls and procedures” (Disclosure Controls). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Our management, including the chief executive officer and chief financial officer, does not expect that our Disclosure Controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based upon their controls evaluation, our chief executive officer and chief financial officer have concluded that our Disclosure Controls are effective at a reasonable assurance level.

Evaluation of Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 15d-15(f). A system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.

Under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2011 based on the criteria established in a report entitled “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has evaluated and concluded that the Company’s internal control over financial reporting was effective as of December 31, 2011. In addition, there were no changes in our internal controls over financial reporting that occurred during the period covered by such report that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. The Company’s registered public accounting firm was not required to issue an attestation on our internal control over financial reporting pursuant to rules of the Securities and Exchange Commission.

Item 9B. Other Information.

None.

Part III

Item 10.

Directors, Executive Officers and Corporate Governance.

The information under the captions "Grand River Commerce, Inc.’s Board of Directors and Executive Officers," "Related Matters - Section 16(a) Beneficial Ownership Reporting Compliance" and "Corporate Governance" in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 24, 2012, is incorporated herein by reference.

Code of Ethics

The Company has adopted a Code of Ethics applicable to all directors, officers and employees. A copy of the Code of Ethics is available on the Bank’s website at www.grandriverbank.com. A copy of the Code of Ethics may be obtained, without charge, upon written request addressed to Grand River Commerce, Inc. 4471 Wilson Ave SW, Grandville, MI 49518 Attn: Corporate Secretary. The request may be delivered by letter to the address set forth above or by fax to the attention of the Company’s Corporate Secretary at (616) 929-1610.

Item 11.

Executive Compensation.

The information under the captions "Executive Compensation" in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 24, 2012, is incorporated herein by reference.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information under the caption "Ownership of Grand River Commerce, Inc. Common Stock" in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 24, 2012, is incorporated herein by reference.

Item 13.

Certain Relationships, Related Transactions and Director Independence.

The information under the captions "Related Matters - Transactions with Related Persons" and "Corporate Governance" in the Registrant's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 24, 2012, is incorporated herein by reference.

Item 14.

Principal Accountant Fees and Services.

The information under the caption "Related Matters - Independent Certified Public Accountants" in the Registrant's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 24, 2012, is incorporated herein by reference.

Part IV

Item 15.

Exhibits and Financial Statement Schedules

(a) (1) Financial Statements

See “Index to Consolidated Financial Statements” filed under item 8 of this report.

(a) (2) Financial Statement Schedules

None. The consolidated financial statement schedules are omitted because they are inapplicable or the requested information is shown in our consolidated financial statements or related notes thereto.

(b)

Number		Description
1.1		Agency Agreement by and between the Company and Commerce Street Capital, LLC*
3.1		Articles of Incorporation**
3.2		Bylaws**
3.3		Amended and Restated Bylaws***
4.1		Specimen common stock certificate**
4.2		Form of Grand River Commerce, Inc. Organizers’ Warrant Agreement**
4.3		See Exhibits 3.1 and 3.2 for provisions of the articles of in Company and bylaws defining rights of holders of the common stock
10.1		Grand River Commerce, Inc. 2009 Stock Incentive Plan***
10.2		Form of Incentive Stock Option Award Agreement pursuant to the Grand River Commerce, Inc. 2009 Stock Incentive Plan***
10.3		Form of Stock Option Award Agreement for non-qualified stock options pursuant to the Grand River Commerce, Inc. 2009 Stock Incentive Plan***
10.4		Form of Warrant Agreement****
10.5		Employment Agreement by and between Grand River Bank and David H. Blossey+
10.6		Employment Agreement by and between Grand River Bank and Robert P. Bilotti+
10.7		Employment Agreement by and between Grand River Bank and Elizabeth C. Bracken+
10.8		Consulting Agreement by and between Grand River Commerce, Inc. and David H. Blossey+**
10.9		Consulting Agreement by and between Grand River Commerce, Inc. and Robert P. Bilotti+**
10.10		Consulting Agreement by and between Grand River Commerce, Inc. and Elizabeth C. Bracken+**
10.11		Employment Agreement by and between Grand River Bank and Mark Martis+
10.12		Consulting Agreement by and between Grand River Commerce, Inc. and Mark Martis+**
10.13		Amendment to Lease Agreement by and between Grand River Bank and Southtown Center LLC, dated December 10, 2010.
10.14		Employment Agreement by and between Grand River Bank and Patrick K. Gill+
31.1		Certification of Chief Executive Officer
31.2		Certification of Chief Financial Officer
32.1		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Indicates a compensatory plan or contract

Previously filed as an exhibit to our Current Report on Form 8-K filed March 10, 2009

Previously filed as an exhibit to the registration statement filed November 16, 2007

***

Previously filed as an exhibit to our Current Report on Form 8-K filed May 30, 2008

signatures

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	GRAND RIVER COMMERCE, INC.

	By:	/s/ Robert P. Bilotti
	Robert P. Bilotti
	Chief Executive Officer

Pursuant to the requirements of the Exchange Act this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURE	TITLE	DATE

/s/ Robert P. Bilotti	Director, President and Chief Executive Officer	03/29/11
Robert P. Bilotti ⁽¹⁾

/s/ Cheryl M. Blouw	Director	03/29/11
Cheryl M. Blouw

/s/ Elizabeth C. Bracken	Chief Financial Officer	03/29/11
Elizabeth C. Bracken ⁽²⁾

/s/ Jeffrey A. Elders	Director and Treasurer	03/29/11
Jeffrey A. Elders

	Director	03/29/11
Patrick K. Gill

	Director
Randall L. Hartgerink

/s/ Thomas P. Jeakle	Director	03/29/11
Thomas P. Jeakle

	Director
David K. Hovingh

	Director
Roger L. Roode

	Director and Vice President
Jerry S. Sytsma

⁽¹⁾

Principal executive officer

⁽²⁾

Principal financial and accounting officer

Attached files

GRAND RIVER COMMERCE INC Reports

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