UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K





(Mark One)





[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended December 31, 2010





OR





[  ] 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:    000-53249





AB&T FINANCIAL CORPORATION


(Exact Name of Registrant as specified in its charter)





NORTH CAROLINA
26-2588442(State of Incorporation)
(I.R.S. Employer

Identification No.)




292 West Main Avenue, Gastonia, North Carolina
28052(Address of Principal Office)
(Zip Code)





Registrant's telephone number, including area code:  (704) 867-5828





Securities registered pursuant to Section 12(b) of the Act:





NONE





Securities registered pursuant to Section 12(g) of the Act:





COMMON STOCK, PAR VALUE $1.00 PER SHARE





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act


[ ] Yes   [x] No





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


[x] Yes   [ ] No





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


[  ] Yes [  ] No








Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, the best of the 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.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):





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





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


[  ] Yes [X] No





State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter: $13,993,662.





Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date:  2,668,205 shares of common stock outstanding as of March 30, 2011








Documents Incorporated by Reference:





Portions of the registrant’s proxy statement for the 2011 annual meeting of shareholders are incorporated by reference in Part III of this Form 10-K.


























PART I





ITEM 1.   BUSINESS





General





AB&T Financial Corporation (the “Company” or the “Registrant”) was incorporated under the laws of the State of North Carolina on June 25, 2007. On May 14, 2008, the Company became the sole owner of all of the capital stock of Alliance Bank & Trust Company (the “Bank”). Alliance Bank & Trust Company is a state-chartered bank which was organized and incorporated under the laws of the State of North Carolina in September 2004. The Bank is not a member of the Federal Reserve System. The Bank commenced operations on September 8, 2004.





The Bank is headquartered in Gastonia, North Carolina and currently conducts business in two North Carolina counties through four full-service branch offices. The principal business activity of the Bank is to provide commercial banking services to domestic markets, principally in Gaston and Cleveland counties. As a state-chartered bank, the Bank is subject to regulation by the North Carolina Office of the Commissioner of Banks and the Federal Deposit Insurance Corporation. The Company is also regulated, supervised and examined by the Federal Reserve. The consolidated financial statements include the accounts of the parent company and its wholly owned subsidiary after elimination of all significant intercompany balances and transactions.





The Company applied and was approved for participation in the “TARP” Capital Purchase Program in late 2008.  On January 23, 2009, the Company issued and sold to the United States Department of the Treasury (1) 3,500 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and (2) a warrant to purchase 80,153 shares of the Company’s common stock for an aggregate purchase price of $3.5 million in cash.  The preferred stock qualifies as Tier 1 capital.





Primary Market Area





The Registrant's Primary Market Area (“PMA”) consists of Gaston and Cleveland Counties.  The PMA has a population of over 308,000 with an average median household income of over $43,000.





At June 30, 2010, total deposits in the Registrant’s PMA exceeded $3.6 billion.  As of December 31, 2010, the PMA reported moderate levels of unemployment (10.7% in Gaston County and 11.7% in Cleveland County) compared to state and national averages (9.7% and 9.4%, respectively). The leading economic components of Gaston and Cleveland Counties are manufacturing, services and retail trade.  The largest employers in the Registrant’s PMA include Caromont Health, Gaston County Schools, Wal-Mart Distribution Center, Wix Filtration Corp., American & Efird, Pharr Yarns, Cleveland County Schools, Cleveland Regional Medical Center, Gaston County Administration, Gardner-Webb University, Cleveland Community College and Cleveland County Administration.





Competition





Commercial banking in North Carolina is extremely competitive with state laws long permitting statewide branching. In its market area, the Registrant competes directly for deposits with other commercial banks, savings and loan associations, agencies issuing U. S. Government securities and all other organizations and institutions engaged in money market transactions. In its lending activities, the Registrant competes with all other financial institutions as well as consumer finance companies, mortgage companies and other lenders that do business in its market area.  The most recent current data for the Registrant’s PMA indicates that there are 90 offices of commercial banks and savings institutions (58 in Gaston County and 32 in Cleveland County).





Employees





The Registrant and the Bank currently employ 35 full-time employees and one part-time employee.  None of the Registrant’s employees are covered by a collective bargaining agreement.  The Registrant believes its relations with its employees to be good.








Regulation





The Company and the Bank are extensively regulated under both federal and state law. Generally, these laws and regulations are intended to protect depositors and borrowers, not shareholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable law or regulation may have a material effect on the business of the Company.


















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Dodd–Frank Wall Street Reform and Consumer Protection Act.On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry in the United States. The Dodd-Frank Act includes, among other things:





·
the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and to improve cooperation between federal agencies;


·
the creation of a Bureau of Consumer Financial Protection authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank financial companies;


·
the establishment of strengthened capital and prudential standards for banks and bank holding companies;


·
enhanced regulation of financial markets, including derivatives and securitization markets;


·
the elimination of certain trading activities by banks;


·
a permanent increase of the previously implemented temporary increase of FDIC deposit insurance to $250,000 per account, an extension of unlimited deposit insurance on qualifying noninterest-bearing transaction accounts, and an increase in the minimum deposit insurance fund reserve requirement from 1.15% to 1.35%, with assessments to be based on assets as opposed to deposits;


·
amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations; and


·
new disclosure and other requirements relating to executive compensation and corporate governance.





Although the Dodd-Frank Act has been signed into law, a number of provisions remain to be implemented through the rulemaking process at various regulatory agencies. We are unable to predict the extent to which the Dodd-Frank Act or the forthcoming rules and regulations will impact our business. However, we believe that certain aspects of the new legislation, including, without limitation, the additional cost of higher deposit insurance coverage and the costs of compliance with disclosure and reporting requirements and examinations could have a significant impact on our business, financial condition, and results of operations. Additionally, we cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced, or how such changes may affect us.





Regulation of the Bank





State Law. The Bank is subject to extensive supervision and regulation by the North Carolina Commissioner of Banks (the “Commissioner”). The Commissioner oversees state laws that set specific requirements for bank capital and regulate deposits in, and loans and investments by, banks, including the amounts, types, and in some cases, rates. The Commissioner supervises and performs periodic examinations of North Carolina-chartered banks to assure compliance with state banking statutes and regulations, and the Bank is required to make regular reports to the Commissioner describing in detail the resources, assets, liabilities and financial condition of the Bank. Among other things, the Commissioner regulates mergers and consolidations of state-chartered banks, the payment of dividends, loans to officers and directors, record keeping, types and amounts of loans and investments, and the establishment of branches.





Deposit Insurance.  The Bank’s deposits are insured up to limits set by the Deposit Insurance Fund (the “DIF”) of the FDIC. The DIF was formed on March 31, 2006, upon the merger of the Bank Insurance Fund and the Savings Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). The Reform Act established a range of 1.15% to 1.50% within which the FDIC may set the Designated Reserve Ratio (the “reserve ratio” or “DRR”). The Dodd-Frank Act gave the FDIC greater discretion to manage the DIF, raised the minimum DIF reserve ratio to 1.35%, and removed the upper limit of 1.50%. In October 2010, the FDIC adopted a restoration plan to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. The FDIC also proposed a comprehensive, long-range plan for management of the DIF. As part of this comprehensive plan, the FDIC has adopted a final rule to set the DRR at 2.0%.





On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted and temporarily raised the standard limit of FDIC insurance coverage from $100,000 to $250,000 per depositor.  On May 20, 2009, the Helping Families Save Their Homes Act extended the temporary increase in the standard maximum deposit insurance amount (SMDIA) to per depositor through December 31, 2013. On July 21, 2010, the Dodd-Frank Act permanently increased FDIC insurance coverage to $250,000 per depositor.





The FDIC imposes a risk-based deposit insurance premium assessment on member institutions in order to maintain the DIF. This assessment system was amended by the Reform Act and further amended by the Dodd-Frank Act. Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, its long-term debt ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. The Dodd-Frank Act changed the methodology for calculating deposit insurance assessments from the amount of an insured institution’s domestic deposits to its total assets minus tangible capital. On February 7, 2011, the FDIC issued a new regulation implementing these revisions to the assessment system. The regulation will be effective April 1, 2011.





On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program (the “TLGP”) to strengthen confidence and encourage liquidity in the banking system.  The TLGP consists of two components: a temporary guarantee of newly-issued senior unsecured debt named the Debt Guarantee Program, and a temporary unlimited guarantee of funds in noninterest-bearing transaction accounts at FDIC insured institutions named the Transaction Account Guarantee Program (“TAG”).  All newly-issued senior unsecured debt will be charged an annual assessment of up to 100 basis points (depending on term) multiplied by the amount of debt issued and






4





calculated through the date of that debt or June 30, 2012, whichever is earlier.  The Bank elected to opt out of the Debt Guarantee Program and elected to participate in the TAG Program.  On August 26, 2009, the FDIC adopted a final rule extending the TAG portion of the TLGP for six months through June 30, 2010 and it was extended again through December 31, 2010. The Bank elected to continue to participate in the TAG Program through December 31, 2010. On July 21, 2010, the Dodd-Frank Act extended unlimited FDIC insurance coverage to noninterest-bearing transaction deposit accounts. It does not apply to accounts earning any level of interest with the exception of Interest on Lawyers’ Trust Accounts (“IOLTA”) accounts. This unlimited FDIC insurance coverage is applicable to all applicable deposits at any FDIC-insured financial institution. Therefore, there is no additional FDIC insurance surcharge related to this coverage after December 31, 2010.





During 2009, the FDIC took several measures aimed at replenishing the DIF. On May 22, 2009, the FDIC imposed a 5 basis point special assessment on each insured institution’s assets minus Tier 1 capital as of June 30, 2009. On November 17, 2009, the FDIC voted to require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, as well as all of 2010, 2011, and 2012. For purposes of determining the prepayment, the FDIC used an institution’s assessment rate in effect on September 30, 2009.





The FDIC has authority to increase insurance assessments.  A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank.  Management cannot predict what insurance assessment rates will be in the future.





Insurance of deposits may be terminated by the FDIC upon a finding that an insured institution has engaged in unsafe or 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.





Capital Requirements. The federal banking regulators have adopted certain risk-based capital guidelines to assist in the assessment of the capital adequacy of a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit, and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.





A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets. The regulators measure risk-adjusted assets, which include off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. “Tier 1,” or core capital, includes common equity, qualifying noncumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions. “Tier 2,” or supplementary capital, includes among other things, limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations and less required deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. Banks and bank holding companies subject to the risk-based capital guidelines are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at least 4% and a ratio of total capital to risk-weighted assets of at least 8%. The appropriate regulatory authority may set higher capital requirements when particular circumstances warrant. As of December 31, 2010, the Bank was classified as “well-capitalized” with Tier 1 and Total Risk-Based Capital of 13.54% and 14.82%, respectively.





The federal banking agencies have adopted regulations specifying that they will include, in their evaluations of a bank’s capital adequacy, an assessment of the bank’s interest rate risk exposure. The standards for measuring the adequacy and effectiveness of a banking organization’s interest rate risk management include a measurement of oversight by senior management and the board of directors, and a determination of whether a banking organization’s procedures for comprehensive risk management are appropriate for the circumstances of the specific banking organization.





Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions, including limitations on its ability to pay dividends, the issuance by the applicable regulatory authority of a capital directive to increase capital and, in the case of depository institutions, the termination of deposit insurance by the FDIC, as well as the measures described under the “Federal Deposit Insurance Corporation Improvement Act of 1991” below, as applicable to undercapitalized institutions. In addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends to the shareholders.





Federal Deposit Insurance Corporation Improvement Act of 1991.  In December 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDIC Improvement Act”), which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made significant revisions to several other federal banking statutes. The FDIC Improvement Act provides for, among other things:





-
publicly available annual financial condition and management reports for certain financial institutions, including audits by independent accountants,





-
the establishment of uniform accounting standards by federal banking agencies,





-
the establishment of a “prompt corrective action” system of regulatory supervision and intervention, based on capitalization levels, with greater scrutiny and restrictions placed on depository institutions with lower levels of capital,





-
additional grounds for the appointment of a conservator or receiver, and





-
restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements.





5


The FDIC Improvement Act also provides for increased funding of the FDIC insurance funds and the implementation of risk-based premiums.





A central feature of the FDIC Improvement Act is the requirement that the federal banking agencies take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. Pursuant to the FDIC Improvement Act, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity.





The FDIC Improvement Act provides the federal banking agencies with significantly expanded powers to take enforcement action against institutions which fail to comply with capital or other standards. Such action may include the termination of deposit insurance by the FDIC or the appointment of a receiver or conservator for the institution. The FDIC Improvement Act also limits the circumstances under which the FDIC is permitted to provide financial assistance to an insured institution before appointment of a conservator or receiver.





International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001.  On October 26, 2001, the USA PATRIOT Act of 2001 was enacted.  This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which sets forth anti-money laundering measures affecting insured depository institutions, broker-dealers and other financial institutions.  The Act requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on the operations of financial institutions.





Community Reinvestment Act. The Registrant is subject to the provisions of the Community Reinvestment Act of 1977, as amended (CRA).  Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with the examination of a bank, to assess such bank’s record in meeting the credit needs of the community served by that bank, including low-and moderate-income neighborhoods.  The regulatory agency’s assessment of the Registrant’s record is made available to the public.  Such an assessment is required of any bank which has made application for a domestic deposit-taking branch, relocation of a main office, branch or ATM, merger or consolidation with or acquisition of assets or assumption of liabilities of a federally insured depository institution.





Under CRA regulations, banks with assets of less than $250,000,000 that are independent or affiliated with a holding company with total banking assets of less than $1 billion, are subject to streamlined small bank performance standards and much less stringent data collection and reporting requirements than larger banks.  The agencies emphasize that small banks are not exempt from CRA requirements.  The streamlined performance method for small banks focuses on the bank’s loan-to-deposit ratio, adjusted for seasonal variations and as appropriate, other lending-related activities, such as loan originations for sale to secondary markets or community development lending or qualified investments; the percentage of loans and, as appropriate, other lending-related activities located in the Registrant’s assessment areas; the Registrant’s record of lending to and, as appropriate, other lending-related activities for borrowers of different income levels and businesses and farms of different sizes; the geographic distribution of the Registrant’s loans given its assessment areas, capacity to lend, local economic conditions, and lending opportunities; and the Registrant’s record of taking action, if warranted, in response to written complaints about its performance in meeting the credit needs of its assessment areas.





Regulatory agencies will assign a composite rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance” to the institution using the foregoing ground rules.  A bank’s performance need not fit each aspect of a particular rating profile in order for the bank to receive that rating; exceptionally strong performance with respect to some aspects may compensate for weak performance in others, and the bank’s overall performance must be consistent with safe and sound banking practices and generally with the appropriate rating profile.  To earn an outstanding rating, the bank first must exceed some or all of the standards mentioned above.  The agencies may assign a “needs to improve” or “substantial noncompliance” rating depending on the degree to which the bank has failed to meet the standards mentioned above.





The regulation further states that the agencies will take into consideration these CRA ratings when considering any application and that a bank’s record of performance may be the basis for denying or conditioning the approval of an application.





Miscellaneous. The dividends that may be paid by the Bank are subject to legal limitations. In accordance with North Carolina banking law, dividends may not be paid unless a bank’s capital surplus is at least 50% of its paid-in capital.


The earnings of the Bank will be affected significantly by the policies of the Federal Reserve Board, which is responsible for regulating the United States money supply in order to mitigate recessionary and inflationary pressures. Among the techniques used to implement these objectives are open market transactions in United States government securities, changes in the rate paid by banks on bank borrowings, and changes in reserve requirements against bank deposits. These techniques are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect interest rates charged on loans or paid for deposits.





The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Bank.





We cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on the Bank’s operations.







6


Regulation of the Registrant





Federal Regulation. The Registrant is subject to examination, regulation and periodic reporting under the Bank Holding Company Act of 1956, as administered by the Federal Reserve Board. The Federal Reserve Board has adopted capital adequacy guidelines for bank holding companies on a consolidated basis.





The Registrant is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval is required for the Registrant to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than five percent of any class of voting shares of such bank or bank holding company.





The merger or consolidation of the Bank with another bank, or the acquisition by the Registrant of assets of another bank, or the assumption of liability by the Registrant to pay any deposits in another bank, will require the prior written approval of the primary federal bank regulatory agency of the acquiring or surviving bank under the federal Bank Merger Act.  The decision is based upon a consideration of statutory factors similar to those outlined above with respect to the Bank Holding Company Act.  In addition, in certain such cases an application to, and the prior approval of, the Federal Reserve Board under the Bank Holding Company Act and/or the North Carolina Banking Commission may be required.





The Registrant is required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Registrant’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. Such notice and approval is not required for a bank holding company that would be treated as “well capitalized” and “well managed” under applicable regulations of the Federal Reserve Board, that has received a composite “1” or “2” rating at its most recent bank holding company inspection by the Federal Reserve Board, and that is not the subject of any unresolved supervisory issues.





The status of the Registrant as a registered bank holding company under the Bank Holding Company Act does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.





In addition, a bank holding company is prohibited generally from engaging in, or acquiring five percent or more of any class of voting securities of any company engaged in, non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking as to be a proper incident thereto are:





-  making or servicing loans;


-  performing certain data processing services;


-  providing discount brokerage services;


-  acting as fiduciary, investment or financial advisor;


-  leasing personal or real property;


-  making investments in corporations or projects designed primarily to promote community welfare; and


-  acquiring a savings and loan association.





In evaluating a written notice of such an acquisition, the Federal Reserve Board will consider various factors, including among others the financial and managerial resources of the notifying bank holding company and the relative public benefits and adverse effects which may be expected to result from the performance of the activity by an affiliate of such company. The Federal Reserve Board may apply different standards to activities proposed to be commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern. The required notice period may be extended by the Federal Reserve Board under certain circumstances, including a notice for acquisition of a company engaged in activities not previously approved by regulation of the Federal Reserve Board. If such a proposed acquisition is not disapproved or subjected to conditions by the Federal Reserve Board within the applicable notice period, it is deemed approved by the Federal Reserve Board.





However, with the passage of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, which became effective on March 11, 2000, the types of activities in which a bank holding company may engage were significantly expanded. Subject to various limitations, the Modernization Act generally permits a bank holding company to elect to become a “financial holding company.” A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are “financial in nature.”  Among the activities that are deemed “financial in nature” are, in addition to traditional lending activities, securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, certain merchant banking activities and activities that the Federal Reserve Board considers to be closely related to banking.





A bank holding company may become a financial holding company under the Modernization Act if each of its subsidiary banks is “well capitalized” under the Federal Deposit Insurance Corporation Improvement Act prompt corrective action provisions, is well managed and has at least a satisfactory rating under the Community Reinvestment Act.  In addition, the bank holding company must file a declaration with the Federal Reserve Board that the bank holding company wishes to become a financial holding company.  A bank holding company that falls out of compliance with these requirements may be required to cease engaging in some of its activities.  The Registrant has not yet elected to become a financial holding company.





Under the Modernization Act, the Federal Reserve Board 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.  The Modernization Act also imposes additional restrictions and heightened disclosure requirements regarding private information collected by financial institutions.


7





Sarbanes-Oxley Act of 2002.  On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law and became some of the most sweeping federal legislation addressing accounting, corporate governance and disclosure issues. The impact of the Sarbanes-Oxley Act is wide-ranging as it applies to all public companies and imposes significant requirements for public company governance and disclosure requirements.





In general, the Sarbanes-Oxley Act mandates important corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It establishes responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process and creates a regulatory body to oversee auditors of public companies. It backs these requirements with SEC enforcement tools, increases criminal penalties for federal mail, wire and securities fraud, and creates criminal penalties for document and record destruction in connection with federal investigations. It also increases the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and providing federal corporate whistleblower protection.





The economic and operational effects of this legislation on public companies, including us, is significant in terms of the time, resources and costs associated with complying with the law. Because the Sarbanes-Oxley Act, for the most part, applies equally to larger and smaller public companies, we are presented with additional challenges as a smaller, community-oriented financial institution seeking to compete with larger financial institutions in our market.





Recent Regulatory Initiatives.  Beginning in late 2008 and continuing into 2010, the federal government took sweeping actions in response to the deepening economic recession.  As mentioned above, President Bush signed the Emergency Economic Stabilization Act of 2008 or “EESA” into law on October 3, 2008.  Pursuant to EESA, the Department of the Treasury created the Troubled Asset Relief Program or “TARP” for the purpose of stabilizing the U.S. financial markets.  On October 14, 2008, the Treasury announced the creation of the TARP Capital Purchase Program.  The Capital Purchase Program was designed to invest up to $250 billion (later increased to $350 billion) in certain eligible financial institutions in the form of nonvoting senior preferred stock initially paying quarterly dividends at a five percent annual rate.  In connection with its investment in senior preferred stock, the Treasury also received ten-year warrants to purchase common shares of participating institutions.





The Company applied and was approved for participation in the Capital Purchase Program in late 2008.  On January 23, 2009, the Company issued and sold to the Treasury (1) 3,500 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and (2) a warrant to purchase 80,153 shares of the Company’s common stock for an aggregate purchase price of $3.5 million in cash.  The preferred stock qualifies as Tier 1 capital.


As a result of its participation in the Capital Purchase Program, the Company has become subject to a number of new regulations and restrictions.  The ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration shares of its common stock is subject to restrictions.  The Company is also required to have in place certain limitations on the compensation of its senior executive officers.





On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 into law.  This law includes additional restrictions on executive compensation applicable to the Company as a participant in the TARP Capital Purchase Program.





For additional information about this transaction and the Company’s participation in the Capital Purchase Program, please see Note 17 to the Company’s audited consolidated financial statements included with this report and the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on January 28, 2009.





Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.




As discussed above, the Dodd-Frank Act was signed into law in July 2010.




Also in July 2010, the federal banking agencies issued guidance which applies to all banking organizations supervised by the agencies. Pursuant to the guidance, to be consistent with safety and soundness principles, a banking organization’s incentive compensation arrangements should: (1) provide employees with incentives that appropriately balance risk and reward; (2) be compatible with effective controls and risk management; and (3) be supported by strong corporate governance including active and effective oversight by the banking organization’s board of directors. Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation.




In September 2010, the Small Business Lending Fund Program (“SBLF”) was created by the Small Business Jobs Act of 2010. Under the SBLF, the U.S. Treasury may invest in preferred stock and other debt instruments issued by financial institutions. To be eligible, an institution must have total assets of $10 billion or less. An institution between $1 billion and $10 billion may apply for up to 3% of its total risk-weighted assets as long as it is otherwise eligible. An institution with assets of $1 billion or less may apply for up to 5% of its total risk-weighted assets as long as it is otherwise eligible. The U.S. Treasury must consult with the institution’s regulators to determine if the institution should receive the investment. Institutions on the FDIC’s problem bank list as of, or within 90 days prior to, the date of the application, are ineligible to participate in the program.




Treasury’s investment must be repaid within 10 years. While the investment is outstanding, the rate at which dividends are payable varies between 1% and 7%, with an initial rate of 5%, and is wholly dependent upon the amount of increase in the bank’s quarterly small business lending following Treasury’s capital investment. If the amount of small business lending does not increase within 2 years, the dividend rate increases to 7%. If Treasury’s investment is not redeemed on or before 41/2 years following its investment, the dividend rate increases to 9%.




8


The application for participation in the SBLF along with a business plan for increasing small business lending must be submitted to the Treasury and the institution’s primary federal regulator prior to March 31, 2011. The Company intends to submit an application for participation in the SBLF. If the application is accepted, there is uncertainty as to whether the Company will be able to increase the level of small business lending in order to qualify for a reduced level of dividend payments. There is also uncertainty as to the capital treatment of any funds received under the SBLF due to conflicts in capital treatment under the Dodd-Frank Act and the proposed Basel III rules. Further, Treasury could change the rules regarding participation in the SBLF at any time.





The Federal Reserve Board’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies:





-           a leverage capital requirement expressed as a percentage of adjusted total assets;


-           a risk-based requirement expressed as a percentage of total risk-weighted assets; and


-           a Tier 1 leverage requirement expressed as a percentage of adjusted total assets.





The leverage capital requirement consists of a minimum ratio of total capital to total assets of 4%, with an expressed expectation that banking organizations generally should operate above such minimum level. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital (which consists principally of shareholders’ equity). The Tier 1 leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated companies, with minimum requirements of 4% to 5% for all others.  As of December 31, 2010, the Registrant was classified as “well-capitalized” with Tier 1 and Total Risk-Based Capital of 13.56% and 14.83%, respectively.





The risk-based and leverage standards presently used by the Federal Reserve Board are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels.





Source of Strength for Subsidiaries.  Bank holding companies are required to serve as a source of financial strength for their depository institution subsidiaries, and, if their depository institution subsidiaries become undercapitalized, bank holding companies may be required to guarantee the subsidiaries’ compliance with capital restoration plans filed with their bank regulators, subject to certain limits.





Dividends.  As a bank holding company that does not, as an entity, currently engage in separate business activities of a material nature, the Registrant’s ability to pay cash dividends depends upon the cash dividends the Registrant receives from the Bank.  At present, the Registrant’s only source of income is dividends paid by the Bank and interest earned on any investment securities the Registrant holds.  The Registrant must pay all of its operating expenses from funds it receives from the Bank.  Therefore, shareholders may receive dividends from the Registrant only to the extent that funds are available after payment of our operating expenses and the board decides to declare a dividend.  In addition, the Federal Reserve Board generally prohibits bank holding companies from paying dividends except out of operating earnings, and the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality and overall financial condition.  We expect that, for the foreseeable future, any dividends paid by the Bank to us will likely be limited to amounts needed to pay any separate expenses of the Company and/or to make required payments on our debt obligations or to meet the dividend requirements on our preferred stock.





The FDIC Improvement Act requires the federal bank regulatory agencies biennially to review risk-based capital standards to ensure that they adequately address interest rate risk, concentration of credit risk and risks from non-traditional activities and, since adoption of the Riegle Community Development and Regulatory Improvement Act of 1994, to do so taking into account the size and activities of depository institutions and the avoidance of undue reporting burdens. In 1995, the agencies adopted regulations requiring as part of the assessment of an institution’s capital adequacy the consideration of (a) identified concentrations of credit risks, (b) the exposure of the institution to a decline in the value of its capital due to changes in interest rates and (c) the application of revised conversion factors and netting rules on the institution’s potential future exposure from derivative transactions.





In addition, the agencies in September 1996 adopted amendments to their respective risk-based capital standards to require banks and bank holding companies having significant exposure to market risk arising from, among other things, trading of debt instruments, (1) to measure that risk using an internal value-at-risk model conforming to the parameters established in the agencies’ standards and (2) to maintain a commensurate amount of additional capital to reflect such risk. The new rules were adopted effective January 1, 1997, with compliance mandatory from and after January 1, 1998.  Subsidiary banks of a bank holding company are subject to certain quantitative and qualitative restrictions imposed by the Federal Reserve Act on any extension of credit to, or purchase of assets from, or letter of credit on behalf of, the bank holding company or its subsidiaries, and on the investment in or acceptance of stocks or securities of such holding company or its subsidiaries as collateral for loans. In addition, provisions of the Federal Reserve Act and Federal Reserve Board regulations limit the amounts of, and establish required procedures and credit standards with respect to, loans and other extensions of credit to officers, directors and principal shareholders of the Bank, the Registrant, and any subsidiary of the Registrant and related interests of such persons. Moreover, subsidiaries of bank holding companies are prohibited from engaging in certain tie-in arrangements (with the holding company or any of its subsidiaries) in connection with any extension of credit, lease or sale of property or furnishing of services.





Any loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would also apply to guarantees of capital plans under the FDIC Improvement Act.






9


Interstate Branching





Under the Riegle-Neal Interstate Banking and Branching Act (the “Riegle-Neal Act”), the Federal Reserve Board may approve bank holding company acquisitions of banks in other states, subject to certain aging and deposit concentration limits. As of June 1, 1997, banks in one state may merge with banks in another state, unless the other state has chosen not to implement this section of the Riegle-Neal Act. These mergers are also subject to similar aging and deposit concentration limits.North Carolina “opted-in” to the provisions of the Riegle-Neal Act.  The Dodd-Frank Act allows national and state banks to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state.





We cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on our operations.





ITEM 1A.   RISK FACTORS





Smaller reporting companies such as the Registrant are not required to provide the information required by this item.





ITEM 1B.   UNRESOLVED STAFF COMMENTS





Smaller reporting companies such as the Registrant are not required to provide the information required by this item.







ITEM 2.   PROPERTIES





The following table sets forth the location of the Registrant’s banking offices or properties, as well as certain information relating to these properties to date.





Office Location
Year

Opened
Approximate

Square Footage
Owned or LeasedAdministrative Office

292 W. Main Ave.

Gastonia, NC 28052
2006
10,000
OwnGastonia Office

2227 Union Rd.

Gastonia, NC 28054
2008
2,737
OwnShelby Branch

412 S. DeKalb St.

Shelby, NC 28150
2006
3,800
OwnKings Mountain Branch

209 South Battleground Ave.

Kings Mountain, NC 28086
2008
2,650
LeaseProposed Branch

314 East King Street

Kings Mountain, NC 28086
NA
NA
NAProposed Branch

405 Beatty Drive

Mt Holly, NC 28120
NA
NA
NA











ITEM 3.   LEGAL PROCEEDINGS





There are no pending legal proceedings to which the Registrant is a party, or of which any of its property is the subject other than routine litigation that is incidental to its business.





ITEM 4.   [RESERVED]










10


Part II





ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES







The Registrant’s common stock is traded on the Over The Counter Bulletin Board under the symbol “ABTO.”  The Registrant’s stock is considered thinly traded with low volume trades occurring infrequently.





Known stock trading prices:


High


Low2010First quarter

$
3.50


$
2.00Second quarter


3.50



2.12Third quarter


2.90



1.20Fourth quarter


2.25



1.502009First quarter

$
6.90


$
3.25Second quarter


6.00



3.26Third quarter


5.25



4.00Fourth quarter


4.90



2.60





As of December 31, 2010, there were 699 record holders of the Registrant’s Common Stock.





As a bank holding company that does not engage in separate business activities of a material nature, the Registrant’s ability to pay cash dividends depends upon the cash dividends the Registrants receives from the Bank.  As a state-chartered bank subject to North Carolina banking law, the Bank may not pay cash dividends to the Registrant unless the Bank's capital surplus is at least 50% of its paid-in capital.  Further, the Bank may only pay dividends out of retained earnings.  At December 31, 2010, the Bank had a retained deficit of $6,540,739.





See Item 12 of this report for disclosure regarding securities authorized for issuance under equity compensation plans.





ITEM 6.   SELECTED FINANCIAL DATA





Smaller reporting companies such as the Registrant are not required to provide the information required by this item




ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION








The following discussion describes our results of operations for 2010 as compared to 2009, and 2009 as compared to 2008, and also analyzes our financial condition as of December 31, 2010 as compared to December 31, 2009. 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 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 2010 and 2009 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 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 and other borrowings.





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, as well as several tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans.





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 expense, in the "Noninterest Income and Expense" section.





The following discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements.  We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.










11


Selected Financial Data





The following selected financial data for the years ended December 31, 2010 and 2009 is derived from the consolidated financial statements and other data of AB&T Financial Corporation.  The selected financial data should be read in conjunction with the Registrant’s financial statements, including the accompanying notes, included elsewhere herein.


2010


2009Income Statement Data:Interest income

$
7,020,976


$
7,101,540Interest expense


2,067,261



3,244,865Net interest income


4,953,715



3,856,675Provision for loan losses


3,346,727



3,478,372Net interest income after provision for loan losses


1,606,988



378,303Noninterest income


853,339



451,469Noninterest expense


5,843,384



5,457,206Loss before income taxes


(3,383,057
)


(4,627,434
)Income tax (benefit) expense


66,063



(1,740,916
)Net loss

$
(3,449,120
)

$
(2,886,518
)Accretion of preferred stock


24,312



22,758Preferred dividends paid


175,000



163,040Net loss available to common shareholders

$
(3,648,432
)

$
(3,072,316
)Balance Sheet Data:Assets

$
184,588,829


$
176,730,998Earning assets


175,054,372



170,234,924Securities (1)


19,023,896



6,444,594Loans (2)


148,289,512



139,974,913Allowance for loan losses


5,225,914



2,408,990Deposits


148,983,739



143,669,792Shareholders’ equity


21,354,902



24,893,706Per-Share Data:Loss per share – basic

$
(1.37
)

$
(1.15
)Loss per share – diluted


(1.37
)


(1.15
)Book value (period end)


6.72



8.03


______________________


(1)
Marketable securities are all available for sale and recorded at their fair market value. Nonmarketable securities totaling $1,267,280 and $1,413,180 are included for 2010 and 2009, respectively.  These securities are recorded at cost.


(2)Loans are stated at gross amounts before allowance for loan losses.





Basis of Presentation





The following discussion should be read in conjunction with the preceding “Selected Financial Data” and the Company’s Financial Statements and the Notes thereto and the other financial data included elsewhere in this Annual Report.  The financial information provided in certain tables 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 Financial Statements, the Notes thereto and the other financial data included elsewhere in this Annual Report.





General





AB&T Financial Corporation and Alliance Bank & Trust Company are headquartered in Gastonia, North Carolina.  The principal business activity of the Bank is to provide banking services to domestic markets, principally in the Gastonia and Shelby, North Carolina metropolitan area.  Our deposits are insured by the Federal Deposit Insurance Corporation.





In 2004, the Bank completed an initial public offering of its common stock in which it sold a total of 1,065,030 shares of common stock at $11.00 per share.  Proceeds of the offering were used to pay organizational costs and provide the initial capital for the Bank.





In January 2007, the Bank completed a secondary offering of its common stock in which it sold a total of 1,339,100 shares of its common stock at an offering price of $9.85 per share.  Gross proceeds from the offering were $13,190,135, less offering expenses of $928,111.  Proceeds from the offering were used to support the growth of the Bank.





On May 22, 2007, the shareholders of the Bank approved a plan of corporate reorganization under which the Bank became a wholly owned subsidiary of AB&T Financial Corporation, which was organized for that purpose by the Bank’s board of directors.  Pursuant to the reorganization, the Company issued all shares of its common stock in exchange for all of the outstanding common shares of the Bank on May 14, 2008.








12





The Company applied and was approved for participation in the U.S. Department of the Treasury “TARP” Capital Purchase Program in late 2008.  On January 23, 2009, the Company issued and sold to the Treasury (1) 3,500 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and (2) a warrant to purchase 80,153 shares of the Company’s common stock for an aggregate purchase price of $3.5 million in cash.  The shares are part of the “TARP” Capital Purchase Program, and the preferred stock qualifies as Tier 1 capital.





Results of Operations





For the year ended December 31, 2010, compared with year ended December 31, 2009


Net interest income increased $1,097,040 or 28.45% in 2010 from $3,856,675 in 2009.  Average loans decreased $2,767,489 or 1.97% from 2009 to 2010, the increase in net interest income was due primarily to a increase in net interest spread which increased from 2.18% in 2009 to 2.84% in 2010.  The components of interest income were from loans, including fees of $6,592,205, federal funds sold of $22,545, and investment income of $391,491, and interest earning deposits of $14,221.





The Company’s net interest spread and net interest margin were 2.84% and 3.02%, respectively, in 2010 compared to 2.18% and 2.47%, respectively, in 2009. This represents a 55 basis point (22.27%) increase in net interest margin, primarily derived from the decrease in the cost of funds from 2009.  Yields on earning assets decreased in 2010.  Yields on average earning assets decreased from 4.54% in 2009 to 4.28% in 2010 primarily as a result of a full year of depressed interest rates during 2010.  At December 31, 2010 approximately 55% of the Company’s loans were variable rate loans tied to the prime rate, which reached its current low point of 3.25% in December 2008.  Rates on average interest-bearing liabilities decreased from 2.37% in 2009 to 1.45% in 2010.





The provision for loan losses was $3,346,727 in 2010 compared to $3,478,372 in 2009.  The charges to the provision were primarily to maintain the allowance for loan losses at a level sufficient to cover possible future losses in the loan portfolio.  Impaired loans as of December 31, 2010 increased to $14,338,761 from $6,066,187 as of December 31, 2009.  Impaired loans as of December 31, 2010 were made up largely of credits secured by real estate.  All impaired loans are currently within various stages of workouts and management feels that loss provisions placed against these credits are appropriate at this time.





Noninterest income increased $401,870, or 89.01%, to $853,339 in 2010 from $451,469 in 2009.  The largest component of noninterest income was from the gain on sale of investment securities, which totaled $410,187. Service charges on deposit accounts was the second largest item which decreased $8,280 or 2.17%, to $374,047 for the year ended December 31, 2010, when compared to 2009.


Noninterest expense increased $386,178 or 7.08%, to $5,843,384 in 2010 from $5,457,206 in 2009.  The largest component of noninterest expense was salaries and employee benefits which increased $226,483, or 10.27%, to $2,431,812 for the year ended December 31, 2010.  Losses and write downs on the sale of other real estate decreased $539,380 or 48.40%, to $575,000 in 2010 from $1,114,380 in 2009 due to the slowdown in the decrease in the value of foreclosed real estate in the markets we serve.  The loss on sale of a real estate secured loan during 2010 added an additional $281,293 to noninterest expense. The sale of this loan to an independent investor, allowed the Company to forgo the costs of foreclosing on the property and additional time and disposition costs associated with its sale.  FDIC Insurance premiums increased $184,093 or 66.94% to $459,095 for the year ended December 31, 2010.  The increase in other operating expenses in 2010 was also due to an increase in other real estate expense which increased from $104,246 in 2009 to $375,897 in 2010 and an advertising expense which increased from $23,211 in 2009 from $86,519 in 2010.


Our net loss was $3,449,120 in 2010 compared to a net loss of $2,886,518 in 2009.  The net loss in 2010 is after the recognition of an income tax expense of $66,063, and the net loss in 2009 is after the recognition of an income tax benefit of $1,740,916.  The income tax expense and benefit was based on an effective tax rate of 2.01% and 37.62% for 2010 and 2009, respectively.  The decrease in the effective tax rates is due primarily to the valuation allowance on net operating loss carry forwards. The decrease in income and subsequent net loss for 2010 was driven by multiple factors based upon the economic environment in which the Bank is currently operating.  However, the primary factors in the decline of income continue to be losses associated with the loan portfolio and the extended margin compression associated with historically low levels of interest rates after 400 basis points of rate reductions by the Federal Reserve in 2008.  As the Bank has been able to re-price deposits to decrease our cost of funds, the yield on our loan portfolio is still depressed as approximately 55% of our loan portfolio is variable based on the prime rate.  A second factor was the provision for loan losses that the Bank added during the year along with the write down of other real estate owned of $575,000 to reflect changes in the value of real estate.





For the year ended December 31, 2009, compared with year ended December 31, 2008


Net interest income decreased $386,302 or 9.10% in 2009 from $4,242,977 in 2008.  Although the average loan portfolio increased $6,200,002 or 4.61% from 2008 to 2009, the decrease in net interest income was due primarily to a decrease in net interest spread which decreased from 2.25% in 2008 to 2.18% in 2009.  The components of interest income in 2009 were from loans, including fees of $6,763,059, federal funds sold of $11,433, and investment income of $267,240, and interest earning deposits of $59,808.





The Company’s net interest spread and net interest margin were 2.18% and 2.47%, respectively, in 2009 compared to 2.25% and 2.76%, respectively, in 2008.  Yields on most earning assets decreased in 2009.  Yields on average earning assets decreased from 5.72% in 2008 to 4.54% in 2009 primarily as a result of a full year of depressed interest rates during 2009.  At December 31, 2009 approximately 84% of the Company’s loans were variable rate loans tied to the prime rate, which reached its current low point of 3.25% at December 2008.  Yields on average interest-bearing liabilities decreased from 3.47% in 2008 to 2.37% in 2009.





The provision for loan losses was $3,478,372 in 2009 compared to $1,312,969 in 2008.  The charges to the provision were primarily to maintain the allowance for loan losses at a level sufficient to cover possible future losses in the loan portfolio.  Impaired loans as of December 31, 2009 increased to $6,066,187 from $5,043,946 as of December 31, 2008.  Impaired loans as of December 31, 2009 were made up largely of credits secured by real estate.  All credits were within various stages of workouts and management feels that loss provisions placed against these credits are appropriate at this time.


13





Noninterest income decreased $113,521, or 33.59%, to $451,469 in 2009 from $337,948 in 2008.  The largest component of noninterest income was from service charges on deposit accounts which increased $128,070 or 50.37%, to $382,327 for the year ended December 31, 2009, when compared to 2008 as a result of increased deposit account volume.





Noninterest expense increased $1,400,567, or 34.53%, to $5,457,206 in 2009 from $4,056,639 in 2008.  The largest component of noninterest expense was salaries and employee benefits which decreased $39,973, or 1.78%, to $2,205,329 for the year ended December 31, 2009.  Losses and write downs on the sale of other real estate increased $923,910 or 485.07%, to $1,114,380 in 2009 from $190,470 in 2008 due to the decrease in the value of foreclosed real estate.  The increase in other operating expenses in 2009 was largely due to an increase in legal and accounting fees which increased to $211,660 in 2009 from $126,976 in 2008.  The increase in legal and account fees was primarily a result of the unsuccessful merger with 1st Financial Services Corporation.





Our net loss was $2,886,518 in 2009 compared to a net loss of $513,797 in 2008.  The net loss in 2009 is after the recognition of an income tax benefit of $1,740,916, and the net loss in 2008 is after the recognition of an income tax benefit of $274,886.  The income tax benefit was based on an effective tax rate of 37.62% and 34.85% for 2009 and 2008, respectively.  The decrease in income and subsequent net loss for 2009 was driven by multiple factors based upon the economic environment in which the Bank is currently operating.  However, two primary factors in the decline of income were the historically low levels of interest rates after 400 basis points of rate reductions by the Federal Reserve in 2008.  This pushed net interest margins much lower than prior periods thus reducing net interest income, a primary source of the Bank’s revenue.  A second factor was the increase in provision for loan losses that the Bank added during the year along with the write down of other real estate owned of $1,034,897 to reflect changes in the value of real estate.  During the year ending December 31, 2009 the Bank added $3,478,372 to the provision, an increase of $2,165,403 or 165% over the prior year.




















































































14




Net Interest Income





General.  For an established financial institution, the largest component of net income is its net interest income, which is the difference between the income earned on assets and interest paid on deposits and borrowings used to support such assets.  Net interest income is determined by the yields earned on our interest-earning assets and the rates paid on our interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of our interest-earning assets and interest-bearing liabilities.  This net interest income divided by average interest-earning assets represents our net interest margin.





Average Balances, Income and Expenses and Rates.  The following tables set forth, for the periods indicated, certain information related to our average balance sheet and our average yields on assets and average costs of liabilities.  Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities and are then annualized.  Average balances have been derived from the daily balances throughout the period indicated.





For the year ended December 31, 2010


For the year ended December 31, 2009Average

Balance


Income/

Expense


Yield/

Rate


Average

Balance


Income/

Expense


Yield/

RateAssets:Earning Assets:Loans1

$
137,825,896



6,592,205



4.78
%

$
140,593,385


$
6,763,059



4.81
%Securities, taxable


12,964,681



386,902



2.98
%


5,085,032



262,961



5.17
%Federal funds sold


10,179,719



22,545



0.22
%


3,641,423



11,433



0.31
%Interest earning deposits


1,541,386



14,735



0.96
%


5,670,272



59,808



1.05
%Nonmarketable equity securities


1,365,746



4,589



0.34
%


1,403,078



4,279



0.30
%Total earning assets


163,877,428



7,020,976



4.28
%


156,393,190



7,101,540



4.54
%Cash items


2,220,629











7,172,835Premises and equipment


3,913,583











4,060,044Other assets


7,550,145











4,928,829Allowance for loan losses


(2,773,232
)










(2,319,974
)Total assets

$
174,788,553










$
170,234,924Liabilities:Interest-Bearing Liabilities:Interest-bearingtransaction accounts


5,758,500



46,382



0.81
%

$
4,818,359


$
46,145



0.96
%Savings and moneymarket deposits


30,000,288



438,187



1.46
%


20,921,873



247,372



1.18
%Time deposits


97,461,495



1,275,940



1.31
%


91,637,602



2,266,897



2.47
%Federal Home Loan Bank advances


9,249,315



304,332



3.29
%


18,834,411



676,754



3.59
%Other borrowings


242,181



2,420



1.00
%


957,510



7,697



0.80
%Total interest-bearing liabilities


142,711,779



2,067,261



1.45
%


137,169,755



3,244,865



2.37
%Demand deposits


7,022,385











5,818,891Accrued interest andother liabilities


230,289











242,999Shareholders’ equity


24,824,100











27,003,279Total liabilities and

shareholders’ equity

$
174,788,553










$
170,234,924Net interest spread










2.83
%










2.18
%Net interest income






4,953,715










$
3,856,675Net interest margin










3.02
%










2.47
%





(1) In 2010, the effect of fees collected on loans totaling $213,187 increased the annualized yield on loans by 0.15% from 4.63%.  The effect on the annualized yield on earning assets was an increase of 0.13% from 4.15%.  The effect on net interest spread and net interest margin was an increase of 0.13% and 0.14% from 2.70% and 2.89%, respectively. In 2010, the effect of nonaccrual loans averaging $8,415,744 decreased the annualized yield on loans by 0.31%.


(2) Net interest income divided by average earning assets.
















15


Net Interest Income- continued





Analysis of Changes in Net Interest Income.  Net interest income can also be analyzed in terms of the impact of changing rates and changing volume.  The following table reflects the extent to which changes in interest rates and changes in the volume of earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated.  Information on changes in each category attributable to (i) changes due to volume (change in volume multiplied by prior period rate), (ii) changes due to rates (changes in rates multiplied by prior period volume) and (iii) changes in rate/volume (change in rate multiplied by the change in volume) is provided as follows:





2010 compared to 2009Due to increase (decrease) inVolume


Rate


Volume/Rate


TotalInterest income:Loans

$
(133,126
)

$
(38,485
)

$
757


$
(170,854
)Securities, taxable (1)


323,019



(89,992
)


(109,086
)


123,941Federal funds sold and other


18,434



(41,624
)


(10,461
)


(33,651
)Total interest income


208,327



(170,101
)


(118,790
)


(80,564
)Interest expense:Interest-bearing deposits


345,578



(1,009,263
)


(136,220
)


(799,905
)Federal Home Loan Bank advances


(344,410
)


(57,042
)


29,030



(372,422
)Short-term borrowings


(5,750
)


1,871



(1,398
)


(5,277
)Total interest expense


(4,582
)


(1,064,434
)


(108,588
)


(1,177,604
)Net interest income

$
212,909


$
894,333


$
(10,202
)

$
1,097,040








2009 compared to 2008Due to increase (decrease) inVolume


Rate


Volume/Rate


TotalInterest income:Loans

$
381,423


$
(1,803,033
)

$
(83,180
)

$
(1,504,790
)Securities, taxable (1)


64,797



(39,658
)


(10,186
)


14,953Federal funds sold and other


(102,983
)


(178,985
)


63,659



(218,309
)Total interest income


343,237



(2,021,676
)


(29,707
)


(1,708,146
)Interest expense:Interest-bearing deposits


296,253



(1,426,180
)


(111,143
)


(1,241,070
)Federal Home Loan Bank advances


(33,925
)


13,210



(642
)


(21,357
)Short-term borrowings


(43,658
)


(45,091
)


29,332



(59,417
)Total interest expense


218,670



(1,458,061
)


(82,453
)


(1,321,844
)Net interest income

$
124,567



(563,615
)


52,746



(386,302
)


(1)Securities include nonmarketable equity securities.





Interest 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 repricing within a given period of time.  Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available for sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability.  Managing the amount of assets and liabilities repricing in this same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates.




























16


Net Interest Income- continued


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




Interest Sensitivity Analysis


(Dollars in thousands)

Within

Three

Months


After

Three

Through

Twelve

Months


One

Through

Five

Years


Greater

Than

Five

Years


TotalAssetsEarning assets:Loans

$
72,941


$
8,066


$
62,319


$
4,963


$
148,289Securities available for sale


492



56



8,048



9,161



17,757Nonmarketable securities


1,267



-



-



-



1,267Interest-bearing deposits in other banks


2,800



790



-



-



3,590Federal funds sold


4,151



-



-



-



4,151Total earning assets


81,651



8,912



70,367



14,124



175,054LiabilitiesInterest-bearing liabilities:Interest - bearing deposits:Demand deposits


6,774



-



-



-



6,774Savings and money market deposits


41,552



-



-



-



41,552Time deposits


17,327



66,720



9,386



-



93,433Federal Home Loan Bank advances


5,500



-



8,000



-



13,500Other borrowings


360



-



-



-



360Total interest-bearing liabilities


71,513



66,720



17,386



-



155,619Period gap


10,138



(57,808
)


52,981



14,124



19,435Cumulative gap


10,138



(47,670
)


5,311



19,435Ratio of cumulative gap to total earning assets


5.79
%


(27.23
%)


3.03
%


11.10
%





The above table reflects the balances of interest-earning assets and interest-bearing liabilities at the earlier of their repricing 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 deposits in other banks are reflected at their contractual maturity date.  Scheduled payment amounts of fixed rate amortizing loans are reflected at each scheduled payment date.  Scheduled payment amounts of variable rate amortizing loans are reflected at each scheduled payment date until the loan may be repriced contractually; the unamortized balance is reflected at that point.  Interest-bearing liabilities with no contractual maturity, such as savings deposits and interest-bearing transaction accounts, are reflected in the earliest repricing 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. Other borrowings, which consist of federal funds purchased and securities sold under agreements to repurchase, are reflected at their contractual maturity date. Federal Home Loan Bank advances are reflected at their contractual maturity dates.





We generally would benefit from increasing market rates of interest when we have an asset-sensitive gap position and generally would benefit from decreasing market rates of interest when we are liability-sensitive.  We are cumulatively asset sensitive.  However, our gap analysis is not a precise indicator of our interest sensitivity position.  The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally.  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.






















17


Provision and Allowance for Loan Losses





General.  We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem credits.  On a quarterly basis, our Board of Directors reviews and approves the appropriate level of our allowance for loan losses based upon management’s recommendations, the results of the internal monitoring and reporting system, and an analysis of economic conditions in our market.





Additions to the allowance for loan losses, which are expensed as the provision for loan losses on our income statement, are made periodically to maintain the allowance at an appropriate level based on management’s analysis of the risk inherent in the loan portfolio.  Loan losses and recoveries are charged or credited directly to the allowance.  The amount of the provision is a function of the level of loans outstanding, the level of nonperforming loans, the amount of loan losses actually charged against the reserve during a given period, and current and anticipated economic conditions.





Our allowance for loan losses is based upon judgments and assumptions about risk elements in the portfolio, future economic conditions, and other factors affecting borrowers.  The process includes identification and analysis of loss potential in various portfolio segments utilizing a credit risk grading process and specific reviews and evaluations of significant problem credits.  In addition, management monitors the overall portfolio quality through observable trends in delinquencies, charge-offs, and general and economic conditions in the service area.  The adequacy of the allowance for loan losses and the effectiveness of our monitoring and analysis system are also reviewed periodically by both the Federal and State banking regulators.





The December 31, 2010 allowance for loan losses, and, therefore indirectly the provision for loan losses for the year ended December 31, 2010, was determined based on the following specific factors though not intended to be an all inclusive list:




·
The impact of the ongoing depressed overall economic environment, including those within our geographic market,


·
The cumulative impact of the extended duration of this economic deterioration on our borrowers, in particular those with real estate related loans,


·
The declining asset quality trends in our loan portfolio,


·
The increasing trend in the historical loan loss rates within our loan portfolio,


·
The results of our internal and independent loan reviews during the third and fourth quarters of 2010 resulting in loan downgrades,


·
Our individual impaired loan analysis which identified continued downward trends in appraised values and market assumptions used to value real estate dependent loans.





Based on present information and an ongoing evaluation, we consider the allowance for loan losses to be adequate to meet presently known and inherent risks in the loan portfolio.  Our judgment about the adequacy of the allowance is based upon a number of assumptions about future events which we believe to be reasonable but which may or may not be accurate.  Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses in 2010 or that additional increases in the allowance for loan losses will not be required.  We do not allocate the allowance for loan losses to specific categories of loans but evaluate the adequacy on an overall portfolio basis utilizing a risk grading system.





The following table sets forth certain information with respect to our allowance for loan losses and the composition of charge-offs and recoveries for the years ended December 31, 2010 and 2009.





Allowance for Loan Losses


2010


2009Total loans outstanding at end of period

$
148,289,512


$
139,974,913Average loans outstanding

$
137,825,896


$
140,593,385Balance of allowance for loan losses at beginning of period

$
2,408,990


$
1,935,702Recoveries


181,929



135,830Charge-offs


(711,732
)


(3,140,914
)Provision for loan losses


3,346,727



3,478,372Balance for loan losses at end of year

$
5,225,914


$
2,408,990Allowance for loan losses to period end loans


3.52
%


1.72
%





In addition to loans charged-off in the ordinary course of business, included within loans charged-off for the year ended December 31, 2009 were $1.5 million relating to loans individually evaluated for impairment.  The determination was made to take partial charge-offs on certain collateral dependent loans during 2009 based on the status of the underlying collateral or our expectation that these loans would be foreclosed on, and we would take possession of the collateral.  The loan charge-offs primarily related to construction, acquisition, and development real estate projects that are not complete and will require additional investment to be completed.  Additionally, the loan charge-offs were recorded to write down the loans to the fair value of the collateral less cost to sell.










18





Nonperforming Assets


Nonperforming Assets.  As of December 31, 2010 and 2009, loans in nonaccrual status totaled approximately $10,257,000 and $6,001,000, respectively.  Loans past due ninety days or more and still accruing interest as of December 31, 2010 and 2009, were approximately $1,870,000 and $63,000, respectively. Assets held as other real estate totaled $6,402,263 and $2,050,272 in 2010 and 2009, respectively.





Our policy with respect to nonperforming assets is as follows.  Accrual of interest will be discontinued on a loan when we believe, after considering economic and business conditions and collection efforts that the borrower’s financial condition is such that the collection of interest is doubtful.  A delinquent loan will generally be placed in nonaccrual status when it becomes 90 days or more past due.  When a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid will be reversed and deducted from current earnings as a reduction of reported interest income. No additional interest will be accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.  When a problem loan is finally resolved, there may ultimately be an actual writedown or charge-off of the principal balance of the loan which would necessitate additional charges to earnings.





Potential Problem Loans.  At December 31, 2010, through our internal review mechanisms, we had identified $8,671,253 of criticized loans and $21,517,718 of classified loans.  The results of this internal review process are considered in determining our assessment of the adequacy of the allowance for loan losses.





Our criticized loans decreased from $8,742,720 at December 31, 2009 to $8,671,253 at December 31, 2010.  Total classified loans increased from $9,112,635 at December 31, 2009 to $21,517,717 at December 31, 2010.  The increase in classified loans as of period end is made up of loans primarily secured by real estate assets.  The Bank also has a credit facility to an operating entity closely tied to the residential building industry which has been negatively impacted by the deterioration in the construction industry. The Bank is currently working to resolve these criticized loans and minimize further negative impacts to the Bank.





Noninterest Income and Expense





Noninterest Income.  The largest component of noninterest income was service charges on deposit accounts.   The following table sets forth the principal components of noninterest income for the years ended December 31, 2010 and 2009.





2010


2009Service charges on deposit accounts

$
374,047


$
382,327Gain on the sale of securities


410,187



-Other income


69,105



69,142Total noninterest income

$
853,339


$
451,469





Noninterest Expense.Salaries and employee benefits comprised the largest component of noninterest expense and totaled $2,431,812 for the year ended December 31, 2010 as compared to $2,205,329 for the year ended December 31, 2009.  Loss on sale of other real estate decreased from 2009 by approximately $539,380 to $575,000.  Other operating expenses totaled $1,722,815 for the year ended December 31, 2010, compared to $1,472,188 for the year ended December 31, 2009.  The increase in other operating expenses was due primarily to the increase in professional fees and expenses associated with other real estate owned.





The following table sets forth the primary components of noninterest expense for the years ended December 31, 2010 and 2009.





2010


2009Salaries and employee benefits

$
2,431,812


$
2,205,329Net occupancy expense


197,111



196,708FDIC insurance


459,095



275,002Other insurance


28,640



38,099Advertising and marketing expense


86,519



23,212Office supplies, stationary and printing


92,657



100,429Data processing


146,204



134,147Professional fees


302,234



458,485Furniture and equipment expense


176,258



193,599Telephone


48,311



47,708Postage


48,210



63,621Other real estate expense


375,897



104,246Loss on sale of loans


281,293



-Loss on sale of other real estate


575,000



1,114,380Other


594,143



505,241Total noninterest expense

$
5,843,384


$
5,457,206










19


Balance Sheet Review





General.  At December 31, 2010, we had total assets of $184,488,829, consisting principally of $143,063,598 in net loans, $19,023,896 in investments, $4,150,670 in federal funds sold, $3,861,622 in net premises, furniture and equipment, and $3,924,571 in cash and due from banks compared to December 31, 2009 when the Bank had total assets of $176,730,998, an increase of 4.44%.  Total assets in 2009 consisted principally of $137,565,923 in net loans, $6,444,594 in investments, $16,729,661 in federal funds sold, $3,952,877 in net premises, furniture and equipment and $4,701,944 in cash and due from banks.





At December 31, 2010, the Bank had liabilities totaling $163,133,927, consisting principally of $148,983,739 in deposits, and $13,500,000 in advances from the Federal Home Loan Bank. This was an increase of 7.44% over the total liabilities at December 31, 2009 which totaled $151,837,292 and consisted principally of $143,669,792 in deposits, and $8,000,000 in advances from Federal Home Loan Bank.





At December 31, 2010 shareholders’ equity equaled $21,354,902, a decrease of 13.81% over the 2009 year ending equity balance of $24,893,706. This decrease is primarily due to the net loss for the year of $3,449,120 plus dividends on preferred stock of $175,000.





Loans.Loans are the largest category of earning assets and typically provide higher yields than the other types of earning assets.  Associated with the higher loan yields are the inherent credit and liquidity risks which we attempt to control and counterbalance.  Loans averaged $137,825,896 in 2010 as compared to $140,593,385 in 2009.  At December 31, 2010 total loans were $148,289,512 or 5.94% higher than the December 31, 2009 balance of $139,974,913.





The following table sets forth the composition of the loan portfolio by category at December 31, 2010 and 2009 and highlights our general emphasis on real-estate lending.





Composition of Loan Portfolio


(Dollars in thousands)2010                                                               2009


Amount


Percent of

Total


Amount


Percent of

TotalCommercial and industrial

$
19,351



13.05
%

$
15,220



10.87
%Real EstateMortgage


104,975



70.79
%


94,439



67.47
%Construction


23,068



15.56
%


29,444



21.04
%Consumer


896



0.60
%


872



0.62
%Total Loans

$
148,290



100.00
%

$
139,975



100.00
%Allowance for Loan Losses


(5,226
)






(2,409
)Net Loans

$
143,064






$
137,566





The largest component of loans in our loan portfolio is real estate mortgage loans.  At December 31, 2010 real estate mortgage loans totaled $104,975,000 and represented 70.79% of the total loan portfolio.  At December 31, 2009, real estate mortgage loans totaled $94,439,000 and represented 67.47% of the total loan portfolio.





In the context of this discussion, a “real estate mortgage loan” is defined as any loan, other than a loan for construction purposes, secured by real estate, regardless of the purpose of the loan.  It is common practice for financial institutions in the Bank’s market area to obtain a security interest in real estate whenever possible, in addition to any other available collateral.  This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component.





Residential 1 to 4 family real estate loans totaled $43,562,000 at December 31, 2010 and $46,869,000 at December 31, 2009.  Residential 1 to 4 family real estate loans consist of first and second mortgages on single or multi-family residential dwellings.  Nonresidential and construction real estate loans, which include commercial loans and other loans secured by multi- family properties and farmland, totaled $84,481,000 at December 31, 2010 and $77,014,000 at December 31, 2009.  The demand for residential and commercial real estate loans in the market remains strong due to the low interest rate environment.




Our loan portfolio also includes consumer loans.  At December 31, 2010 and 2009, consumer loans totaled $896,000 and $872,000 and represented 0.60% and 0.62% of the total loan portfolio, respectively.





Our loan portfolio reflects the diversity of our market.  Our home office is located in Gastonia, North Carolina and we have branches in Shelby and Kings Mountain, North Carolina.  We expect the area to remain stable with slower but continued growth in the near future.  The diversity of the economy creates opportunities for all types of lending.  We do not engage in foreign lending.





The repayment of loans in the loan portfolio as they mature is also a source of liquidity for us.  The following table sets forth our loans maturing within specified intervals at December 31, 2010.  The Company does not actively market loans for sale, but considers all options related to non-performing loans and potential reduction of criticized assets.






20





Loan Maturity Schedule and Sensitivity to Changes in Interest Rates


December 31, 2010

(Dollars in thousands)

One Year

or Less


Over One

Year

Through

Five Years


Over

Five Years


TotalCommercial and industrial

$
10,659,997


$
8,250,896


$
440,000


$
19,350,893Real estate


69,704,955



53,692,813



4,645,176



128,042,944Consumer and other


376,065



481,568



38,042



895,675$
80,741,017


$
62,425,277


$
5,123,218


$
148,289,512Loans maturing after one year with:Fixed interest rates














61,911,039Floating interest rates














5,637,456$
67,548,495




The information presented in the above table is based on the contractual maturities of the 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 their maturity.  Consequently, we believe this treatment presents fairly the maturity and repricing structure of the loan portfolio shown in the above table.





Investment Securities.  The investment securities portfolio is also a component of our total earning assets and includes securities available for sale and nonmarketable equity securities.  Total securities available for sale averaged $12,964,681 in 2010 as compared to $5,085,032 in 2009.  Total nonmarketable equity securities averaged $1,365,746 in 2010 as compared to $1,403,078 in 2009.  At December 31, 2010, the total securities portfolio was $19,023,896 as compared to $6,444,594 at December 31, 2009.





The following table sets forth the scheduled maturities and average yields of securities available for sale at December 31, 2010.  The table excludes nonmarketable equity securities.





Investment Securities Maturity Distribution and Yields





(Dollars in thousands)

After One but

Within Five Years


After Five but

Within Ten Years


Over Ten YearsAmount


Yield


Amount


Yield


Amount


YieldMortgage-backed securities

$
8,048



2.102%


$
4,412



1.804%


$
4,617



2.687%





Other attributes of the securities portfolio, including yields and maturities, are discussed above in “--Net Interest Income--- Interest Sensitivity.”





Short-Term Investments.Short-term investments, which consist primarily of federal funds sold, averaged $10,179,719 in 2010 and $3,641,423 in 2009.  At December 31, 2010 and 2009, short-term investments totaled $4,150,670 and $16,729,661, respectively.  These funds are an important source of our liquidity. Federal funds are generally invested in an earning capacity on an overnight basis.





Deposits.  Average total deposits totaled $140,242,668 during 2010 as compared to $123,196,725 during 2009.  At December 31, 2010, total deposits were $148,983,739 as compared to $143,669,792 at December 31, 2009.  Average interest-bearing liabilities totaled $142,711,779 in 2010 as compared to $137,169,755 in 2009.





The following table sets forth our deposits by category as of December 31, 2010 and 2009.


Deposits


2010


2009Amount


Percent of Deposits


Amount


Percent of DepositsNoninterest-bearing demand deposits

$
7,225,888



4.85
%

$
5,626,494



3.92
%NOW interest bearing deposits


6,773,623



4.55



4,759,708



3.31Savings and money market accounts


41,551,912



27.89



24,279,357



16.90Time deposits less than $100,000


85,690,137



57.51



102,069,318



71.04Time deposits $100,000 and over


7,742,179



5.20



6,934,915



4.83Total Deposits

$
148,983,739



100
%

$
143,669,792



100
%

















21


Core deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets.  Our core deposits were $141,241,560 at December 31, 2010.





Deposits, and particularly core deposits, have been a primary source of funding and have enabled us to successfully meet both our short-term and long-term liquidity needs.  We anticipate that such deposits will continue to be our primary source of funding in the future.  Our loan-to-deposit ratio was 99.53% and 97.43% at December 31, 2010 and 2009, respectively.  The maturity distribution of our time deposits over $100,000 at December 31, 2010, is set forth in the following table:




Maturities of Certificates of Deposit of $100,000 or More





(Dollars in thousands)

Within

Three

Months


After Three

Through Six

Months


After Six

Through

Twelve

Months


After

Twelve

Months


TotalCertificates of deposit of $100 or more

$
962


$
1,300


$
2,110


$
2,602


$
6,974








Time deposits over $100,000 in the aggregate amount of $962,000 had scheduled maturities within three months, and approximately $4,372,000, or 63%, had maturities within twelve months.  Large certificate of deposit customers tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits. The total certificates of deposit greater than $100 thousand in the above table does not include approximately $768 thousand in certificates greater than $100 thousand held in individual retirement accounts.





Federal Home Loan Bank Advances.Total advances from the Federal Home Loan Bank were $13,500,000 at December 31, 2010, compared to $8,000,000 at December 31, 2009.  The average of Federal Home Loan Bank advances outstanding was $9,249,315 during 2010, compared to $18,834,411 during 2009.  Advances from the Federal Home Loan Bank serve as a secondary funding source.  Advances from the Federal Home Loan Bank mature at different periods as discussed in the notes to the financial statements and are secured by the Bank’s investment in Federal Home Loan Bank stock and real estate loan portfolio.





Other Borrowings.  Other borrowings, which consist of federal funds purchased and securities sold under agreements to repurchase, averaged $242,181 in 2010 as compared to $957,510 in 2009 and totaled $360,143 at December 31, 2010 and $0 at December 31, 2009.  The maximum amount at any month end in 2010 was $5,070,000 and had a weighted average interest rate during the year of 1.00%.  The maximum amount at any month end in 2009 was $14,783,069 and had a weighted average interest rate during the year of 0.80%.  The repurchase agreements are collateralized by investment securities.





Capital





We are subject to various regulatory capital requirements administered by the state and 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 material effect on our 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.  Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.





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





We are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio.  Only the strongest institutions are allowed to maintain capital at the minimum requirement of 3%.  All others are subject to maintaining ratios 1% to 2% above the minimum.




We exceeded the regulatory capital requirements at December 31, 2010 and 2009 as set forth in the following table.


















22


Analysis of Capital and Capital Ratios


December 31,

2010


2009(Dollars in thousands)Tier 1 capital

$
19,823


$
23,688Tier 2 capital


1,865



1,750Total qualifying capital

$
21,688


$
25,438Risk-adjusted total assets (including off-balance sheet exposures)

$
146,226


$
171,360Tier 1 risk-based capital ratio


13.56
%


17.01
%Total risk-based capital ratio


14.83
%


18.26
%Tier 1 leverage ratio


11.26
%


13.82
%


Off-Balance Sheet Risk




Through our operations, 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, 2010, we had issued commitments to extend credit of $10,483,000 through various types of commercial lending arrangements.  All of these commitments to extend credit had variable rates.  The Company also had standby letters of credit which totaled $100,000.





The following table sets forth the length of time until maturity for unused commitments to extend credit at December 31, 2010.





(Dollars in thousands)

Within

One

Month


After One

Through

Three

Months


After Three

Through

Twelve

Months


Within

One

Year


Greater

Than

One Year


TotalUnused commitments to

extend credit

$
5,089


$
-


$
3,557


$
8,646


$
1,837


$
10,483





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.


Critical Accounting Policies





We have adopted various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements.  Our significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 2010 as filed with this annual report on Form 10-K. Certain accounting policies involve significant judgments and assumptions which have a material impact on the carrying value of certain assets and liabilities.  These accounting policies are considered to be critical accounting policies.  The judgments and assumptions used are based on historical experience and other factors, which are believed to be reasonable under the circumstances.  Because of the nature of the judgments and assumptions, actual results could differ from these judgments and estimates which could have a material impact on the carrying values of assets and liabilities and results of operations.





We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of the consolidated financial statements.  Refer to the portion of this discussion that addresses the allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.


Liquidity Management and Capital Resources




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 represents our ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities.  Without proper liquidity management, we would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities we serve.





Liquidity management is made more complex because different balance sheet components are subject to varying degrees of management control.  For example, the timing of maturities of the investment portfolio is very 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 nearly the same degree of control.  We also have the ability to obtain funds from various financial institutions should the need arise.  The amount available under such agreements was $16,000,000 at December 31, 2010.  In addition, we have the ability to borrow from the Federal Home Loan Bank.  Our available credit with the Federal Home Loan Bank was $14,290,000 at December 31, 2010.





Impact of Inflation





Unlike most industrial companies, the assets and liabilities of financial institutions such as the Bank are primarily monetary in nature.  Therefore, interest rates have a more significant effect on the Bank’s performance than do the effects of changes in the general rate of inflation and change in prices.  In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services.  As discussed previously, management seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.


23





Forward-Looking Information





Statements contained in this report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995.  Amounts herein could vary as a result of market and other factors.  Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Registrant with the Securities and Exchange Commission from time to time.  Such forward-looking statements may be identified by the use of such words as “believe”, “expect”, “anticipate”, “should”, “might”, “planned”, “estimated”, and “potential”.  Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Registrant that are subject to various factors which could cause actual results to differ materially form these estimates.  These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Bank’s operations, pricing, products and services.





ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Smaller reporting companies such as the Registrant are not required to provide the information required by this item.



























































































24


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA











AB&T FINANCIAL CORPORATION AND


ALLIANCE BANK & TRUST COMPANY





Consolidated Financial Statements




Years ended December 31, 2010 and 2009






















Table of Contents





Page No.Report of Independent Registered Public Accounting Firm
26Consolidated Balance Sheets
27Consolidated Statements of Operations
28Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income(Loss)
29Consolidated Statements of Cash Flows
30Notes to Consolidated Financial Statements
31-49

























































































25


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



































The Board of Directors


AB&T Financial Corporation


Gastonia, North Carolina








We have audited the accompanying consolidated balance sheets of AB&T Financial Corporation and subsidiary, (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in shareholders’ equity and comprehensive loss, and cash flows for the years then ended. These 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 auditing 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 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.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes 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 financial position of AB&T Financial Corporation and subsidiary, as of December 31, 2010 and 2009 and the related statements of operations, changes in shareholders’ equity and comprehensive loss, and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.











/s/Elliott Davis, PLLC





Elliott Davis, PLLC


Charlotte, North Carolina


March 31, 2011













































26
 AB&T FINANCIAL CORPORATION AND SUBSIDIARY


Consolidated Balance Sheets


December 31,Assets:

2010


2009Cash and cash equivalents:Cash and due from banks

$
3,924,571


$
4,701,944Federal funds sold


4,150,670



16,729,661Total cash and cash equivalents


8,075,241



21,431,605Time deposits with other banks


789,721



1,296,527Investments:Securities available for sale


17,756,616



5,031,414Nonmarketable equity securities


1,267,280



1,413,180Total investments


19,023,896



6,444,594Loans receivable


148,289,512



139,974,913Less allowance for loan losses


(5,225,914
)


(2,408,990
)Loans, net


143,063,598



137,565,923Premises, furniture and equipment, net


3,861,622



3,952,877Accrued interest receivable


676,898



566,318Other real estate owned


6,402,263



2,050,272Other assets


2,595,590



3,422,882Total assets

$
184,488,829


$
176,730,998Liabilities:Deposits:Noninterest-bearing transaction accounts

$
7,225,888


$
5,626,494Interest-bearing transaction accounts


6,773,623



4,759,708Savings and money market


41,551,912



24,279,357Time deposits $100,000 and over


7,742,179



6,934,915Other time deposits


85,690,137



102,069,318Total deposits


148,983,739



143,669,792Federal funds purchased and securities soldunder agreements to repurchase


360,143



-Advances from the Federal Home Loan Bank


13,500,000



8,000,000Accrued interest payable


66,787



55,169Other liabilities


223,258



112,331Total liabilities


163,133,927



151,837,292Commitments and contingencies (Notes 10, 12 and 19)Shareholders’ equity:Preferred stock, no par value, 1,000,000 shares authorized,issued and outstanding – 3,500 at December 31, 2010 and 2009


3,410,220



3,385,908Common stock, $1.00 par value, 11,000,000 shares authorized;and 2,678,205 shares issued at December 31, 2010 and 2009


2,678,205



2,678,205Treasury stock, at cost (10,000 shares at December 31, 2010 and 2009)


(55,600
)


(55,600
)Warrants


136,850



136,850Capital surplus


21,787,729



21,734,686Retained deficit


(6, 540,739
)


(3,066,700
)Accumulated other comprehensive income (loss)


(61,763
)


80,357Total shareholders’ equity


21,354,902



24,893,706Total liabilities and shareholders’ equity

$
184,488,829


$
176,730,998





The accompanying notes are an integral part of the consolidated financial statements
































27


AB&T FINANCIAL CORPORATION AND SUBSIDIARY





Consolidated Statements of Operations


For the years ended December 31, 2010 and 2009





2010


2009Interest income:Loans, including fees

$
6,592,205


$
6,763,059Securities available-for-sale, taxable andnonmarketable equity securities


391,491



267,240Federal funds sold


22,545



11,433Money Market deposit


514



23,480Time deposits with other banks


14,221



36,328Total interest income


7,020,976



7,101,540Interest expense:Time deposits $100,000 and over


192,714



484,951Other deposits


1,567,795



2,075,463Federal Home Loan Bank advances


304,332



676,754Other borrowings


2,420



7,697Total interest expense


2,067,261



3,244,865Net interest income


4,953,715



3,856,675Provision for loan losses


3,346,727



3,478,372Net interest income after provision for loan losses


1,606,988



378,303Noninterest income:Service charges on deposit accounts


374,047



382,327Gain on sale of available for sale securities


410,187



-Other


69,105



69,142Total noninterest income


853,339



451,469Noninterest expenses:Salaries and employee benefits


2,431,812



2,205,329Net occupancy


197,111



196,708Furniture and equipment


176,258



193,599FDIC Insurance premiums


459,095



275,002Loss on sale of loans


281,293



-Losses on sale and write down of other real estate


575,000



1,114,380Other operating


1,722,815



1,472,188Total noninterest expense


5,843,384



5,457,206Loss before income taxes


(3,383,057
)


(4,627,434
)Income tax expense (benefit)


66,063



(1,740,916
)Net loss

$
(3,449,120
)

$
(2,886,518
)Accretion of preferred stock to redemption value


24,312



22,758Preferred stock dividends


175,000



163,040Net loss available to common shareholders

$
(3,648,432
)

$
(3,072,316
)Losses per common share

Basic

$
(1.37
)

$
(1.15
)Diluted

$
(1.37
)

$
(1.15
)Average shares outstanding

Basic


2,668,205



2,668,205Diluted


2,668,205



2,668,205





The accompanying notes are an integral part of the consolidated financial statements



























28
 AB&T FINANCIAL CORPORATION AND SUBSIDIARY


Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Loss


For the years ended December 31, 2010 and 2009


(dollars in thousands except for share data)


Common Stock

Shares


Common Stock

Amount


Preferred

Stock

Shares


Preferred

Stock

Amount


Treasury

Stock


Warrants


Capital

Surplus


Retained

Earnings

(Deficit)


Accum-ulated Other

Compre-

hensive

Income

(Loss)


TotalBalance,

December 31, 2008


2,678,205


$
2,678



-


$
-


$
-


$
-


$
21,607


$
(158
)

$
66


$
24,194Net loss from  operations






























(2,886
)






(2,886
)Other comprehensive income

net of tax


































14



14Total Comprehensive loss






































(2,872
)Issuance of Preferred Stock










3,500



3,363























3,363Issuance of Common Stock Warrants






















137















137Accretion of preferred stock to redemption value














23















(23
)






-Dividends, preferred


























(142
)










(142
)Purchase of Treasury Stock (10,000 shares)


















(56
)


















(56
)Stock-based employee

compensation


























269











269Balance

December 31, 2009


2,678,205



2,678



3,500



3,386



(56
)


137



21,734



(3,067
)


80



24,893Net  loss from operations






























(3,449
)






(3,349
)Other comprehensive loss

net of tax


































(142
)


(142
)Total Comprehensive loss






































(3,491
)Accretion of preferred stock to redemption value














24















(24
)






-Dividends, preferred


























(175
)










(175
)Stock-based employee

compensation


























228











228Balance

December 31, 2010


2,678,205


$
2,678



3,500


$
3,410


$
(56
)

$
137


$
21,787


$
(6,540
)

$
(62
)

$
21,355





The accompanying notes are an integral part of the consolidated financial statements


29





AB&T FINANCIAL CORPORATION AND SUBSIDIARY




Consolidated Statements of Cash Flows


For the years ended December 31, 2010 and 2009





Cash flows from operating activities:

2010


2009Net loss

$
(3,449,120
)

$
(2,886,518
)Adjustments to reconcile net loss to net cash provided (used) by operating activities:Provision for loan losses


3,346,727



3,478,372Depreciation expense


169,309



202,934Discount accretion and premium amortization


106,465



(9,627
)Loss on sale of other real estate


7,108



79,545Loss on write down of other real estate


566,140



1,034,917Loss on sale of loans


281,293



-Gain on sale of securities available for sale


(410,187
)


-Deferred income tax benefit


(31,772
)


(1,486,296
)Increase in accrued interest receivable


(110,580
)


(47,814
)Increase (decrease) in accrued interest payable


11,618



(53,874
)Increase (decrease) in other assets


949,736



(780,979
)Increase in other liabilities


110,927



61,527Stock-based compensation expense


227,436



269,175Net cash provided by operating activities


1,775,100



(138,638
)Cash flows from investing activities:Purchases of securities available for sale


(25,291,202
)


(1,045,600
)Calls, paydowns, and maturities of securities available for sale


3,092,599



685,764Purchases of nonmarketable equity securities


-



(41,900
)Proceeds from sale of nonmarketable equity securities


145,900



-Proceeds from sale of securities available for sale


9,544,331



-Maturities (purchases) of time deposits with other banks, net


506,806



(36,328
)Net increase in loans receivable


(16,323,908
)


(4,576,458
)Purchases of premises, furniture and equipment


(78,054
)


(26,324
)Proceeds from sale of furniture and equipment


-



28,238Capitalized other real estate expenses


(236,908
)


(133,184
)Proceeds from sale of loans


1,593,994



-Proceeds from sale of other real estate


915,888



531,515Net cash used by investing activities


(26,130,554
)


(4,614,277
)Cash flows from financing activities:Net increase in deposits


5,313,947



22,351,774Increase (decrease) in federal funds purchased


360,143



(1,068,339
)Increase (decrease) in Federal Home Loan Bank advances


5,500,000



(15,570,000
)Proceeds from issuance of preferred stock, net


-



3,363,150Preferred dividends paid


(175,000
)


(141,944
)Purchase of Treasury stock


-



(55,600
)Proceeds from issuance of stock warrants


-



136,850Net cash provided by financing activities


10,999,090



9,015,891Net increase (decrease) in cash and cash equivalents


(13,356,364
)


4,262,976Cash and cash equivalents, beginning of year


21,431,605



17,168,629Cash and cash equivalents, end of year

$
8,075,241


$
21,431,605





Supplemental disclosure of cash flow information:


Transfer of loans to real estate acquired in settlement of loans

$
5,604,219


$
1,266,727Interest paid

$
2,055,643


$
3,298,739Taxes paid

$
-


$
-





The accompanying notes are an integral part of the consolidated financial statements
















30





Notes to Consolidated Financial Statements










NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Organization - AB&T Financial Corporation (the “Company”), was incorporated under the laws of the State of North Carolina on June 25, 2007. On May 14, 2008, the Company became the sole owner of all the shares of the capital stock of Alliance Bank & Trust Company (the “Bank”). Alliance Bank & Trust Company is a state-chartered bank which was organized and incorporated under the laws of the State of North Carolina in September 2004. The Bank is not a member of the Federal Reserve System. The Bank commenced operations on September 8, 2004. The Company and the Bank are collectively referred to as the “Company” unless otherwise noted.





The Bank is headquartered in Gastonia, North Carolina and currently conducts business in two North Carolina counties through four full service branch offices. The principal business activity of the Bank is to provide commercial banking services to domestic markets, principally in Gaston and Cleveland counties. As a state-chartered bank, the Bank is subject to regulation by the North Carolina Office of the Commissioner of Banks and the Federal Deposit Insurance Corporation. The Company is also regulated, supervised and examined by the Federal Reserve. The consolidated financial statements include the accounts of the parent company and its wholly-owned subsidiary after elimination of all significant intercompany balances and transactions.





Management’s Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period.  Actual results could differ from those estimates.





Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans, including valuation allowances for impaired loans, and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans.  In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties.  Management must also make estimates in determining the estimated useful lives and methods for depreciating premises and equipment.





While management uses available 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 Company’s allowance for losses on loans.  Such agencies may require the Company 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.





Concentrations of Credit Risk - Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amounts due from banks.





The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily in Gaston and Cleveland counties in North Carolina.  The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers.  Additionally, management is not aware of any concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions.





In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g., principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios.  Management has determined that there is no concentration of credit risk associated with its lending policies or practices.  Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e., balloon payment loans).  These loans are underwritten and monitored to manage the associated risks.  Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.





The Company’s investment portfolio consists principally of obligations of the United States, and its agencies or its corporations.  In the opinion of management, there is no concentration of credit risk in its investment portfolio.  The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.





Time Deposits with Other Banks - Time deposits with other banks include the bank’s investments in certificates of deposit with a maturity date greater than 90 days.  Because the maturity date is greater than 90 days, these time deposits are not included in cash and cash equivalents.





Securities Available-for-Sale - Securities available-for-sale are carried at amortized cost and adjusted to estimated market value by recognizing the aggregate unrealized gains or losses in a valuation account.  Aggregate market valuation adjustments are recorded in shareholders' equity net of deferred income taxes.  Reductions in market value considered by management to be other than temporary are reported as a realized loss and a reduction in the cost basis of the security. The adjusted cost basis of investments available-for-sale is determined by specific identification and is used in computing the gain or loss upon sale.


31


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued





Nonmarketable Equity Securities - Nonmarketable equity securities include the cost of the Company's investment in the stock of Federal Home Loan Bank and Community Bankers Bank.  These stocks have no quoted market value and no ready market for them exists.  Investment in the Federal Home Loan Bank is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to collateralize such borrowings.  At December 31, 2010 and 2009, the Company's investment in Federal Home Loan Bank stock was $1,222,100 and $1,368,000, respectively.  At December 31, 2010 and 2009, investment in Community Bankers Bank was $45,180.





Loans Receivable - Loans are stated at their unpaid principal balance.  Interest income is computed using the simple interest method and is recorded in the period earned.





When serious doubt exists as to the collectibility of a loan or when a loan becomes contractually 90 days past due as to principal or interest, interest income is generally discontinued unless the estimated net realizable value of collateral exceeds the principal balance and accrued interest.  When interest accruals are discontinued, income earned but not collected is reversed.





The Company identifies impaired loans through its normal internal loan review process.  Loans on the Company’s problem loan watch list are considered potentially impaired loans.  These loans are evaluated in determining whether all outstanding principal and interest are expected to be collected at their contractual terms.  Loans are not considered impaired if a minimal payment delay occurs and all amounts due, including accrued interest at the contractual interest rate for the period of delay, are expected to be collected consistent with the contract.  At December 31, 2010 and 2009, loans in impaired status totaled $14,338,761 and $6,066,187, respectively.





Allowance for Loan Losses - An allowance for loan losses is maintained at a level deemed appropriate by management to provide adequately for known and inherent losses in the loan portfolio.  The allowance is based upon past loan loss experience, current economic conditions that may affect the borrowers' ability to pay, and the underlying collateral value of the loans.  Loans which are deemed to be uncollectible are charged off and deducted from the allowance.  The provision for loan losses and recoveries of loans previously charged off are added 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 light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.





The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of the loan. The general component covers nonclassified loans and is based upon historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.




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 in accordance with 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 of 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. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective rate, the loan’s obtainable market price, 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 Bank does not separately identify individual consumer or residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.





Premises, Furniture and Equipment - Premises, furniture and equipment are stated at cost, less accumulated depreciation.  The provision for depreciation is computed by the straight-line method, based on the estimated useful lives for buildings of 40 years and furniture and equipment of 5 to 10 years.  Leasehold improvements are amortized over the life of the leases.  The cost of assets sold or otherwise disposed of and the related allowance for depreciation are eliminated from the accounts and the resulting gains or losses are reflected in the income statement when incurred. Maintenance and repairs are charged to current expense. The costs of major renewals and improvements are capitalized.





Other Real Estate Owned - Other real estate owned includes real estate acquired through foreclosure.  Other real estate owned is initially recorded at fair value and then carried at the lower of cost (principal balance of the former loan plus costs of improvements) or estimated fair value.  Any write-downs at the dates of foreclosure are charged to the allowance for loan losses. Expenses to maintain such assets and subsequent valuation writedowns are included in other expenses.  Gains and losses on disposal are included in noninterest income or expense.





Securities Sold Under Agreements to Repurchase - The Bank enters into sales of securities under agreements to repurchase.  Fixed-coupon repurchase agreements are treated as financing, with the obligation to repurchase securities sold being reflected as a liability and the securities underlying the agreements remaining as assets.


32


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued


Income Taxes - Income taxes are the sum of amounts currently payable to taxing authorities and the net changes in income taxes payable or refundable in future years.  Income taxes deferred to future years are determined utilizing a liability approach.  This method gives consideration to the future tax consequences associated with differences between financial accounting and tax bases of certain assets and liabilities which are principally the allowance for loan losses, depreciable premises and equipment, and the Company’s net operating loss carryforward.





Advertising Expense - Advertising and public relations costs are expensed as incurred.  External costs incurred in producing media advertising are expensed the first time the advertising takes place.  External costs relating to direct mailing costs are expended in the period in which the direct mailings are sent.  Advertising and public relations costs of approximately $86,500 and $23,000 were included in the Company's results of operations for 2010 and 2009, respectively.





Stock-Based Compensation- Compensation expense is recognized as salaries and benefits in the consolidated statement of operations. In calculating the compensation expense for stock options, the fair value of options granted is estimated as of the date granted using the Black-Scholes option pricing model.  There were no options granted in 2009 or 2010.





Earnings (Losses) Per Share - Basic earnings (losses) per share represents income available to shareholders divided by the weighted-average number of common shares outstanding during the period.  Dilutive earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued.  Potential common shares that may be issued by the Company relate to outstanding stock options and warrants and are determined using the treasury stock method.





Comprehensive Income (Loss) - Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists of unrealized gains and losses on investment securities available for sale, net of taxes. Comprehensive income (loss) is presented in the statements of stockholders’ equity and comprehensive income (loss).





The approximate components of other comprehensive income and related tax effects are as follows for the years ended December 31, 2010 and 2009:





2010


2009Unrealized gains on securities available for sale

$
178,000


$
22,800Reclassification adjustment for gains realized in net income


(410,000
)


-Net unrealized gains on securities


(232,000
)


22,800Tax effect


90,000



(8,800
)Net of tax amount

$
(142,000
)

$
14,000





Statement of Cash Flows - For purposes of reporting cash flows in the financial statements, the Company considers certain highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.  Cash equivalents include amounts due from banks and federal funds sold.  Generally, federal funds are sold for one-day periods.





Off-Balance Sheet Financial Instruments - In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit.  These financial instruments are recorded in the financial statements when they become payable by the customer. In preparing these financial statements, the Company has evaluated events and transactions through our filing date for potential recognition or disclosure in the Consolidated Financial Statements.





Recent Accounting Pronouncements - The following is a summary of recent authoritative pronouncements that may affect accounting, reporting, and disclosure of financial information by the Company:




In January, 2010, guidance was issued to alleviate diversity in the accounting for distributions to shareholders that allow the shareholder to elect to receive their entire distribution in cash or shares but with a limit on the aggregate amount of cash to be paid.  The amendment states that the stock portion of a distribution to shareholders that allows them to elect to receive cash or shares with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance.  The amendment is effective for interim and annual periods ending on or after December 15, 2009 and had no impact on the Company’s financial statements.





Also in January, 2010, an amendment was issued to clarify the scope of subsidiaries for consolidation purposes.  The amendment provides that the decrease in ownership guidance should apply to (1) a subsidiary or group of assets that is a business or nonprofit activity, (2) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture, and (3) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity.  The guidance does not apply to a decrease in ownership in transactions related to sales of in substance real estate or conveyances of oil and gas mineral rights.  The update is effective for the interim or annual reporting periods ending on or after December 15, 2009 and had no impact on the Company’s financial statements.




In April 2010, guidance was issued related to accounting for acquired troubled loans that are subsequently modified.    The guidance provides that if these loans meet the criteria to be accounted for within a pool, modifications to one or more of these loans does not result in the removal of the modified loan from the pool even if the modification would otherwise be considered a troubled debt restructuring. The pool of assets in which the loan is included will continue to be considered for impairment.  The amendments do not apply to loans not meeting the criteria to be accounted for within a pool. These amendments are effective for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. These amendments had no impact on the financial statements.




33


NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –continued


In July 2010, the Receivables topic of the ASC was amended to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments will require the allowance disclosures to be provided on a disaggregated basis.  The Company is required to begin to comply with the disclosures in its financial statements for the year ended December 31, 2010.  Disclosures about Troubled Debt Restructurings required by the Update have been deferred by FASB in a proposed Update.  See Note. 4.




On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services industry.  The Dodd-Frank Act includes several provisions that will affect how community banks, thrifts, and small bank and thrift holding companies will be regulated in the future.  Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage, and impose new capital requirements on bank and thrift holding companies.  The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks.  Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting originator compensation, minimum repayment standards, and pre-payments.  Management is actively reviewing the provisions of the Dodd-Frank Act and assessing its probable impact on the Company’s business, financial condition, and results of operations.





In August 2010, two updates were issued to amend various SEC rules and schedules pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies and based on the issuance of SEC Staff Accounting Bulletin 112.  The amendments related primarily to business combinations and removed references to “minority interest” and added references to “controlling” and “noncontrolling interests(s)”.  The updates were effective upon issuance but had no impact on the Company’s financial statements.





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





Risks and Uncertainties – In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory.  There are three main components of economic risk:  interest rate risk, credit risk and market risk.  The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different basis than its interest-earning assets.  Credit risk is the risk of default on the Company’s loan portfolio that results from borrower’s inability or unwillingness to make contractually required payments.  Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.





The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period.  The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions from the regulators’ judgments based on information available to them at the time of their examination.





Reclassifications – Certain captions and amounts in the 2009 consolidated financial statements were reclassified to conform with the 2010 presentation.





Subsequent Events – In preparing these financial statements, the Company has evaluated events and transactions through our filing date for potential recognition or disclosure in the Consolidated Financial statements.  See Note 22.





NOTE 2 – CASH AND DUE FROM BANKS





The Company is required to maintain cash balances with its correspondent banks to cover all cash letter transactions.  At December 31, 2010 and 2009, the requirement was met by the cash balance in the vault.





NOTE 3 – INVESTMENT SECURITIES





The amortized cost and estimated fair values of securities available-for-sale were:





Gross UnrealizedAmortized

Cost


Gains


Losses


Estimated

Fair ValueDecember 31, 2010Mortgage-backed securities

$
17,857,784


$
40,753


$
141,921


$
17,756,616Total

$
17,857,784


$
40,753


$
141,921


$
17,756,616December 31, 2009U.S. Government Agencies

$
1,042,373


$
-


$
2,782


$
1,039,591Mortgage-backed securities


3,857,417



155,987



21,581



3,991,823Total

$
4,899,790


$
155,987


$
24,363


$
5,031,414







34


NOTE 3 – INVESTMENT SECURITIES -continued


The following is a summary of maturities of securities available-for-sale as of December 31, 2010.  The amortized cost and estimated fair values are based on the contractual maturity dates.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.




Securities

Available-for-SaleAmortized

Costs


Estimated

Fair ValueDue in one year or less

$
681,351


$
678,868Due after one year but within five years


8,121,936



8,048,378Due after five years but within ten years


4,408,890



4,412,366Due after ten years


4,645,607



4,617,004$
17,857,784


$
17,756,616





The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2010 and 2009:





Less than

twelve months


Twelve months

or more


TotalDecember 31, 2010

Fair value


Unrealized

Losses


Fair value


Unrealized

Losses


Fair value


Unrealized

LossesMortgage-backed securities

$
12,247,383


$
141,921


$
-


$
-


$
12,247,383


$
141,921Total

$
12,334,411


$
141,921


$
-


$
-


$
12,334,441


$
141,921December 31, 2009Mortgage-backed securities

$
1,229,796


$
21,581


$
-


$
-


$
1,229,796


$
21,581U.S. Government agencies


1,039,591



2,782



-



-



1,039,591



2,782Total

$
2,269,387


$
24,363


$
-


$
-


$
2,269,387


$
24,363





Securities classified as available-for-sale are recorded at fair market value.   None of the unrealized losses consisted of securities in a continuous loss position for twelve months or more at December 31, 2010 or 2009.  Of the securities in an unrealized loss position as of December 31, 2010, the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost.  The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.





At December 31, 2010 and 2009, investment securities with a book value of $278,544 and $341,937 and a market value of $283,288 and $356,584, respectively, were pledged as collateral for the securities sold under agreements to repurchase. Proceeds from available for sale securities totaled $9,544,331 resulting in gross gains of $410,187. There were no sales of investments for the year ended December 31, 2009.




NOTE 4 - LOANS RECEIVABLE





Major classifications of loans receivable at December 31, 2010 and 2009 are summarized as follows:





2010


2009Real estate – construction

$
23,068,291


$
29,444,000Real estate –commercial


61,412,742



47,570,000Real estate – residential


43,561,911



46,869,000Commercial and industrial


19,350,893



15,220,000Consumer and other


895,675



871,913Total gross loans

$
148,289,512


$
139,974,913
















35


NOTE 4 - LOANS RECEIVABLE -continued


As of December 31, 2010 and 2009, loans individually evaluated and considered impaired were as follows:





December 31,2010


2009Total loans considered impaired at period end

$
14,338,761


$
6,066,187Loans considered impaired for

which there is a related allowancefor loan loss:Outstanding loan balance


11,489,267



4,972,626Related allowance established


2,783,404



863,742Loans considered impaired for which

no related allowance for loan losswas established


2,849,495



1,093,561Average annual investment in impaired loans


14,370,750



9,365,634Interest income recognized on impaired loans during the period of impairment

Cash basis

$
219,029


$
183,264





The following table represents the balance in the allowance for loan losses and recorded investment in loans by portfolio segment on impairment method as of December 31, 2010:





Real EstateConstruction


Commercial


Residential


Commercial & Industrial


ConsumerAllowance for loan and lease losses:Ending balance attributable to loans:Individually evaluated for impairment

$
823,975


$
637,723


$
878,725


$
442,981


$
-Loans:Loans individually evaluated for impairment

$
5,048,519


$
3,540,487


$
4,331,447


$
1,418,308


$
-Loans collectively evaluated for impairment

$
18,019,772


$
57,872,255


$
39,230,464


$
17,932,585


$
895,675








As of December 31, 2010 and 2009, loans in nonaccrual status were approximately $10,257,000 and $6,001,000, respectively.  Loans ninety days or more past due and still accruing interest as of December 31, 2010 and 2009, were approximately $1,869,000 and $63,000, respectively.





The following table presents loans individually evaluated for impairment as of December 31, 2010:





Unpaid

Principal

Balance


Recorded

Investment


Allowance

Allocated


Average

Recorded

Investment


Interest

Income

RecognizedWith no related allowance recorded:Commercial and industrial

$
49,555


$
49,555


$
-


$
49,765


$
-Real estate:Construction


2,494,797



2,494,797



-



2,494,797



-Mortgage – residential


-



-



-



-Mortgage – commercial


304,395



304,395



-



305,143With an allowance recorded:Commercial, and industrial


1,368,753



1,368,753



442,981



1,371,776



12,446Real estate:Construction


2,553,722



2,553,722



823,975



2,554,097



16,327Mortgage – residential


5,086,632



4,331,447



878,725



4,356,514



147,806Mortgage – commercial


3,236,092



3,236,092



637,723



3,238,658



42,450Total

$
15,093,946


$
14,338,761


$
2,783,404


$
14,370,750


$
219,029



















36


NOTE 4 - LOANS RECEIVABLE -continued


Transactions in the allowance for loan losses for the years ended December 31, 2010 are summarized as follows:





Real EstateConstruction


Commercial


Residential


Commercial and Industrial


Consumer


Unallocated


TotalBalance, beginning of year

$
457,357


$
251,634


$
444,670


$
311,216


$
16,557


$
927,556


$
2,408,990Provision charged to

operations


830,253



1,280,752



1,489,690



382,959



64,434



(701,361
)


3,346,727Recoveries


-



-



122,590



3,572



55,767



-



181,929Charge-offs


(154,430
)


-



(366,100
)


(61,120
)


(130,082
)


-



(711,732
)Balance, end of year

$
1,133,180


$
1,532,386


$
1,690,850


$
636,627


$
6,676


$
226,195


$
5,225,914





Transactions in the allowance for loan losses for the years ended December 31, 2009 are summarized as follows:


2009Balance, beginning of year

$
1,935,702Provision charged to operations


3,478,372Recoveries


135,830Charge-offs


(3,140,914
)Balance, end of year

$
2,408,990






Nonaccrual


Accruing loans delinquent for 90 days or moreCommercial and industrial

$
1,207,596


$
433,325Real estate:Construction


1,285,564



24,575Mortgage – residential


4,223,726



1,056,621Mortgage – commercial


3,540,488



349,867Consumer


-



4,963Total

$
10,257,374


$
1,869,351





The following table presents the aging of the recorded investment in past due loans and leases as of December 31, 2010:


30 – 89 Days Past Due


Greater than 90 Days Past Due


Nonaccrual Loans


Total Past Due


Loans Not Past Due


TotalCommercial and industrial

$
148,926


$
433,325


$
1,207,596


$
1,789,847


$
14,561,046


$
19,350,893Real estate:Construction


2,469,828



24,575



1,285,564



3,779,967



19,288,324



23,068,291Mortgage - residential


837,087



1,056,621



4,223,726



6,117,434



37,444,477



43,561,911Mortgage - commercial


642,994



349,867



3,540,488



4,533,349



56,879,393



61,412,742Consumer


22,326



4,963



-



27,289



868,386



895,675Total

$
4,121,161


$
1,869,351


$
10,257,374


$
16,247,886


$
132,041,626


$
148,289,512
  Restructured loans included in nonperforming assets at December 31, 2010 consisted of 5 commercial real estate loans with a combined principal balance of $1,226,680, Concessions made to the original contractual terms of these loans consisted primarily of the deferral of interest and/or principal payments due to a weakening of the borrowers’ financial condition. The principal balances on these restructured loans were matured and/or in default at the time of restructure and we have no commitments to lend additional funds to any of these borrowers. There were $9,065,817 of restructured loans still accruing interest at December 31, 2010. This total consisted of $8,677,113 in 15 construction and/or commercial real estate loans less than 30 days delinquent and $388,704 in 2 commercial real estate loans that had matured and were than 90 days delinquent. At December 31, 2009 there were no restructured loans to report.





The Company categorizes 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 Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $0.5 million or $1.0 million, depending on loan type, and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis with the most recent analysis performed at December 31, 2010. The Company uses the following definitions for risk ratings:


37


NOTE 4 - LOANS RECEIVABLE -continued


Special Mention. Loans classified as special mention, while still adequately protected by the borrower’s capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management’s close attention so as to avoid becoming undue or unwarranted credit exposures.





Substandard. Loans classified as substandard are inadequately protected by the borrower’s current financial condition and payment capability or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.





Doubtful.Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.





Loss.Loans classified as loss are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Losses are taken in the period in which they surface as uncollectible.





Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans and leases. As of December 31, 2010, and based on the most recent analysis performed, the risk category of loans and leases is as follows:





Pass


Special

Mention


Substandard


Doubtful


Loss


TotalCommercial and industrial

$
17,317,162


$
624,237


$
524,303


$
885,191


$
-


$
19,350,893Real estate:Construction


16,578,691



2,395,478



3,618,125



475,997



-



23,068,291Mortgage - residential


33,862,736



2,269,002



6,269,672



1,160,501



-



43,561,911Mortgage - commercial


49,470,261



3,367,398



8,575,083



-



-



61,412,742Consumer


871,691



15,138



8,846



-



-



895,675Total

$
118,100,541


$
8,671,253


$
18,996,029


$
2,521,689


$
-


$
148,289,512





At December 31, 2010, we do not have loans defined as subprime.






















































38


NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT





Premises, furniture and equipment consisted of the following at December 31, 2010 and 2009:


2010


2009Buildings

$
2,841,763


$
2,834,862Land


1,022,587



1,014,787Leasehold and land improvements


104,450



104,450Furniture and equipment


670,683



620,117Software


79,806



63,373Total


4,719,289



4,637,589Less, accumulated depreciation


(857,667
)


(684,712
)Premises, furniture and equipment, net

$
3,861,622


$
3,952,877





Depreciation expense for the years ended December 31, 2010 and 2009 was $169,309and $202,934, respectively.





NOTE 6 - DEPOSITS





At December 31, 2010, the scheduled maturities of certificates of deposit and individual retirement accounts were as follows:




Maturing In:

Amount2011

$
83,939,4692012


6,985,0402013


999,2472014


39,6792015


1,468,881Total

$
93,432,316








NOTE 7 - FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE





The Company had federal funds purchased and securities sold under agreements to repurchase which generally mature within one day.  At December 31, 2010, and 2009 the Company had $360,143 and $0 securities sold under agreements to repurchase.  At December 31, 2010 and 2009, there were no federal funds purchased.





NOTE 8 - ADVANCES FROM THE FEDERAL HOME LOAN BANK





Advances from the Federal Home Loan Bank consisted of the following at December 31, 2010 and 2009:





Description

Interest

Rate


2010


2009Fixed rate advances maturing:November 3, 2014


2.84%


$
8,000,000


$
8,000,000Variable rate advances maturing:May 5, 2011

Variable



5,500,000$
13,500,000


$
8,000,000








Scheduled principal reductions of Federal Home Loan Bank advances are as follows:





2011

$
5,500,0002014


8,000,000Total

$
13,500,000





As collateral, the Company has pledged first mortgage loans on one to four family residential loans totaling $26,491,268, multifamily loans totaling $7,039,816 and commercial real estate loans totaling $65,348,272 at December 31, 2010 (see Note 4).  Certain advances are subject to prepayment penalties.













39


NOTE 9 - INCOME TAXES





Income tax expense (benefit) for the years ended December 31, 2010 and 2009 is summarized as follows:


2010


2009Current portionFederal

$
98,534


$
(254,620
)State


-



-Total current


98,534



(254,620
)Deferred income tax expense (benefit)


(1,244,869
)


(1,486,296
)Change in valuation allowance


1,212,398



-Income tax expense (benefit)

$
66,063


$
(1,740,916
)






The gross amounts of deferred tax assets and deferred tax liabilities are as follows at December 31, 2010 and 2009:





2010


2009Deferred tax assets:Allowance for loan losses

$
1,621,584


$
802,489Organization and start-up costs


-



85,287Nonaccrual interest on loans


218,166



99,069Net operating loss carryforward


873,318



645,103Stock compensation


210,414



160,429Unrealized loss on securities


39,232



-Other real estate owned


448,371



289,724Other


16,528



5,599Total deferred tax assets


3,427,613



2,087,700Less valuation allowance


(1,212,398
)


-2,215,215



2,087,700Deferred tax liabilities:Accumulated depreciation


58,419



73,836Unrealized gain on securities


-



50,741Organization and start-up costs


68,232



-Other


28,638



25,641Total deferred tax liabilities


155,289



150,218Net deferred tax asset

$
2,059,926


$
1,937,482





Deferred tax assets represent the future tax benefit of deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net revised realizable value.  At December 31, 2010, the Company’s gross deferred tax asset totaled $3.4 million.  Based on the Company’s projections of future taxable income over the next three years, cumulative tax losses over the previous three years, limitations on future utilization of various deferred tax assets under Internal Revenue Code, and available tax planning strategies, the Company recorded a valuation allowance in the amount of $1.2 million through a charge against income tax expense (benefit).  The Company has net operating loss carryfowards of approximately $2.1 million which will expire in 2029 and 2030 if not utilized to offset taxable income prior to that date.





As of December 31, 2009, the Company’s analysis concluded that it was more likely than not that all of its net deferred income tax assets would be realized based on the company’s projections of future taxable income over the next three years  and net operating loss carrybacks refundable from income taxes previously paid.  As a result, no valuation allowance was recorded at December 31, 2009.





The Company is subject to U.S. federal and North Carolina state income tax.  Tax authorities in various jurisdictions may examine the Company.  The Company and the Bank are not subject to federal and state income tax examinations for taxable years prior to 2007.






















40


NOTE 9 - INCOME TAXES- continued


A reconciliation between the income tax expense (benefit) and the amount computed by applying the federal statutory rate of 34% to income before income taxes follows:







For the years ended

December 31,2010


2009Tax expense (benefit) at statutory rate

$
(1,151,239
)

$
(1,573,328
)State income tax, net of federal income tax benefit


(142,565
)


(204,381
)Stock compensation expense


33,243



39,344Valuation allowance


1,212,398



-Other, net


114,226



(2,551
)$
66,063


$
(1,740,916
)





The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions at December 31, 2010.





NOTE 10 - LEASES





The Company leases a Kings Mountain branch location.  The operating lease had an original term of two years and three months, expiring on March 31, 2010.  The lease currently renews on a month-to-month basis.  Under the terms of the lease, the monthly rental payment is $2,650 or $31,800 per year.





The total lease expense included in the statement of operations for the years ended December 31, 2010 and December 31, 2009 was $36,191 and $37,308, respectively





NOTE 11 - RELATED PARTY TRANSACTIONS





Certain parties (principally certain directors and executive officers of the Company, their immediate families and business interests) were loan customers of and had other transactions in the normal course of business with the Bank.  Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility.  As of December 31, 2010 and 2009, the Company had related party loans totaling approximately $7,000,934 and $7,485,902, respectively.





Deposits by directors, officers and their related interests, as of December 31, 2010 and 2009 approximated $1,988,388 and $2,586,000, respectively.





NOTE 12 - COMMITMENTS AND CONTINGENCIES





The Company is subject to claims and lawsuits which arise primarily in the ordinary course of business.  Management is not aware of any legal proceedings which would have a material adverse effect on the financial position or operating results of the Company.





NOTE 13 - STOCK COMPENSATION PLANS





In 2005, the shareholders approved the Incentive Stock Option Plan (Incentive Plan) and the Nonstatutory Stock Option Plan (Nonstatutory Plan).  The Incentive Plan provides for the granting of up to 267,755 stock options to purchase shares of the Company's common stock to officers and employees of the Company. The Company may grant awards for a term of up to ten years from the effective date of the Plan.  Options may be exercised up to ten years after the date of grant. The per-share exercise price will be determined by the Option Committee of the Board of Directors, except that the exercise price of an incentive stock option may not be less than fair market value of the common stock on the grant date. At December 31, 2010, 183,922 options had been granted under the Incentive Plan.





The Nonstatutory Plan provides for the granting of up to 267,755 stock options to purchase shares of the Company's common stock to Directors of the Company.  The Company may grant awards for a term of up to ten years from the effective date of the Plan.  Options may be exercised up to ten years after the date of grant.  The per-share exercise price will be determined by the Board of Directors, except that the exercise price of a nonstatutory stock option may not be less than fair market value of the common stock on the grant date.  At December 31, 2010, 243,911 options had been granted under the Nonstatutory Plan.


















41


NOTE 13 - STOCK COMPENSATION PLANS -continued


A summary of the status of our stock option plans as of December 31, 2010 and 2009, and changes during the periods then ended are presented below.





December 31, 2010


December 31, 2009Shares


Weighted-

Average

Exercise

Price


Shares


Weighted-

Average

Exercise

PriceOutstanding at beginning of year


427,833


$
7.65



427,833


$
7.65Granted


-



-



-



-Exercised


-



-



-



-Forfeited


63,044



7.38



-



-Outstanding at end of year


364,789


$
7.67



427,833


$
7.65








The following table summarizes information about stock options outstanding under the Company’s plans at December 31, 2010:





Outstanding


ExercisableNumber of options


364,789



201,232Weighted average remaining life


6.8



6.4Weighted average exercise price

$
7.67


$
8.00Compensation charged to pretax income

$
227,436Approximate future compensation of options

$
391,456Weighted average years remaining to recognize future compensation


3.0





The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of 2010 and the exercise price, multiplied by the number of in-the-money options) for options outstanding and exercisable at December 31, 2010 amounted to $0.  This amount represents what would have been received by the option holder had all option holders exercised their options on December 31, 2010.  The intrinsic value changes are based on changes in the fair market value of the Company’s stock.





The Company measures the fair value of each option award on the date of grant using the Black-Scholes option pricing model with the following assumptions:  the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant; the dividend yield is based on the Company's dividend yield at the time of the grant (subject to adjustment if the dividend yield on the grant date is not expected to approximate the dividend yield over the expected life of the options); the volatility factor is based on the historical volatility of the Company's stock (subject to adjustment if historical volatility is reasonably expected to differ from the past); the weighted-average expected life is based on the historical behavior of employees related to exercises, forfeitures and cancellations.  These assumptions are summarized in Note 1 to these financial statements.




















































42





NOTE 14 - EARNINGS (LOSSES) PER SHARE





Basic earnings (losses) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding.  Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive common share equivalents using the treasury stock method.  Due to there being a net loss for 2009 and 2010, the dilutive common share equivalents outstanding totaling 364,789 and 427,833 at December 31, 2010 and 2009 and warrants of 81,153, respectively were antidilutive; therefore, basic loss per share and diluted loss per share were the same.





2010


2009Basic earnings (loss) per share computation:Net earnings (loss) available to common shareholders

$
(3,648,432
)

$
(3,072,316
)Average common shares outstanding – basic


2,668,205



2,668,205Basic net earnings (loss) per share

$
(1.37
)

$
(1.15
)Diluted earnings (losses) per share computation:


2010



2009Net earnings (loss) available to common shareholders

$
(3,648,432
)

$
(3,072,316
)Average common shares outstanding – basic


2,668,205



2,668,205Incremental shares from assumed conversions:

Stock options and warrants


-



-Average common shares outstanding – diluted


2,668,205



2,668,205Diluted earnings (loss) per share

$
(1.37
)

$
(1.15
)





NOTE 15 - REGULATORY MATTERS





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 adverse material effect on the Company’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.





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





The Company and the Bank are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio.  Only the strongest institutions are allowed to maintain capital at the minimum requirement of 3%.  All others are subject to maintaining ratios 1% to 2% above the minimum.





As of December 31, 2010, management believes it is categorized as well-capitalized under the regulatory framework for prompt corrective action.  There are no conditions or events that management believes have changed the Company’s or the Bank’s categories.


















43




NOTE 15 - REGULATORY MATTERS - continued


The following table summarizes the capital amounts and ratios of the Company and the Bank and the regulatory minimum requirements at December 31, 2010 and 2009.





Actual


For Capital

Adequacy Purposes


To Be Well-Capitalized Under Prompt Corrective

Action Provisions(Dollars in thousands)

Amount


Ratio


Amount


Ratio


Amount


RatioDecember 31, 2010The CompanyTotal capital (to risk-weighted assets)

$
21,688



14.83
%

$
11,698



8.00
%

$
N/A



N/ATier 1 capital (to risk-weighted assets)


19,823



13.56
%


5,849



4.00
%


N/A



N/ATier 1 capital (to average assets)


19,823



11.26
%


7,041



4.00
%


N/A



N/AThe BankTotal capital (to risk-weighted assets)

$
21,674



14.82
%

$
11,706



8.00
%

$
14,623



10.00
%Tier 1 capital (to risk-weighted assets)


19,804



13.54
%


5,849



4.00
%


8,774



6.00
%Tier 1 capital (to average assets)


19,804



11.20
%


7,105



4.00
%


8,882



5.00
%December 31, 2009The CompanyTotal capital (to risk-weighted assets)

$
25,438



18.26
%

$
11,143



8.00
%

$
N/A



N/ATier 1 capital (to risk-weighted assets)


23,688



17.01
%


5,571



4.00
%


N/A



N/ATier 1 capital (to average assets)


23,688



13.82
%


6,854



4.00
%


N/A



N/AThe BankTotal capital (to risk-weighted assets)

$
25,438



18.26
%

$
11,143



8.00
%

$
13,928



10.00
%Tier 1 capital (to risk-weighted assets)


23,688



17.01
%


5,571



4.00
%


8,357



6.00
%Tier 1 capital (to average assets)


23,688



13.82
%


6,854



4.00
%


8,568



5.00
%





NOTE 16 - UNUSED LINES OF CREDIT





At December 31, 2010, the Company had lines of credit to purchase federal funds up to $16,000,000 from unrelated financial institutions.  At December 31, 2010, the Company had no outstanding borrowings on these lines.  Under the terms of the arrangements, the Company may borrow at mutually agreed-upon rates for periods varying from one to thirty days. The Company also has a line of credit to borrow funds from the Federal Home Loan Bank up to 15% of the Bank's total assets, which totaled $27,673,000 as of December 31, 2010.  As of December 31, 2010, the Bank had $13,500,000 in advances on this line.





NOTE 17 - PREFERRED STOCK





On January 23, 2009, the Company entered into a Letter Agreement with the United States Department of the Treasury (the “Treasury”), pursuant to which the Company issued and sold to the Treasury (1) 3,500 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the Preferred Stock”) and (2) a warrant to purchase 80,153 shares of the Company’s common stock, $1.00 par value per share, for an aggregate purchase price of $3,500,000 in cash. The Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Company may redeem the Preferred Stock subject to consultation with the appropriate federal banking agency. The Preferred Stock is generally nonvoting. The warrant has a 10-year term and is immediately exercisable upon its issuance, with an initial per share exercise price of $6.55. The warrant has anti-dilution protections, registration rights, and certain other protections for the holder. Pursuant to the Purchase Agreement, the Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant.





The Series A Preferred Stock has a preference over the Company’s common stock upon liquidation. Dividends on the preferred stock, if declared, are payable quarterly in arrears. The Company’s ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, its common stock is subject to certain restrictions in the event that the company fails to pay or set aside full dividends on the preferred stock for the latest completed dividend period.




NOTE 18 - RESTRICTIONS ON DIVIDENDS, LOANS, OR ADVANCES





The Company’s dividend payments will be made from dividends received from the Bank. The Bank, as a North Carolina banking corporation, may pay dividends only out of undivided profits as determined pursuant to North Carolina General Statutes.  However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the Bank.










44





NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK





The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments consist of commitments to extend credit and standby letters of credit.  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.  A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.  The Company’s exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual notional amount of the instrument. Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Company uses the same credit policies in making commitments to extend credit as it does for on-balance sheet instruments.  Letters of credit are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as other lending facilities.





Collateral held for commitments to extend credit and letters of credit varies but may include accounts receivable, inventory, property, plant, equipment and income-producing commercial properties.




The following table summarizes the Company’s off-balance sheet financial instruments whose contract amounts represent credit risk at December 31, 2010 and 2009:





2010


2009Commitments to extend credit

$
10,483,000


$
10,358,000Financial standby letters of credit


100,000



180,000$
10,583,000


$
10,538,000





NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS





Effective January 1, 2008, the Company adopted ASC Topic 820, Fair Value Measurements and Disclosures, which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. ASC Topic 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available for sale investment securities) or on a nonrecurring basis (for example, impaired loans).





ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:





Level 1
Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries, other securities that are highly liquid and are actively traded in over-the-counter markets and money market funds.Level 2
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bond, corporate debt securities, and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.


45
 NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS -continued
 Assets measured at fair value on a recurring basis are as follows as of December 31, 2010:





Quoted market price in active markets

(Level 1)


Significant other observable inputs

(Level 2)


Significant unobservable inputs

(Level 3)Available-for-sale investments:Mortgage-backed securities

$
-


$
17,756,616


$
-Total

$
-


$
17,756,616


$
-





Assets measured at fair value on a recurring basis are as follows as of December 31, 2009:





Quoted market price in active markets

(Level 1)


Significant other observable inputs

(Level 2)


Significant unobservable inputs

(Level 3)Available-for-sale investmentsMortgage-backed securities

$
-


$
3,991,823


$
-Agencies






1,039,591Total

$
-


$
5,031,414


$
-





The Company had no liabilities carried at fair value or measured at fair value on a recurring basis at December 31, 2010 or 2009.





Assets measured at fair value on a non-recurring basis are as follows as of December 31, 2010:





Quoted market price in active markets

(Level 1)


Significant other observable inputs

(Level 2)


Significant unobservable inputs

(Level 3)Impaired loans

$
-


$
14,338,761


$
-Other real estate owned






6,402,263Total

$
-


$
20,741,024


$
-





Assets measured at fair value on a non-recurring basis are as follows as of December 31, 2009:





Quoted market price in active markets

(Level 1)


Significant other observable inputs

(Level 2)


Significant unobservable inputs

(Level 3)Impaired loans

$
-


$
6,066,187


$
-Other real estate owned






2,050,272Total

$
-


$
8,116,459


$
-





The Company had no liabilities carried at fair value or measured at fair value on a non-recurring basis at December 31, 2010 or 2009.





The Company is predominantly an asset based lender with real estate serving as collateral on a substantial majority of loans. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 2 inputs.






46


NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS -continued


The Company has no assets or liabilities whose fair values are measured using Level 3 inputs.





The following table summarizes fair value estimates as of December 31, 2010 and 2009 for financial instruments, as defined by ASC Topic 825, excluding short-term financial assets and liabilities, for which carrying amounts approximate fair value, and financial instruments recorded at fair value on a recurring basis at December 31, 2010.





In accordance with ASC Topic 825, the Company has not included assets and liabilities that are not financial instruments in its disclosure, such as the value of the long-term relationships with the Company’s deposit, net premises and equipment, net core deposit intangibles, deferred taxes and other assets and liabilities. Additionally, the amounts in the table have not been updated since the date indicated; therefore the valuations may have changes since that point in time. For these reasons, the total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.





The following disclosures represent financial instruments in which the ending balance at December 31, 2010 and 2009 are not carried at fair value in its entirety on the Company’s Consolidated Balance Sheet.




Short-term Financial Instruments - The carrying value of short-term financial instruments, including cash and cash equivalents, time deposits placed, federal funds sold and purchased, repurchase agreements, and other short-term investments and borrowings, approximates the fair value of these instruments. These financial instruments generally expose the Company to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market.





Loans-Fair values were generally determined by discounting both principal and interest cash flows expected to be collected using an observable discount rate for similar instruments with adjustments that the Company believes a market participant would consider in determining fair value. The Company estimates the cash flows expected to be collected using internal credit risk, interest rate and prepayment risk models that incorporate the Company’s best estimate of current key assumptions, such as default rates, loss severity and prepayment speeds for the life of the loan.





Deposits-The fair value for certain deposits with stated maturities was calculated by discounting contractual cash flows using current market rates for instruments with similar maturities. The carrying value of foreign time deposits approximates fair value. For deposits with no stated maturities, the carrying amount was considered to approximate fair value and does not take into account the significant value of the cost advantage and stability of the Company’s long-term relationships with depositors.





FHLB Advances-The Company uses quoted market prices for its long-term debt when available. When quoted market prices are not available, fair value is estimated based on current market interest rates and credit spreads for debt with similar maturities.





The approximate carrying and fair values of certain financial instruments at December 31, 2010 and 2009 were as follows: (dollars in thousands)







December 31, 2010


December 31, 2009Carrying Amount


Estimated Fair Value


Carrying Amount


Estimated Fair ValueFinancial Assets:Loans receivable, net

$
143,064


$
143,375


$
137,566


$
137,205Financial Liabilities:Total deposits

$
148,984


$
145,952


$
143,670


$
139,206FHLB advances

$
13,500


$
14,007


$
8,000


$
8,004


































47


NOTE 21 – AB&T FINANCIAL CORPORATION (PARENT COMPANY ONLY)





Presented below are the condensed financial statements for AB&T Financial Corporation (Parent Company only):


AB&T FINANCIAL CORPORATION AND SUBSIDIARY


Condensed Balance Sheet





December 31,2010


2009Assets:Cash

$
410,297


$
-Investment in banking subsidiary


21,335,991



24,893,706Total Assets

$
21,764,288


$
24,893,706Liabilities and stockholders’ equity:Liabilities


391,386



-Stockholders’ equity

$
21,372,902


$
24,893,706Total liabilities and stockholders’ equity

$
21,764,288


$
24,893,706







AB&T FINANCIAL CORPORATION AND SUBSIDIARY


Condensed Statement of Operations


For the years ended December 31, 2010 and 2009





2010


2009Income

$
-


$
-Expenses


245,525



269,175Loss before income equity inundistributed losses of banking subsidiary


(245,525
)


(269,175
)Equity in undistributed losses of banking subsidiary


(3,203,595
)


(2,617,343
)Net loss

$
(3,449,120
)

$
(2,886,518
)





AB&T FINANCIAL CORPORATION AND SUBSIDIARY


Condensed Statement of Cash Flows


For the years ended December 31, 2010 and 2009





2010


2009Cash flows from operating activities:Net loss

$
(3,449,120
)

$
(2,886,518
)Adjustments to reconcile net loss to net cashprovided by operating activities:Stock based compensation expense


227,436



269,175Increase in due to banking subsidiary


391,386



-Equity in undistributed losses of banking subsidiary


3,203,595



2,617,343Net cash provided by operating activities


373,297



-Cash flows from investing activities:Dividends received from banking subsidiary


212,000



141,944Investment in banking subsidiary


-



(3,500,000
)Net cash provided (used) by investing activities


212,000



(3,358,056
)Cash flows from financing activities:Dividends, paid


(175,000
)


(141,944
)Proceeds from issuance of preferred stock, net


-



3,363,150Proceeds from issuance of stock warrants


-



136,850Net cash (used) provided by financing activities


(175,000
)


3,358,056Increase (decrease) in cash


410,297



-Cash and cash equivalents, beginning of year


-



-Cash and cash equivalents, end of year

$
410,297


$
-








48


NOTE 22 – SUBSEQUENT EVENT





On March 25, 2011, the Company completed a loan “swap” transaction accounted for as a transfer of financial assets, which included the purchase of a pool of residential mortgage home equity loans with an estimated fair value of approximately $26.1 million. The residential mortgage home equity loan portfolio (portfolio) was purchased from a private equity firm in exchange for a combination of approximately $4.1 million in carrying value of certain non-performing loans and cash of approximately $20.4 million. The non-performing loans were transferred without recourse and were carried at fair value prior to the exchange, in accordance with accounting standards. Company will amortize approximately $900 in loan purchase adjustment as a yield adjustment over the expected life of the loans.















































































































49







ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


None.





ITEM 9A.   CONTROLS AND PROCEDURES





(a)
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)) pursuant to Exchange Act Rule 13a-14.  Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective.





(b)
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-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 financial statements for external purposes in accordance with generally accepted accounting principles.





All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may be inadequate due to changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.





Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2009 based on the criteria established in a report entitled “Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission” and the interpretive guidance issued by the Commission in Release No. 34-55929.  Based on this evaluation, the Company’s internal control over financial reporting was effective as of December 31, 2010.





The Company is continuously seeking to improve the efficiency and effectiveness of its operations and of its internal controls.  This results in modifications to its processes throughout the Company.  However, there has been no change in its internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting.





This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to an exemption from that requirement for smaller reporting companies.











ITEM 9B.   OTHER INFORMATION


None.





PART III







ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE


Incorporated by reference from the discussion under the headings “Proposal 1: Election of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Meetings and Committees of the Board of Directors” of the Registrant’s proxy statement for the 2011 annual meeting of shareholders, to be filed with the Securities and Exchange Commission.




The Registrant has a code of ethics that is applicable, among others, to its principal executive officer and principal financial officer.  The Registrant’s code of ethics will be provided to any person upon written request made to Daniel C. Ayscue, president and chief executive officer, AB&T Financial Corporation, 292 W. Main Avenue, Gastonia, NC 28052.




ITEM 11.   EXECUTIVE COMPENSATION







Incorporated by reference from the discussion under the headings “Executive Compensation” and “Director Compensation” of the Registrant’s proxy statement for the 2011 annual meeting of shareholders, to be filed with the Securities and Exchange Commission.










50




ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS







Incorporated by reference from the discussion under the heading “Beneficial Ownership of Voting Securities” of the Registrant’s proxy statement for the 2011 annual meeting of shareholders, to be filed with the Securities and Exchange Commission.




Stock Option Plans





Set forth below is certain information regarding the Registrant’s various stock option plans.





Equity Compensation Plan InformationPlan Category

No. of securities to be issued upon exercise of outstanding options, warrants and rights

Weighted-average exercise price of outstanding options, warrants and rights

No. of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(a)

(b)

(c)Equity compensation plans approved by security holders

364,789

$7.67

170,721Equity compensation plans not approved by security holders

n/a

n/a

n/aTotal

364,789

$7.67

170,721





ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE







Incorporated by reference from the discussion under the headings “Director Independence,” “Director Relationships,” and “Indebtedness of and Transactions with Management” of the Registrant’s proxy statement for the 2011 annual meeting of shareholders, to be filed with the Securities and Exchange Commission.




ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES




Incorporated by reference from the discussion under the headings “Proposal 3: Ratification of Independent Public Accountants” and “Report of the Audit Committee” of the Registrant’s proxy statement for the 2011 annual meeting of shareholders, to be filed with the Securities and Exchange Commission.
















































51







Part IV








ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.





(a)           List of Documents Filed as Part of this Report





(1) Financial Statements.The following consolidated financial statements are filed as part of this report
 
  Report of Independent Registered Public Accounting Firm





Consolidated Balance Sheets as of December 31, 2010 and 2009





Consolidated Statements of Operations for the Years Ended


December 31, 2010 and 2009





Consolidated Statements of Changes in Shareholders’ Equity and


Comprehensive Loss for the Years Ended December 31, 2010 and 2009





Consolidated Statements of Cash Flows for the Years Ended


December 31, 2010 and 2009





Notes to Consolidated Financial Statements





(2) Financial Statement Schedules.All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto.





(3)Exhibits.The following is a list of exhibits filed as part of this report:





No.                           Description





3.1
Articles of Incorporation of Registrant (incorporated by reference from Exhibit 3.01 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on May 20, 2008)





3.2
Bylaws of Registrant (incorporated by reference from Exhibit 3.02 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on May 20, 2008)





3.3
Articles of Amendment dated January 22, 2009, regarding Series A Preferred Stock (incorporated by reference from Exhibit 3.1 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on January 28, 2009)





4.1
Specimen of Registrant’s common stock certificate (incorporated by reference from Exhibit 5.1 to Registrant’s Registration Statement on Form S-8, Registration No. 333-157471, as filed with the Securities and Exchange Commission on February 23, 2009)





4.2
Specimen of Registrant’s series A preferred stock certificate (incorporated by reference from Exhibit 4.2 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on January 28, 2009)





4.3
Warrant to Purchase Common Stock of AB&T Financial Corporation, dated January 23, 2009 (incorporated by reference from Exhibit 4.1 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on January 28, 2009)





10.1
2005 Incentive Stock Option Plan (incorporated by reference from Exhibit 10.05 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on May 20, 2008)*





10.2
2005 Nonstatutory Stock Option Plan (incorporated by reference from Exhibit 10.06 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on May 20, 2008)*





10.3
Employment Agreement of Daniel C. Ayscue (incorporated by reference from Exhibit 10.02 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on May 20, 2008)*







52




ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES - continued





10.6
Letter Agreement including the Securities Purchase Agreement- Standard Terms, between AB&T Financial Corporation and the United States Department of the Treasury, dated January 23, 2009 (incorporated by reference from Exhibit 10.1 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on January 28, 2009)





10.7
Form of Executive Compensation Modification Agreement (incorporated by reference from Exhibit 10.2 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on January 28, 2009)*





21.1
Subsidiaries (filed herewith)





23.1
Consent of Elliott Davis, PLLC (filed herewith)


31.1
Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) (filed herewith) 31.2
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) (filed herewith)





32.1
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) (filed herewith)


99.1
Certification of Principal Executive Officer and Principal Financial Officer pursuant to section 18 U.S.C. 1350 as adopted pursuant to Secton 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)





99.2
Certification of Principal Financial Officer pursuant to section 111(b)(4) of the Emergency Economic Stabilization Act of 2008, as amended (filed herewith)


_________________________





*      Compensatory Plan or Management Contract







(b)Exhibits.The exhibits required by Item 601 of Regulation S-K are either filed as part of the reportor incorporated by

reference herein.






(c)Financial Statements and Schedules Excluded from Annual Report.There are no other financial statements and financial statement schedules which were excluded from the Annual Report to Stockholders pursuant to Rule 14a-3(b) which are required to be included herein.






















































53














SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.





AB&T FINANCIAL CORPORATION


Registrant





By:/s /Daniel C. Ayscue


Daniel C. Ayscue


President and Chief Executive Officer


(Principal Executive Officer)





Date:  March 31, 2011





Pursuant to the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.





/s /Kenneth Appling

Kenneth Appling, Director
March 31, 2011/s/Roger Mobley

Roger Mobley, Executive Vice President and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)
March 31, 2011/s /Joseph H. Morgan

Joseph H. Morgan, Director
March 31, 2011/s /Wayne F. Shovelin

Wayne F. Shovelin., Director
March 31, 2011/s/ David W. White

David W. White, Director
March 31, 2011













































54





EXHIBIT INDEX





No.                           Description





3.1
Articles of Incorporation of Registrant*





3.2
Bylaws of Registrant*





3.3
Articles of Amendment*





4.1
Specimen of Registrant’s common stock certificate*





4.2
Specimen of Registrant’s series A preferred stock certificate*





4.3
Warrant to Purchase Common Stock*





10.1
2005 Incentive Stock Option Plan*





10.2
2005 Nonstatutory Stock Option Plan*





10.3
Employment Agreement of Daniel C. Ayscue*




10.6
Letter Agreement with the United States Department of the Treasury*





10.7
Form of Executive Compensation Modification Agreement*





21.1
Subsidiaries





23.1
Consent of Elliott Davis, PLLC





31.1               Certification of the Principal Executive Officer pursuant to Rule 13a-14(a)





31.2               Certification of the Principal Financial Officer pursuant to Rule 13a-14(a)





32.1
Certification of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





99.1
Certification of Principal Executive Officer pursuant to section 111(b)(4) of the Emergency Economic Stabilization Act of 2008, as amended





99.2
Certification of Principal Financial Officer pursuant to section 111(b)(4) of the Emergency Economic Stabilization Act of 2008, as amended





_________________________





* Incorporated by reference