Unassociated Document

PART I— FINANCIAL INFORMATION		1

ITEM 1.	INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	1

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	30

ITEM 4.	CONTROLS AND PROCEDURES	30

PART II— OTHER INFORMATION		31

ITEM 1.	LEGAL PROCEEDINGS	31

ITEM 1A.	RISK FACTORS	31

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	31

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	31

ITEM 4.	(REMOVED AND RESERVED)	31

ITEM 5.	OTHER INFORMATION	32

ITEM 6.	EXHIBITS	32

	September 30, 2010			December 31, 2009
ASSETS
Cash and cash equivalents
Cash	$	3,642,560		$	8,267,952
Federal funds sold		993,190			5,124,934
Total cash and cash equivalents		4,635,750			13,392,886

Securities, available for sale		3,608,440			2,486,372
Federal Home Loan Bank Stock, at cost		33,400			1,000
Mortgage loans held for sale		—			417,000
Loans
Total loans		36,175,733			13,351,225
Less: allowance for loan losses		364,000			134,000
Net loans		35,811,733			13,217,225
Premises and equipment		220,549			280,683
Interest receivable and other assets		186,161			121,073
TOTAL ASSETS	$	44,496,033		$	29,916,239

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities
Deposits
Non-interest bearing	$	4,302,495		$	4,278,828
Interest bearing		28,707,692			13,184,788
Total deposits		33,010,187			17,463,616

Interest payable and other liabilities		205,949			109,491
Total liabilities		33,216,136			17,573,107

Shareholders’ equity
Common Stock, $0.01 par value, 10,000,000 shares authorized — 1,700,120 shares issued and outstanding at September 30, 2010, and at December 31, 2009		17,001			17,001
Additional paid-in capital		14,984,498			14,948,729
Additional paid-in capital warrants		479,321			479,321
Accumulated deficit		(4,238,707	)		(3,102,722	)
Accumulated other comprehensive income		37,784			803
Total shareholders’ equity		11,279,897			12,343,132

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	44,496,033		$	29,916,239

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009

Interest income
Loans, including fees	$	454,681		$	47,328		$	1,011,009		$	48,399
Securities		23,711			785			67,837			1,194
Federal funds sold and other income		2,651			9,931			12,695			15,579
Total interest income		481,043			58,044			1,091,541			65,172

Interest expense
Deposits		125,427			20,845			285,752			24,199
Borrowings		—			—			—			16,679
Total interest expense		125,427			20,845			285,752			40,878

Net interest income		355,616			37,199			805,789			24,294

Provision for loan losses		56,000			55,000			230,000			58,000
Net interest income(expense) after provision for loan losses		299,616			(17,801	)		575,789			(33,706	)

Non-interest income
Service charges and other fees		1,575			93			3,162			215
Escrow interest		—			—			—			19,297
Gain on sale of loans		7,265			—			18,871			19,297
Other		1,634			1,728			5,105			3,101
Total non-interest income		10,474			1,821			27,138			22,613

Non-interest expenses
Salaries and benefits		349,331			271,407			998,471			451,053
Occupancy and equipment		42,285			38,189			123,355			95,213
Share based payment awards (Note 10)		13,629			15,470			35,769			25,783
Travel and training		12,802			5,707			36,417			16,309
Data processing & computer support		33,046			20,724			87,431			30,424
Marketing		15,816			22,529			73,727			43,394
Professional fees		15,399			10,858			58,472			252,859
Legal fees		14,793			26,316			71,399			40,299
Audit fees		28,714			35,125			94,784			73,966
Loan processing expense		3,369			786			11,374			1,335
Insurance, including FDIC coverage		19,809			7,427			51,828			19,800
Telephone and data communications		10,138			9,948			31,293			25,373
Printing, postage and office supplies		8,290			8,013			29,001			32,460
Other		14,591			(1,378	)		35,591			17,760
Total non-interest expenses		582,012			471,121			1,738,912			1,126,028

Net loss	$	(271,922	)	$	(487,101	)	$	(1,135,985	)	$	(1,137,121	)

Basic (loss) per share	$	(0.16	)	$	(0.29	)	$	(0.67	)	$	(0.67	)
Diluted (loss) per share	$	(0.16	)	$	(0.29	)	$	(0.67	)	$	(0.67	)

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

Balance at January 1, 2009	$	—	$	(1,065,527	)	$	—	$	(1,492,706	)	$	—	$	(2,558,233	)
Issuance in initial public offering of 1,700,120 common shares (net of cash offering costs of $486,621)		17,001		16,452,118			—		—			—		16,469,119
Share based payment awards under equity compensation plan		—		25,783			—		—			—		25,783
Issuance of common stock warrants in connection with initial public common stock offering		—		(479,321	)		479,321		—			—		—
Comprehensive loss		—		—			—		(1,137,121	)		171		(1,136,950	)

Balance at September 30, 2009	$	17,001	$	14,933,053		$	479,321	$	(2,629,827	)	$	171	$	12,799,719

Balance at January 1, 2010	$	17,001	$	14,948,729		$	479,321	$	(3,102,722	)	$	803	$	12,343,132
Share based payment awards under equity compensation plan		—		35,769			—		—			—		35,769
Comprehensive loss		—		—			—		(1,135,985	)		36,981		(1,099,004	)

Balance at September 30, 2010	$	17,001	$	14,984,498		$	479,321	$	(4,238,707	)	$	37,784	$	11,279,897

	Nine Months Ended September 30,
	2010			2009
Cash flows from operating and pre-operating activities
Net loss	$	(1,135,985	)	$	(1,137,121	)
Adjustments to reconcile net loss to net cash used in operating and pre-operating activities
Share based payment awards issued under equity compensation plan		35,769			25,783
Provision for loan losses		230,000			58,000
Net, amortization on investment securities		11,112			(1,106	)
Originations of loans held for sale		(1,183,000	)		—
Proceeds from loan sales		1,618,871			—
Deferred income tax benefit		(19,051	)		(88	)
Net realized gain on sale of loans		(18,871	)		—
Depreciation		67,366			43,981
Net change in:
Interest receivable and other assets		(65,088	)		(69,142	)
Interest payable and other liabilities		96,458			18,275
Net cash used in operating and pre-operating activities		(362,419	)		(1,061,418	)

Cash flows from investing activities
Loan principal originations, net		(22,824,508	)		(5,757,536	)
Activity in available for sale securities
Maturities and prepayments		2,931,114			—
Purchase of securities		(4,008,262	)		(999,462	)
Purchase of Federal Home Loan Bank stock		(32,400	)		—
Purchase of equipment		(7,232	)		(207,298	)
Net cash used in investing activities		(23,941,288	)		(6,964,296	)

Cash flows from financing activities
Acceptances of and withdrawals of deposits, net		15,546,571			11,010,302
Proceeds from issuance of common stock, net of offering costs of $532,081		—			16,469,119
Net short-term borrowings (repayments)		—			(1,360,000	)
Net other borrowings (repayments)		—			(1,288,002	)
Net cash provided by financing activities		15,546,571			24,831,419

Net (decrease) increase in cash and cash equivalents		(8,757,136	)		16,805,705

Cash and cash equivalents, beginning of the period		13,392,886			40,525

Cash and cash equivalents, end of the period	$	4,635,750		$	16,846,230

Supplemental cash flows information:
Cash paid during the period for interest	$	273,332		$	44,017

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 31st. Upon receiving final regulatory approvals in April 2009 to commence business, GRCI capitalized Grand River Bank, a de novo bank in formation (the “Bank”) which also has a December 31st fiscal year end. Prior to this date, GRCI was considered a developmental stage enterprise for financial reporting purposes.

On April 30, 2009, GRCI completed an initial public offering of common stock, raising in excess of $17,000,000 in equity capital prior to offering costs, through the sale of shares of GRCI’s common stock. On the same date, GRCI acquired 100% of the authorized, issued, and outstanding shares of common stock, par value $0.01 per share, of the Bank. The Bank issued 1,500,000 shares of common stock to GRCI at a price of $8.46 per share or an aggregate price of $12,690,000 (the “Purchase Price”). This amount reflected the amount required for regulatory purposes to be invested in the Bank by GRCI in order for the Bank to begin operations. GRCI paid the Purchase Price in cash. Proceeds of the offering were used to capitalize the Bank, lease operational facilities and provide working capital.

The Bank is a wholly-owned subsidiary of GRCI. Prior to its acquisition by GRCI, the Bank had no operations, assets, or liabilities. The Bank is chartered by the State of Michigan. The Bank is a full-service commercial Bank headquartered in Grandville, Michigan. The Bank serves Grandville, Grand Rapids and their neighboring communities 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.

The accompanying condensed consolidated balance sheet as of December 31, 2009, which has been derived from audited consolidated financial statements and the interim unaudited condensed consolidated financial statements, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, refer to the consolidated financial statements and footnotes thereto included in GRCI’s annual report for the year ended December 31, 2009.

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

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 income tax assets. In connection with the determination of the allowance for loan losses management obtains independent appraisals for significant properties that are collateral for loans as deemed necessary.

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.

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 and the lowest priority to unobservable data, such as the reporting entity's own data. The Company may choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, allowing the Company to record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting principles, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. At September 30, 2010, the Company had not elected the fair value option for any financial assets or liabilities not otherwise required to be reported at fair value.

For assets and liabilities recorded at fair value, it is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements for those financial instruments for which there is an active market. In cases where the market for a financial asset or liability is not active, the Company includes appropriate risk adjustments that market participants would make for nonperformance and liquidity risks when developing fair value measurements. Fair value measurements for assets and liabilities for which limited or no observable market data exists are accordingly based primarily upon estimates and are often calculated based on the economic and competitive environment, the characteristics of the asset or liability and other factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. For a further discussion of Fair Value Measurement, refer to Note 6 to the interim condensed consolidated financial statements.

For the purposes of the condensed consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks, federal funds sold, and securities purchased under agreements to resell, 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 exceed the Federal Deposit Insurance Corporation (“FDIC”) insured limits or are not insured.

Debt securities that management has the 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.

Investment securities are reviewed quarterly for possible other-than-temporary impairment (OTTI). In determining whether an OTTI 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. Realized gains and losses on the sale of securities are included in earnings using the specific identification method for determining the amortized cost of securities sold.

Loans are receivables that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off and 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 condensed consolidated balance sheets.

The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Loans are returned to accrual status when all the principal and interest amounts contractually due are reasonably assured of repayment within a reasonable time frame.

The allowance for loan losses is established through provisions for loan losses charged to expense. Loans are charged-off 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 very recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process known as seasoning. As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because our loan portfolio consists of loans issued primarily in the past twelve 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 and allowance 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.

Specific allowances for losses are established for large impaired loans on an individual basis. 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. A general allowance is established for non-impaired loans. The general component is based on historical loss experience adjusted for qualitative factors. The qualitative factors consider credit concentrations, recent levels and trends in delinquencies and nonaccrual, 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 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 Bank, (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 Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at the lower of their carrying value or fair value less selling costs at the date of foreclosure establishing a new carrying amount. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenues and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. As of September 30, 2010, the Company had no foreclosed real estate.

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.

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. 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. 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 year of operations has been completely offset by a valuation allowance. Additionally, the Company has a deferred tax liability recognized related to the unrealized gain on available for sale securities and is reported in the “interest payable and other liabilities” section on the consolidated balance sheet.

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.

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income (loss). Although 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 condensed consolidated balance sheet, such items, along with net income (loss), are components of comprehensive income (loss).

Basic and diluted losses per share have been computed by dividing the net loss by the weighted-average number of common shares outstanding for the period. Weighted-average common shares outstanding for the three and nine month periods ended September 30, 2010 and 2009 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.

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.

FASB ASC Topic 715, “Compensation – Retirement Benefits.” In January 2010, ASC Topic 715 was amended by Accounting Standards Update (ASU) No. 2010-06, “Improving Disclosures about Fair Value Measurements”, to change the terminology for major categories of assets to classes of assets to correspond with the amendments to ASC Topic 820 (see below). The new guidance was effective for interim and annual periods after January 1, 2010 and had no impact on the Company’s interim condensed consolidated financial statements.

FASB ASC Topic 810, “Consolidation.” New authoritative accounting guidance under ASC Topic 810 amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other factors, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC Topic 810 was effective January 1, 2010 and had no impact on the Company’s interim condensed consolidated financial statements.

FASB ASC Topic 820, “Fair Value Measurements and Disclosures.” In January 2010, ASC Topic 820 was amended by ASU No. 2010-6, 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 net). ASU No. 2010-6 also clarifies 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 reporting periods beginning January 1, 2010 except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which will be effective January 1, 2011. The new guidance did not, and is not anticipated to, have a significant impact on the Company’s consolidated financial statements.

FASB ASC Topic 860, “Transfers and Servicing.” New authoritative accounting guidance under ASC Topic 860 amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC Topic 860 was effective January 1, 2010 and had no significant impact on the Company’s interim condensed consolidated financial statements.

FASB ASC Topic 310, “Receivables.” In April 2010, ASC Topic 310 was amended by Accounting Standards Update (ASU) No. 2010-18, “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset (a consensus of the FASB Emerging Issues Task)”, to clarify that individual loans accounted for within pools are not to be removed from the pool solely as a result of modifications to the loan (including troubled debt restructurings). The new guidance is effective for interim and annual periods after July 15, 2010 and did not have a significant impact on the Company’s interim condensed consolidated financial statements.

FASB ASC Topic 310, “Receivables.” In July 2010, ASC Topic 310 was amended by Accounting Standards Update (ASU) No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The primary objective in developing this update was to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. This update is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. Included in the new guidance are credit quality information, impaired loan information, loan modification information and nonaccrual and past due information. The period-end information will be required to be disclosed for the year ending December 31, 2010 and the activity-related information will be required to be disclosed beginning with the first quarter of 2011. The Company does not expect the adoption of this authoritative guidance to have a significant effect on the financial condition and results of operations but will increase the disclosures in the consolidated financial statements.

	Less than one year		One year to five years		Five years to ten years		Over ten years		Total
	Amount		Amount		Amount		Amount		Amount
Available for Sale
U.S. Government agencies	$	—	$	999,950	$	—	$	—	$	999,950
Mortgage-backed securities issued by U.S. government agencies and corporations		—		—		907,031		1,644,209		2,551,240
Total Amortized Cost	$	—	$	999,950	$	907,031	$	1,644,209	$	3,551,190
Fair Value	$	—	$	1,002,345	$	922,892	$	1,683,203	$	3,608,440

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. As of September 30, 2010, the Company had no assets or liabilities recorded at fair value on a nonrecurring basis.

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the estimated amounts provided herein do not necessarily indicate amounts which could be realized in a current exchange. Furthermore, as the Company typically holds the majority of its financial instruments until maturity, it does not expect to realize all of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for items which are not defined as financial instruments, but which have significant value. These include such items as core deposit intangibles, the future earnings of significant customer relationships and the value of other fee generating businesses. The Company believes the imprecision of an estimate could be significant.

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.

Loans: For variable-rate loans that reprice 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.

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.

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.

	September 30, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	4,636	$	4,636	$	13,393	$	13,393
U.S. government agencies		1,002		1,002		1,001		1,001
Mortgage-backed securities		2,606		2,606		1,486		1,486
Mortgage loans held for sale		—		—		417		417
Net loans		35,812		34,896		13,217		13,481
Federal Home Loan Bank Stock		33		33		1		1
Accrued interest receivable		105		105		26		26
Financial liabilities
Deposits		33,010		32,736		17,464		18,061
Accrued interest payable		18		18		4		4

In November 2007, the Company began leasing a building and is obligated under an operating lease agreement through December 2010, with three options to renew for three years each with Southtown Center, LLC. The rent under the terms of the lease is $4,100, subject to a 2% cumulative upward adjustment in each subsequent year. The Company is recognizing the expense including the escalating amounts on a straight-line basis over the term of the agreement. The lease provides that the Company pay 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. Lease expense recognized under the agreement for the three months ended September 30, 2010 and 2009 were $12,112 and $12,270, respectively and $34,834 and $35,692 for the nine months ended September 30, 2010 and 2009, respectively. The lease is in the process of being renewed for three years at the current lease rate of $4,100 per month.

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. GRCI obtained approval of the 2009 Plan from its shareholders at its annual meeting held on April 22, 2010.

A summary 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 of 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 10.5% 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 options outstanding at September 30, 2010 and December 31, 2009 were 100,000. No options have been exercised. Management options have a 5 year vesting period and Director options have a 3 year vesting period. All such options expire in 10 years and have a $10 per share strike price.

The Company estimates the fair value of its stock options using the calculated value on the grant date. The Company currently measures compensation cost of employee and director stock options based on the calculated value instead of fair value because it is not practical to estimate the volatility of our share price. The calculated value method requires that the volatility assumption used in an option-pricing model be based on the historical volatility of an appropriate industry sector index.

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 an appropriate valuation approach based on the Black-Scholes option pricing model.

The Company uses a Black-Scholes formula to estimate the calculated value of share-based payments. The weighted average assumptions used in the Black-Scholes model 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.

24,667 common stock options were able to be exercised for the nine month period ended September 30, 2010. The weighted-average grant-date calculated value approximated $221,100 for options granted during the second quarter of 2009. As of September 30, 2010, there was $143,773 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. As of September 30, 2009, there was $195,217 of total unrecognized compensation cost as the 2009 Stock Option plan was not effective until the Company capitalized and the Bank opened on April 30, 2009. The cost of the plan is expected to be recognized over a weighted-average period of 3.9 years.

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. GRCI has 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 $479,321. 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.

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 critically 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 considered well capitalized as of September 30, 2010.

	Actual					Adequately Capitalized					Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2010
Total capital (to risk-weighted assets)	$	10,981		30.95	%	$	2,838		8.00	%	$	3,548		10.00	%
Tier 1 capital (to risk-weighted assets)		10,617		29.92			1,419		4.00			2,129		6.00
Tier 1 capital (to average assets)		10,617		24.88			1,707		4.00			2,134		5.00

December 31, 2009
Total capital (to risk-weighted assets)	$	11,731		78.99	%	$	1,188		8.00	%	$	1,485		10.00	%
Tier 1 capital (to risk-weighted assets)		11,597		78.09			594		4.00			891		6.00
Tier 1 capital (to average assets)		11,597		45.06			1,029		4.00			1,287		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, 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 above. As a Michigan corporation, there are restrictions under the Michigan Business Corporation Act from paying dividends under certain conditions.

To meet the financial needs of its customers, the Company 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 sheet.

The Company’s exposure to credit loss in the event of nonperformance by the other party is represented by the contractual amount of those instruments. The Company 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 Company, 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.

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.

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 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 and the first year 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.

GRCI is a Michigan corporation and a registered bank holding company which owns all of the issued and outstanding common shares of our subsidiary Grand River Bank (“the Bank”), a Michigan state chartered bank. On April 30, 2009, GRCI completed its initial public offering of common stock. On the same date, GRCI acquired 100% of the authorized, issued, and outstanding shares of common stock, par value $0.01 per share, of the Bank.

The Bank opened for business on April 30, 2009 and is a full-service commercial bank headquartered in Grandville, Michigan. The Bank serves Grandville, Grand Rapids, and their neighboring communities with a broad range of commercial and consumer banking services to small and medium-sized businesses, professionals and individuals who it believes will be particularly responsive to the style of service which the Bank provides. It is assumed that local ownership and control will allow the Bank to serve customers more efficiently and effectively and will aid in the Bank’s growth and success. The Bank endeavors to compete on the basis of providing a unique and personalized banking experience combined with a full range of services, customized and tailored to fit the needs of the client. The Bank recently submitted a revised business plan to the FDIC and OFIR adjusting original financial forecasts to more accurately reflect current expectations and changed economic conditions from the time the original forecast was prepared prior to the opening of the Bank. For more information, see “Item 1A, Risk Factors” below.

Our results of operations depend almost exclusively on the results of operations of the Bank. The results of operations of the Bank depend primarily on its net interest income, which is directly impacted by the market interest rate environment. Net interest income is the difference between the interest income the Bank earns on its interest-earning assets, primarily loans and investment securities, and the interest it pays on its interest-bearing liabilities, primarily money market, savings and certificates of deposit accounts. Net interest income is affected by the shape of the market yield curve, the timing of the placement and re-pricing of interest-earning assets and interest-bearing liabilities on the Bank’s balance sheet, and the prepayment rate on its mortgage-related assets. Our results of operations are also significantly affected by general economic conditions. The financial services industry continues to face volatile and adverse economic conditions. The significant contributors to the disruptions include subprime mortgage lending, illiquidity in the capital and credit markets and the decline of real estate values. While the government indicates it will continue to support the financial services industry, it is difficult to determine how the various government programs will impact the banking industry.

As previously stated, the Bank began active banking operations on April 30, 2009. As of September 30, 2010, the Company’s total assets were $44.5 million, compared to $29.9 million as of December 31, 2009. As of September 30, 2010 total assets were primarily comprised of cash and cash equivalents of $4.6 million, securities of $3.6 million and net loans of $35.8 million. In addition, the Bank ended the September 30, 2010 quarter with $33.0 million in deposits and $11.3 million in shareholders’ equity, compared to $17.5 million in deposits and $12.3 million in shareholders’ equity as of December 31, 2009.

At September 30, 2010, the Bank’s allowance for loan losses was $364,000, or approximately 1.0% of its loans outstanding as required by the FDIC. As the Bank’s loan portfolio continues to grow, we expect to increase our loan loss provision and allowance for loan losses in a prudent and conservative manner, especially in light of the current economic environment. Because we cannot predict with precision the future trajectory of the economy in 2010 and beyond and because significant uncertainty remains with respect to unemployment levels and recessionary economic conditions, we will continue to monitor our loan portfolio carefully and to administer our practice of conservative loan underwriting. We believe that our strong initial capital position will help us navigate through this difficult and unprecedented environment.

Our interim condensed 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.

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, 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 circumstance 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 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.

At September 30, 2010, the Company considers the allowance for loan losses of $364,000 adequate to provide for 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 period, 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 reevaluated on a continual basis as regulatory and business factors change. A valuation allowance for deferred income 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.

No assurance can be given that either the tax returns submitted by us or the income tax reported on the consolidated financial statements will not be adjusted by either adverse rulings by the United States Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service. We are subject to potential adverse adjustments, including, but not limited to, an increase in the statutory federal or state income tax rates, the permanent non-deductibility of amounts currently considered deductible either now or in future periods, and the dependency on the generation of future taxable income 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 September 30, 2010 or December 31, 2009.

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.

As referenced above, GRCI was capitalized and acquired the Bank on April 30, 2009. The Bank opened for business on the same day. Our financial condition for periods prior to April 30, 2009 represents only our financial condition as a development stage company, which reflects our incurrence of pre-opening expenses without the offsetting benefit of any material revenue. Accordingly, because our financial condition for periods prior to April 30, 2009 does not include any period of active banking operations or any period during which the Company was capitalized, the Company does not believe that comparisons of our financial condition during these periods are necessarily meaningful in evaluating our current financial condition.

Total assets increased to $44.5 million at September 30, 2010 from $29.9 million at December 31, 2009. The increase was primarily the result of a $22.6 million increase in net loans (excluding mortgage loans held for sale), and a $1.1 million increase in securities, which were off-set by a $8.8 million decrease in cash and cash equivalents and a $0.4 million decrease in mortgage loans held for sale. These increases in loans were funded primarily from the use of cash and cash equivalents and an increase in deposits.

Net loans were $35.8 million at September 30, 2010 compared to $13.2 million as of December 31, 2009. Since loans typically provide higher interest yields than other types of interest earning assets, we intend to invest a substantial percentage of our earning assets in our loan portfolio. At September 30, 2010, our loan portfolio consisted of $5,667,293 of construction and land development loans, $23,333,477 in commercial real estate loans, $5,132,705 in commercial and industrial loans, $1,310,035 in agricultural production and real estate loans, $732,223 in mortgage and consumer loans compared to December 31, 2009, when our loan portfolio consisted of $1,582,100 of construction and land development loans, $8,177,274 in commercial real estate loans, $1,671,221 in commercial and industrial loans, $595,872 in agricultural production and real estate loans, and $1,324,758 in mortgage and consumer loans. Management expects loans to continue to grow as capital is deployed and excess cash is invested in higher yielding assets per the business plan.

The allowance for loan losses was $364,000 and $134,000 as of September 30, 2010 and December 31, 2009, respectively. As of September 30, 2010 and December 31, 2009, the Company had no non-accrual or non-performing loans or loans considered to be impaired. The allowance for loan losses as a percent of total loans was approximately 1.0% which is the minimum required of the Bank by the FDIC, at September 30, 2010 and December 31, 2009.

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.

Securities classified as available for sale consist of U.S. government agencies, which totaled $3.6 million at September 30, 2010, compared to $2.5 million as of December 31, 2009. The balance as of September 30, 2010 consisted of $1.0 million in U.S. government agencies and $2.6 million in mortgage backed securities issued by the U.S. government agencies. Other securities consist of $33,400 in restricted equity securities as of September 30, 2010 compared to $1,000 as of December 31, 2009. The restricted equity securities are comprised entirely of stock in the Federal Home Loan Bank of Indianapolis. The carrying value of securities and restricted stock increased by approximately $1.2 million from December 31, 2009 to September 30, 2010 due to planned growth in the investment portfolio. The Company expects the investment portfolio to continue to grow as assets grow. The mix of securities purchased is not expected to change significantly.

The Company had $33.0 million in deposits as of September 30, 2010, which consisted of $4,302,495 in non-interest bearing demand deposit accounts, $19,906,557 in time deposits, and $8,801,135 of other interest bearing accounts. Deposits increased $15,546,571 from December 31, 2009 when deposits were $17,463,616 consisting of $4,278,828 in non-interest bearing demand deposit accounts, $7,649,545 in time deposits, and $5,535,243 of other interest bearing accounts. Deposit growth came primarily from loan customers and local deposit customers. No deposits were obtained through deposit brokers. The Bank anticipates that deposits will continue to increase as the Bank implements the business plan.

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. 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.

Our primary sources of liquidity are deposits, available borrowings, scheduled repayments on our loans, and interest on and maturities of our investment securities. We plan to meet our future cash needs through the liquidation of temporary investments and the generation of deposits. Occasionally, we might sell securities in connection with the management of our interest sensitivity gap or to manage cash availability. We may also utilize our cash and due from banks, security repurchase agreements, and federal funds sold to meet liquidity requirements as needed. The Bank has obtained approval for secured lines of credit with the Federal Home Loan Bank of Indianapolis and the Federal Reserve Bank. The Bank has pledged securities issued by U.S. government agencies as collateral for the Federal Home Loan Bank line and is evaluating specific loans for pledging. No collateral has been pledged to the Federal Reserve Bank. In addition, the Bank has obtained approval for a $2.0 million secured line of credit from a correspondent bank. The Bank has pledged mortgage-backed securities issued by U.S government agencies as collateral. As of September 30, 2010, our primary source of liquidity included our securities portfolio and cash and cash equivalents. We believe our liquidity levels are adequate to meet our current operating needs.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Regardless, the Bank is “well capitalized” under these minimum capital requirements as set per bank regulatory agencies.

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

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

As referenced above, GRCI was capitalized and acquired the Bank on April 30, 2009. The Bank opened for business on the same day but with limited operations. The results of operations for periods prior to April 30, 2009 represent only our results of operations as a development stage company, which consisted primarily of incurring pre-opening expenses without the offsetting benefit of any material revenue. Accordingly, because our results of operations for periods prior to April 30, 2009 do not include any period of banking operations, the Company does not believe that comparisons of our results of operations during these periods are meaningful in evaluating our results of operations for the three and nine month periods ended September 30, 2010. Therefore, certain comparisons of our results of operations for the three and nine months ended September 30, 2010 to our results of operations for the three and nine months ended September 30, 2009 have been omitted from the disclosures below.

The Company incurred a net loss of approximately $1,136,000 for the nine months ended September 30, 2010 as compared to a net loss of $1,137,000 for the nine months ended September 30, 2009. The Company incurred a net loss of approximately $272,000 for the three months ended September 30, 2010 as compared to a net loss of $487,000 for the three months ended September 30, 2009. Basic and diluted loss per share was $0.16 and $0.67 for the three and nine months ended September 30, 2010, respectively, and $0.29 and $0.67 for the three and nine months ended September 30, 2009. The decrease in our loss for the three months ended September 30, 2010 over the comparative period ended September 30, 2009 is a result of the growth in net interest income associated with the growth in earnings assets over the prior year as the Bank was beginning operations.

Net interest income was approximately $806,000 for the nine months ended September 30, 2010, compared to $24,000 for the comparative period in 2009 during the development stage and beginning Bank operations. Net interest income was approximately $356,000 for the three months ended September 30, 2010, compared to $37,000 for the comparative period in 2009. The Company is in the process of deploying its initial capital as the Bank originates loans and invests in securities.

The following tables calculate the net yield on earning assets for the three and nine month periods ended September 30, 2010. Net yield on earning assets, defined as net interest income annualized, divided by average interest earning assets, was 2.92% for the first nine months of 2010 and 3.34% for three months ended September 30, 2010. The net yield on earning assets for the comparative period in 2009 is not meaningful due to the limited period of banking operations. The Company anticipates that the spread and the margin will continue to expand as the Company originates higher volumes of loans and takes advantage of the favorable yield curve.


For the nine months ended September 30, 2010	Average Balance		Income/ Expense		Yield/ Rate Annualized
Earning assets:
Cash and cash equivalents	$	8,193,749	$	12,695		0.21	%
Investment securities		3,820,189		67,837		2.37
Loans		24,823,826		1,011,009		5.43

Total earning-assets		36,837,764		1,091,541		3.95
Nonearning assets		351,857

Total assets	$	37,189,621

Interest-bearing liabilities:
Interest Checking	$	3,869,519		23,360		0.80
Savings		2,979,245		25,473		1.14
Time deposits		14,872,012		236,919		2.12

Total interest-bearing liabilities		21,720,776		285,752		1.75

Non-interest bearing liabilities		3,693,339
Shareholders’ equity		11,775,506
Total liabilities and shareholders’ equity	$	37,189,621

Net interest spread						2.20	%
Net interest income/ margin			$	805,789		2.92	%


For the three months ended September 30, 2010	Average Balance		Income/ Expense		Yield/ Rate Annualized
Earning assets:
Cash and cash equivalents	$	5,489,767	$	2,651		0.19	%
Investment securities		3,970,997		23,711		2.39
Loans		33,118,886		454,681		5.49

Total earning-assets		42,579,650		481,043		4.52
Nonearning assets		175,926

Total assets	$	42,755,576

Interest-bearing liabilities:
NOW accounts	$	4,409,104		9,635		0.87
Savings		3,890,455		11,851		1.22
Time deposits		19,314,116		103,941		2.15

Total interest-bearing liabilities		27,613,675		125,427		1.82

Non-interest bearing liabilities		3,703,386
Shareholders’ equity		11,438,515
Total liabilities and shareholders’ equity	$	42,755,576

Net interest spread						2.70	%
Net interest income/ margin			$	355,616		3.34	%

The provision for loan losses for the three and nine month periods ended September 30, 2010 was $56,000 and $230,000, respectively compared to $55,000 and $58,000 for the three and nine month periods ended September 30, 2009. The increased provision was due to the growth in the loan portfolio of $22.8 million since year ended December 31, 2009. There were no charge-offs or recoveries during any period. Management will continue to monitor the portfolio for potential inherent losses that may be existent and will increase the allowance for loan losses accordingly.

Total non-interest income for the three and nine month period ended September 30, 2010 was $10,474 and $27,138, respectively. The income earned in the three month period ended September 30, 2010 was predominately service charges on deposit accounts of $1,575 and $8,899 of other income related to gain on sales of loans held for sale and other miscellaneous income. For the three and nine month periods ended September 30, 2009, non-interest income was $1,821 and $22,613, the significant decline was predominantly the result of $19,300 of interest earned during 2009 on the funds held in escrow during the capital campaign. As volumes of loans and deposits increase, the Company expects our non-interest income to increase as well.

Total non-interest expenses for the three and nine months ended September 30, 2010 were $582,012 and $1,738,912, respectively The largest component of non-interest expenses for the three and nine months ended September 30, 2010 is salaries and benefits, which accounts for approximately 60% and 58%, respectively, of total non-interest expenses. The Company had fourteen full time equivalent employees at September 30, 2010. The other primary components of non-interest expenses for the three months ended September 30, 2010 consisted of $42,285 in occupancy and equipment, $33,046 in data processing and IT related services, $29,502 in audit fees and $15,816 in advertising and marketing expense. For the nine months ended September 20, 2010, other primary components of non-interest expenses consisted of $123,355 in occupancy and equipment, $103,747 in audit fees, $87,431 in data processing and IT related services and $73,727 in advertising and marketing expense. In the comparable prior year periods, total non-interest expense for the three and nine months ended September 30, 2009 were $471,121 and $1,126,028, respectively. The largest component of non-interest expenses for the three and nine months ended September 30, 2009 is salaries and benefits, which accounts for approximately 57% and 40%, respectively, of total non-interest expenses. Other primary components of non-interest expenses for the three months ended September 30, 2009 were occupancy and equipment of $38,189, audit fees of $35,125, legal fees of $26,316, primarily related to the opening of the Bank, and advertising and marketing expenses of $22,529. For the nine months ended September 30, 2009, the other primary expenses were professional fees paid to contracted bank staff prior to the bank opening of $252,859, occupancy and equipment expense of $95,213, audit fees of $73,966 and advertising and marketing expenses of $43,494. Management does not expect any significant unplanned increases in non-interest expense.

No Federal income tax expense or benefit was recognized during the nine months ended September 30, 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. An income tax receivable of $9,692 recorded in other assets in the September 30, 2010 condensed consolidated balance sheet represents the Company’s overpayment of projected Michigan Business Tax for 2009.

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 has become a member of the Federal Home Loan Bank of Indianapolis, which will provide the Bank with a secured line of credit. Collateral will primarily consist of specific pledged loans and investment securities. Management is currently evaluating loans to be pledged in support of borrowings and has pledged securities issued by U.S. government agencies. 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 at such time as the loan portfolio is large enough to support such borrowing. A correspondent bank has approved a $2,000,000 Federal funds line of credit on a secured basis. Investment securities have been pledged 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 during the quarter ended September 30, 2010. Present sources of liquidity are considered sufficient to meet current commitments. At September 30, 2010, 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 September 30, 2010, outstanding unused lines of credit totaled $6,024,932 which included one standby letter of credit totaling $38,785. The Company expects to have sufficient funds available to meet current commitments in the normal course of business. As of September 30, 2010, the Bank had $7,222,000 of outstanding unfunded loan commitments. A majority of these commitments represent commercial loans with available lines of credit.

Certain of the statements contained in this report on Form 10-Q that are not historical facts are forward looking statements relating to, without limitation, future economic performance, plans and objectives of management for future operations, and projections of revenues and other financial items that are based on the beliefs of the Company’s management, as well as assumptions made by and information currently available to the Company’s management.

The Company cautions readers of this report that such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements. Although management believes that its expectations of future performance are based on reasonable assumptions within the bounds of its knowledge of their business and operations, there can be no assurance that actual results will not differ materially from its expectations.

The Company has carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. The Company’s CEO and CFO have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, to allow timely decisions regarding required disclosures.

Our management does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. Control systems, 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 the controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

The Bank must receive FDIC and State of Michigan, Office of Financial and Insurance Regulation (“OFIR”) approval to materially deviate from the Bank’s original Business Plan submitted with the Bank’s Interagency Charter and Federal Deposit Insurance Application (the “Charter Application”), and such approvals may not be granted, which could restrict the Bank’s growth and profitability.

The Bank has requested approval from the FDIC and OFIR to revise the financial projections contained in the Business Plan to reflect the increased growth in loans and deposits. The Bank’s request has not yet been approved or denied by the regulators. The Bank does believe that its level of loans are now consistent with the projections. In its business plan, the Bank projected $15,000,000 in deposits during the first year of operations. The Bank actually generated $24,549,085 in deposits. The original forecast for loan generation was $22,500,000 and the actual first year loan totals were $24,819,720 in many respects the corresponding result of the Bank’s deposit growth.

In the third quarter of 2009 pursuant to FIL-50-2009 issued by the FDIC, the FDIC clarified its position regarding what is known as a “material deviation” from business projections. The Bank may have materially deviated from the Business Plan it submitted with the Charter Application. The FDIC and OFIR may take the position that any material increase in assets beyond what was presented in the original Business Plan (or the revised financial projections, if approved), would constitute a material deviation from the Business Plan and would require prior approval of the regulators before the material deviation may occur. The potential material deviation was due to an increase in loan growth and deposit growth over what was originally projected in the financial projections in the Business Plan.

The Bank has submitted a revised business plan to the regulatory agencies, but the Bank’s request has not yet been approved or denied by the regulators. If the FDIC or the OFIR denies the Bank’s request to revise the financial projections, and as a result determines that the Bank has been operating in violation of its Business Plan, then such determination could have adverse consequences for the Bank, including imposition of an enforcement action against the Bank or a change in the Bank’s regulatory rating. In addition, even if the FDIC and OFIR approve the revised financial projections submitted by the Bank, the Bank would not be permitted to materially deviate from anticipated limits set forth in the revised financial projections without prior regulatory approval.

Exhibit Number		Description

3.1		Articles of Incorporation of GRCI*
3.2		Amended and Restated Bylaws of GRCI**
4.1		Specimen common stock certificate*
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****
31.1		Rule 302 Certification of the Chief Executive Officer
31.2		Rule 302 Certification of the Chief Financial Officer
32.1		Rule 906 Certification

*	Previously filed as an exhibit to our registration statement on November 16, 2007.
**	Previously filed as an exhibit to our Current Report on Form 8-K on May 30, 2008.
***	Previously filed as an exhibit to our Current Report on Form 8-K on September 26, 2009.
****	Previously filed as an exhibit to our Quarterly Report on Form 10-Q on August 14, 2009.

Michigan		20-5393246
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Large accelerated filer o	Accelerated filer o

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

December 31, 2009	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. government agencies	$	1,000,650	$	—	$	(25	)	$	1,000,625
Mortgage-backed securities issued by U.S. government agencies		1,484,505		6,660		(5,418	)		1,485,747
Total	$	2,485,155	$	6,660	$	(5,443	)	$	2,486,372

	September 30, 2010		December 31, 2009
Commercial – non-real estate	$	5,307,845	$	1,939,309
Real estate:
Commercial		24,468,372		9,297,734
Construction and land development		5,667,293		1,582,100
Residential		479,121		215,953
Home equity		247,377		310,155
Consumer		5,725		5,974
Total loans		36,175,733		13,351,225
Less:
Allowance for loan losses		364,000		134,000
Net loans	$	35,811,733	$	13,217,225

	September 30, 2010			December 31, 2009
Leasehold improvements	$	44,540		$	44,540
Furniture, fixtures and equipment		299,416			292,185
Accumulated depreciation		(123,407	)		(56,042	)
Premises and equipment, net	$	220,549		$	280,683

As of September 30, 2010	Level 1		Level 2		Level 3		Total

Securities available for sale	$	—	$	3,608	$	—	$	3,608

As of December 31, 2009	Level 1		Level 2		Level 3		Total

Securities available for sale	$	—	$	2,486	$	—	$	2,486

Calculated volatility		12.00	%
Weighted average dividends		0.00	%
Expected term (in years)	7 years
Risk-free interest rate		2.70	%

	2010				2009
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at January 1		100,000	$	10.00		—	$	—
Granted		—		—		100,000		10.00
Exercised		—		—		—		—
Expired or cancelled		—		—		—		—
Outstanding at September 30		100,000	$	10.00		100,000	$	10.00

	September 30, 2010		December 31, 2009
Unfunded commitments under lines of credit and overdraft lines	$	7,222,000	$	8,220,784
Commitments to grant loans		6,024,932		3,976,000
Total	$	13,264,932	$	12,196,784

	September 30, 2010			December 31, 2009
Deferred Tax Asset:
Net deferred tax assets	$	1,434,000		$	1,048,000
Less: Valuation Allowance		(1,434,000	)		(1,048,000	)
Total net deferred tax asset	$	—		$	—

	Bank
Total risk-based capital		30.95%
Tier 1 risk-based capital		29.92%
Leverage capital		24.88%

Dated: November 10, 2010	GRAND RIVER COMMERCE, INC.

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

	By:	/s/ Elizabeth C. Bracken
		Elizabeth C. Bracken
		Chief Financial Officer