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, 2009





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, 2010








Documents
Incorporated by Reference:





Portions
of the registrant’s proxy statement for the 2010 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.




Merger




On
February 16, 2009, the Company entered into an Agreement and Plan of Merger
(the Merger Agreement) with 1st Financial Services Corporation, Hendersonville,
NC (1st Financial) pursuant to which the Company was to merge with and into 1st
Financial (the Merger). The merger agreement was terminated on October 1,
2009.





Primary
Market Area





The
Registrant's Primary Market Area (“PMA”) consists of Gaston and Cleveland
Counties.  The PMA has a population of over 306,000 with an average
median household income of over $43,000.





At June
30, 2009, total deposits in the Registrant’s PMA exceeded $3.7
billion.  As of December 31, 2009, the PMA reported moderate levels of
unemployment (13.9% in Gaston County and 15.1% in Cleveland County) compared to
state and national averages (10.8% and 9.3%, 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., Pharr Yarns, Sara Lee Corp., Cleveland Regional Medical
Center, PPG Industries, Freightliner, Gaston County Administration and
Gardner-Webb University.





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 31 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.





3


Regulation





Regulation
of the Bank





The Bank
is 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 Registrant and 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 applicable limits by the Deposit Insurance
Fund, or DIF, of the FDIC. The DIF is the successor to the Bank Insurance Fund
and the Savings Association Insurance Fund, which were merged in 2006. The
Bank’s deposits, therefore, are subject to FDIC deposit insurance
assessment.  On October 3, 2008, the Emergency Economic Stabilization
Act of 2008 temporarily raised the standard minimum deposit insurance amount
(the “SMDIA”) from $100,000 to $250,000 per depositor until December 31,
2009.  On May 20, 2009, the Helping Families Save Their Homes Act
extended the temporary increase in the SMDIA to $250,000 per depositor through
December 31, 2013. On January 1, 2014, the SMDIA will return to $100,000 per
depositor for all account categories except IRAs and certain other retirement
accounts, which will remain at $250,000 per depositor, unless a new law is
enacted before then to extend the increased deposit insurance
limits.





The FDIC
recently amended its risk-based deposit assessment system to implement authority
granted by the Federal Deposit Insurance Reform Act of 2005, or the Reform Act.
Under the revised system, insured institutions are assigned to one of four risk
categories based on supervisory evaluations, regulatory capital levels and
certain other factors. An institution’s assessment rate depends upon the
category to which it is assigned. Risk Category I contains well-capitalized
banks with only a few minor weaknesses. Unlike the other categories, Risk
Category I contains further risk differentiation based on the FDIC’s analysis of
financial ratios, examination component ratings and other information.
Assessment rates are determined by the FDIC and for the period effective January
1, 2009 through March 31, 2009 (payment dated June 30, 2009 based on March 31,
2009 data) range from 12 to 14 basis points for the healthiest institutions
(Risk Category I) to 50 basis points of assessable deposits for the riskiest
(Risk Category IV). Effective April 1, 2009, the FDIC has introduced three
adjustments that could be made to an institution’s initial base assessment rate:
(1) a potential decrease for long-term unsecured debt, including senior and
subordinated debt and, for small institutions, a portion of Tier 1 capital; (2)
a potential increase for secured liabilities above a threshold amount; and (3)
for non-Risk Category I institutions, a potential increase for brokered deposits
above a threshold amount.  The new rates will range from 7 to 24 basis
points for the healthiest institutions (Risk Category I) to 43 to 77.5 basis
points of assessable deposits for the riskiest (Risk Category IV).





The FDIC
is authorized to set the reserve ratio for the DIF annually at between 1.15% and
1.5% of estimated insured deposits, in contrast to the statutorily fixed ratio
of 1.25% under the old system. The ratio, which is viewed by the FDIC as the
level that the funds should achieve, was established by the agency at 1.25% for
2007. The Reform Act also provided for the possibility that the FDIC may pay
dividends to insured institutions once the DIF reserve ratio equals or exceeds
1.35% of estimated insured deposits.





On
October 3, 2008, President Bush signed into law the Emergency Economic
Stabilization Act of 2008 (EESA).  The EESA established two major
initiative programs; the Capital Purchase Program (CPP) and the Temporary
Liquidity Guarantee Program (TLG). The TLG provided for two separate FDIC
guarantee programs in which the Company chose to
participate.   For the first program, the FDIC will guarantee
newly issued senior unsecured debt issued between October 14, 2008, and June 30,
2009, including promissory notes, commercial paper, inter-bank funding, and any
unsecured portion of secured debt. The amount of debt covered by the guarantee
may not exceed 125 percent of debt that was outstanding as of September 30, 2008
and scheduled to mature before June 30, 2009. If an insured depository
institution had no eligible debt outstanding at September 30, 2008, the debt
guarantee limit was established at 2% of total liabilities at September 30,
2008.  For eligible debt issued on or before June 30, 2009, coverage
would only be provided until June 30, 2012, even if the liability has not
matured.  The second program guarantees non-interest bearing
transaction accounts to an unlimited amount.  Additional assessment
fees apply to funds guaranteed under these programs.





4


For
eligible senior unsecured debt, an annualized fee will be collected equal to 75
basis points multiplied by the amount of debt guaranteed under this program. The
Company has not issued any debt under this program.  For non-interest
bearing transaction deposit accounts, a 10 basis point surcharge on the
institution’s current assessment rate would be applied to deposits not otherwise
covered by the existing deposit insurance limit of $250,000. Fees for the 10
basis point surcharge on the non-interest bearing transaction accounts over
$250,000 will be collected through the normal assessment cycle.  The
Company anticipates paying assessments under this program.





On
May 22, 2009, the FDIC announced that it would levy a special assessment on
insured institutions as part of its effort to rebuild the deposit insurance
fund. The special assessment equaled five basis points on each FDIC-insured
depository institution’s assets, minus its Tier 1 capital, as of June 30,
2009. The amount of the Bank’s special assessment was $73,671.





On
November 12, 2009, the FDIC voted to require all FDIC insured depository
institutions to prepay risk-based assessments for the fourth quarter of 2009 and
for all of 2010, 2011 and 2012.  The prepaid assessments are designed
to provide the FDIC with additional liquid assets for the deposit insurance
fund, which have been used to protect depositors of failed institutions and have
been exchanged for less liquid claims against the assets of failed
institutions.  The FDIC projected that if no action is taken, its
liquidity needs to resolve failures could exceed its liquid assets beginning in
the first quarter of 2010.  The prepaid assessment for all insured
institutions was collected on December 30, 2009.  For the fourth
quarter of 2009 and all of 2010, the prepaid assessment was based on an
institution’s total base assessment rate in effect on September 30,
2009.  That rate will be increased by 3 basis points for the 2011 and
2012 prepayments and a quarterly five percent deposit growth rate is also built
into the calculation.





On
December 30, 2009, the Bank paid a $609,952 prepaid assessment and it will be
accounted for as a prepaid expense with a zero risk-weighting for risk-based
regulatory capital purposes.  On a quarterly basis after December 31,
2009, the Bank will expense its regular quarterly assessment and record an
offsetting credit to the prepaid assessment asset until the asset is
exhausted.  If the prepaid assessment is not exhausted by June 30,
2013, any remaining amount will be returned to the Bank.





The FDIC
has authority to further increase deposit 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 deposit 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.  Management
of the Bank is not aware of any practice, condition or violation that might lead
to termination of its FDIC deposit insurance.





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, 2009, the Bank was
classified as “well-capitalized” with Tier 1 and Total Risk-Based Capital of
17.01% and 18.26%, 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.





5


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.





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.





6


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.





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.





7


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.





8


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 2009,
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.





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.





9


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, 2009, the Registrant was classified as
“well-capitalized” with Tier 1 and Total Risk-Based Capital of 17.01% and
18.26%, 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.





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.





10


North
Carolina “opted-in” to the provisions of the Riegle-Neal Act. Since July 1,
1995, an out-of-state bank that did not already maintain a branch in North
Carolina was permitted to establish and maintain a de novo branch in North
Carolina, or acquire a branch in North Carolina, if the laws of the home state
of the out-of-state bank permit North Carolina banks to engage in the same
activities in that state under substantially the same terms as permitted by
North Carolina. Also, North Carolina banks may merge with out-of-state banks,
and an out-of-state bank resulting from such an interstate merger transaction
may maintain and operate the branches in North Carolina of a merged North
Carolina bank, if the laws of the home state of the out-of-state bank involved
in the interstate merger transaction permit interstate merger.





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
              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]




11


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
            
            
            Low2009First
      quarter
            
            $
            6.90
            
            
            $
            3.25Second
      quarter
            
            
            6.00
            
            
            
            3.26Third
      quarter.
            
            
            5.25
            
            
            
            4.00Fourth
      quarter
            
            
            4.90
            
            
            
            2.602008First
      quarter
            
            $
            9.70
            
            
            $
            6.75Second
      quarter
            
            
            8.25
            
            
            
            7.00Third
      quarter
            
            
            8.40
            
            
            
            5.50Fourth
      quarter
            
            
            7.50
            
            
            
            4.00





As of
December 31, 2009, there were 635
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, 2009, the Bank had a
retained deficit of $3,030,307.





See Item
11 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 2009 as compared to
2008, and 2008 as compared to 2007, and also analyzes our financial condition as
of December 31, 2009 as compared to December 31, 2008. 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 2009 and 2008 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.










12


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.





Selected
Financial Data





The
following selected financial data for the years ended December 31, 2009 and 2008
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.





2009
            
            
            2008Income
      Statement Data:Interest
      income
            
            $
            7,101,540
            
            
            $
            8,809,686Interest
      expense
            
            
            3,244,865
            
            
            
            4,566,709Net
      interest income
            
            
            3,856,675
            
            
            
            4,242,977Provision for
      loan losses
            
            
            3,478,372
            
            
            
            1,312,969Net
      interest income after provision for loan losses
            
            
            378,303
            
            
            
            2,930,008Noninterest
      income
            
            
            451,469
            
            
            
            337,948Noninterest
      expense
            
            
            5,457,206
            
            
            
            4,056,639Income
      (loss) before income taxes
            
            
            (4,627,434
            )
            
            
            (788,683
            )Income
      tax (benefit) expense
            
            
            (1,740,916
            )
            
            
            (274,886
            )Net
      Income (loss)
            
            $
            (2,886,518
            )
            
            $
            (513,797
            )Accretion of
      preferred stock
            
            
            22,758
            
            
            
            -Preferred
      dividends paid
            
            
            163,040
            
            
            
            -Net
      loss available to shareholders
            
            $
            (3,072,316
            )
            
            $
            (513,797
            )Balance
      Sheet Data:Assets
            
            $
            176,730,998
            
            
            $
            170,310,305Earning
      assets
            
            
            164,472,546
            
            
            
            162,072,092Securities
      (1)
            
            
            6,444,594
            
            
            
            6,009,494Loans
      (2)
            
            
            139,974,913
            
            
            
            139,670,266Allowance for
      loan losses
            
            
            2,408,990
            
            
            
            1,935,702Deposits
            
            
            143,669,792
            
            
            
            121,318,018Shareholders’
      equity
            
            
            24,893,706
            
            
            
            24,194,101Per-Share
      Data:Earnings per
      share – basic
            
            $
            (1.15
            )
            
            $
            (0.19
            )Earnings per
      share – diluted
            
            
            (1.15
            )
            
            
            (0.19
            )Book
      value (period end)
            
            
            8.03
            
            
            
            9.03





______________________





(1)
            Marketable
      securities are all available for sale and recorded at their fair market
      value. Nonmarketable securities totaling $1,413,180 and $1,371,280 are
      included for 2009 and 2008, respectively.  These securities are
      recorded at cost.


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








13


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.





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, 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 average loans 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 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 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% in 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 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 $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.





14


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 accounting fees was primarily a
result of the unsuccessful merger with 1st
Financial Services.





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, the 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.





For
the year ended December 31, 2008, compared with year ended December 31,
2007


Net
interest income decreased $688,354 or 13.96% in 2008 from $4,931,331 in
2007.  Although the average loan portfolio increased $29,630,118 or
28.28% from 2007 to 2008, the decrease in net interest income was due primarily
to a decrease in net interest spread which decreased from 3.16% in 2007 to 2.25%
in 2008.  The components of interest income were from loans, including
fees of $8,267,849, federal funds sold of $205,415, and investment income of
$252,287, and interest earning deposits of $84,135.





The
Company’s net interest spread and net interest margin were 2.25% and 2.76%,
respectively, in 2008 compared to 3.16% and 4.07%, respectively, in
2007.  Yields on most earning assets decreased in
2008.  Yields on average earning assets decreased from 8.14% in 2007
to 5.72% in 2008.  Yields on average interest-bearing liabilities
decreased from 4.98% in 2007 to 3.47% in 2008.





The
provision for loan losses was $1,312,969 in 2008 compared to $572,898 in
2007.  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, 2008
increased to $5,043,946 from $863,880 as of December 31,
2007.  Impaired loans as of December 31, 2008 were made up largely of
three credits, two participated credit facilities, as well as an operating
company closely tied to the residential construction industry.  All
three credits are currently within various stages of workouts and management
feels that loss provisions placed against these credits are appropriate at this
time.





Noninterest
income decreased $100,473, or 40.52%, to $147,478 in 2008 from $247,951 in
2007.  The largest component of noninterest income was from service
charges on deposit accounts which increased $107,696 or 73.48%, to $254,257 for
the year ended December 31, 2008, when compared to 2007 as a result of increased
deposit account volume.  There were losses on the sale of other real
estate in 2008 of $190,470, compared to a gain on the sale of other real estate
in 2007 of $40,242.





Noninterest
expense increased $808,306, or 24.88%, to $4,056,639 in 2008 from $3,248,333 in
2007.  The largest component of noninterest expense was salaries and
employee benefits which increased $281,221, or 14.32%, to $2,245,302 for the
year ended December 31, 2008.  Other operating expenses increased
$179,610, or 18.46%, to $1,150,859 for the year ended December 31,
2008.  The increase in other operating expenses in 2008 was largely
due to an increase in other professional fees which increased to $130,158 in
2008 from $57,211 in 2007.  The increase in professional fees was
primarily a result of professional fees associated with management’s assessment
of internal controls under Sarbanes-Oxley Section 404.





Our net
loss was $513,797 in 2008 compared to a net income of $829,263 in
2007.  The net loss in 2008 is after the recognition of an income tax
benefit of $274,886, and the net income in 2007 is after the recognition of an
income tax expense of $528,788.  The income tax expense was based on
an effective tax rate of 34.85% and 38.94% for 2008 and 2007,
respectively.  The decrease in income and subsequent net loss for 2008
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.  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.  During the year ending December 31, 2008 the Bank added
$1,312,969 to the provision, an increase of $740,071 or 129% over the prior
year.





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.





15


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, 2009
            
            
            For
      the year ended December 31, 2008Average
                Balance
            
            
            Income/
                Expense
            
            
            Yield/
                Rate
            
            
            Average
                Balance
            
            
            Income/
                Expense
            
            
            Yield/
                RateAssets:Earning Assets:Loans1
            
            $
            140,593,385
            
            
            $
            6,763,059
            
            
            
            4.81
            %
            
            $
            134,393,383
            
            
            $
            8,267,849
            
            
            
            6.15
            %Securities,
      taxable
            
            
            5,085,032
            
            
            
            262,961
            
            
            
            5.17
            %
            
            
            3,975,873
            
            
            
            212,993
            
            
            
            5.36
            %Federal funds
      sold
            
            
            3,641,423
            
            
            
            11,433
            
            
            
            0.31
            %
            
            
            10,263,858
            
            
            
            205,415
            
            
            
            2.00
            %Interest earning
      deposits
            
            
            5,670,272
            
            
            
            59,808
            
            
            
            1.05
            %
            
            
            4,187,816
            
            
            
            84,135
            
            
            
            2.01
            %Nonmarketable
      equity
              Securities
            
            
            1,403,078
            
            
            
            4,279
            
            
            
            0.30
            %
            
            
            1,186,370
            
            
            
            39,294
            
            
            
            3.31
            %Total earning
    assets
            
            
            156,393,190
            
            
            
            7,101,540
            
            
            
            4.54
            %
            
            
            154,007,300
            
            
            
            8,809,686
            
            
            
            5.72
            %Cash items
            
            
            7,172,835
            
            
            
            
            
            
            
            
            
            
            
            1,362,317Premises and
      equipment
            
            
            4,060,044
            
            
            
            
            
            
            
            
            
            
            
            3,995,652Other assets
            
            
            4,928,829
            
            
            
            
            
            
            
            
            
            
            
            2,998,907Allowance for loan
      losses
            
            
            (2,319,974
            )
            
            
            
            
            
            
            
            
            
            
            (1,534,289
            )Total assets
            
            $
            170,234,924
            
            
            
            
            
            
            
            
            
            
            $
            160,829,887Liabilities:Interest-Bearing
      Liabilities:Interest-bearing
              transaction
    accounts
            
            $
            4,818,359
            
            
            $
            46,145
            
            
            
            0.96
            %
            
            $
            3,827,604
            
            
            $
            66,853
            
            
            
            1.75
            %Savings and money
              market deposits
            
            
            20,921,873
            
            
            
            247,372
            
            
            
            1.18
            %
            
            
            29,259,451
            
            
            
            709,385
            
            
            
            2.42
            %Time deposits
            
            
            91,637,602
            
            
            
            2,266,897
            
            
            
            2.47
            %
            
            
            75,804,741
            
            
            
            3,025,246
            
            
            
            3.99
            %Federal Home Loan Bank
      advances
            
            
            18,834,411
            
            
            
            676,754
            
            
            
            3.59
            %
            
            
            19,796,421
            
            
            
            698,111
            
            
            
            3.53
            %Other borrowings
            
            
            957,510
            
            
            
            7,697
            
            
            
            0.80
            %
            
            
            2,739,648
            
            
            
            67,114
            
            
            
            2.45
            %Total interest-bearing
      liabilities
            
            
            137,169,755
            
            
            
            3,244,865
            
            
            
            2.37
            %
            
            
            131,427,862
            
            
            
            4,566,709
            
            
            
            3.47
            %Demand deposits
            
            
            5,818,891
            
            
            
            
            
            
            
            
            
            
            
            4,449,114Accrued interest and
              other liabilities
            
            
            242,999
            
            
            
            
            
            
            
            
            
            
            
            169,135Shareholders’
    equity
            
            
            27,003,279
            
            
            
            
            
            
            
            
            
            
            
            24,783,776Total liabilities
and
              shareholders’
    equity
            
            $
            170,234,924
            
            
            
            
            
            
            
            
            
            
            $
            160,829,887Net
      interest spread
            
            
            
            
            
            
            
            
            
            
            2.18
            %
            
            
            
            
            
            
            
            
            
            
            2.25
            %Net
      interest income
            
            
            
            
            
            $
            3,856,675
            
            
            
            
            
            
            
            
            
            
            $
            4,242,977Net
      interest margin2
            
            
            
            
            
            
            
            
            
            
            2.47
            %
            
            
            
            
            
            
            
            
            
            
            2.76
            %





(1)      In
2009, the effect of fees collected on loans totaling $162,791 increased the
annualized yield on loans by 0.12% from 4.69%.  The effect on the annualized yield on
earning assets was an increase of 0.10% from 4.44%.  The
effect on net interest spread and net interest margin was an increase of 0.11% and
0.11% from 2.07% and 2.36%, respectively.


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


16


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:





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
            )








2008
      compared to 2007Due
      to increase (decrease) inVolume
            
            
            Rate
            
            
            Volume/Rate
            
            
            TotalInterest
      income:Loans
            
            $
            2,557,477
            
            
            $
            (2,597,466
            )
            
            $
            (734,639
            )
            
            $
            (774,628
            )Securities, taxable (1)
            
            
            102,982
            
            
            
            6,858
            
            
            
            5,142
            
            
            
            114,982Federal funds sold and
      other
            
            
            46,067
            
            
            
            (414,769
            )
            
            
            (27,849
            )
            
            
            (396,551
            )Total interest
    income
            
            
            2,706,526
            
            
            
            (3,005,377
            )
            
            
            (757,346
            )
            
            
            (1,056,197
            )Interest
      expense:Interest-bearing
      deposits
            
            
            694,075
            
            
            
            (1,465,303
            )
            
            
            (212,535
            )
            
            
            (983,763
            )Federal Home Loan Bank
      advances
            
            
            666,555
            
            
            
            (7,858
            )
            
            
            (55,301
            )
            
            
            603,396Short-term
      borrowings
            
            
            42,723
            
            
            
            (16,941
            )
            
            
            (13,258
            )
            
            
            12,524Total interest
      expense
            
            
            1,403,353
            
            
            
            (1,490,102
            )
            
            
            (281,094
            )
            
            
            (367,843
            )Net interest
    income
            
            $
            1,303,173
            
            
            $
            (1,515,275
            )
            
            $
            (476,252
            )
            
            $
            (688,354
            )








(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.


17


Net Interest Income- continued





The
following table sets forth our interest rate sensitivity at December 31,
2009.





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
            
            $
            68,253
            
            
            $
            14,538
            
            
            $
            52,991
            
            
            $
            4,193
            
            
            $
            139,975Securities available for
      sale
            
            
            -
            
            
            
            -
            
            
            
            105
            
            
            
            4,926
            
            
            
            5,031Nonmarketable
      securities
            
            
            1,413
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,413Interest-bearing deposits in
      other banks
            
            
            115
            
            
            
            1,296
            
            
            
            -
            
            
            
            -
            
            
            
            1,411Federal funds
    sold
            
            
            16,730
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            16,730Total earning
      assets
            
            $
            86,511
            
            
            $
            15,834
            
            
            $
            53,096
            
            
            $
            9,119
            
            
            $
            164,560LiabilitiesInterest-bearing
      liabilities:Interest - bearing
      deposits:Demand deposits
            
            $
            4,760
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            4,760Savings and money market
      deposits
            
            
            24,279
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            24,279Time deposits
            
            
            26,876
            
            
            
            73,322
            
            
            $
            8,806
            
            
            
            -
            
            
            
            109,004Federal Home Loan Bank
      advances
            
            
            -
            
            
            
            -
            
            
            $
            8,000
            
            
            
            -
            
            
            
            8,000Other
borrowings
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total interest-bearing
      liabilities
            
            $
            55,915
            
            
            $
            73,322
            
            
            $
            16,806
            
            
            $
            -
            
            
            $
            146,043Period
      gap
            
            $
            30,596
            
            
            $
            (57,488
            )
            
            $
            36,290
            
            
            $
            9,119
            
            
            $
            18,517Cumulative
      gap
            
            $
            30,596
            
            
            $
            (26,892
            )
            
            $
            9,399
            
            
            $
            18,517Ratio
      of cumulative gap to total earning assets
            
            
            18.59
            %
            
            
            16.34
            %
            
            
            5.71
            %
            
            
            11.25
            %





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.


18


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, 2009 allowance for loan losses, and, therefore indirectly the
provision for loan losses for the year ended December 31, 2009, 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 2009 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 2009 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, 2009 and 2008.





Allowance
for Loan Losses


2009
            
            
            2008Total
      loans outstanding at end of period
            
            $
            139,974,913
            
            
            $
            139,670,266Average
      loans outstanding
            
            $
            140,593,385
            
            
            $
            134,393,383Balance
      of allowance for loan losses at beginning of period
            
            $
            1,935,702
            
            
            $
            1,370,235Recoveries
            
            
            135,830
            
            
            
            116,000Charge-offs
            
            
            (3,140,914
            )
            
            
            (863,502
            )Provision
      for loan losses
            
            
            3,478,372
            
            
            
            1,312,969Balance
      of allowance for loan losses at end of year
            
            $
            2,408,990
            
            
            $
            1,935,702Allowance
      for loan losses to period end loans
            
            
            1.72
            %
            
            
            1.39
            %





19


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.





Nonperforming
Assets




Nonperforming
Assets.  As of December
31, 2009 and 2008, loans in nonaccrual status totaled approximately $6,001,000
and $2,693,000, respectively.  Loans past due ninety days or more and
still accruing interest as of December 31, 2009 and 2008, were approximately
$63,000 and $9,000, respectively. Assets held as other real estate totaled
$2,050,272 and $2,296,290 in 2009 and 2008, 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,
2009, through our internal review mechanisms, we had identified $8,742,720 of
criticized loans and $9,112,635 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 increased from $1,722,862 December 31, 2008 to $8,742,720 at
December 31, 2009.  Total classified loans increased from $5,569,588
at December 31, 2008 to $9,112,635 at December 31, 2009.  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 impaired 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, 2009 and
2008.





2009
            
            
            2008Service
      charges on deposit accounts
            
            $
            382,327
            
            
            $
            254,257Other
      income
            
            
            69,142
            
            
            
            83,691Total noninterest
      income
            
            $
            451,469
            
            
            $
            337,948





Noninterest
Expense.Salaries and
employee benefits comprised the largest component of noninterest expense and
totaled $2,205,329 for the year ended December 31, 2009 as compared to
$2,245,302 for the year ended December 31, 2008.  Loss on sale of
other real estate increased from 2008 by approximately $924,000 to $1,114,380,
primarily as a result of amounts charged off as a result of writing other real
estate down to the lower of cost or net realizable value as of December 31,
2009.  Other operating expenses totaled $1,472,188 for the year ended
December 31, 2009, compared to $1,150,859 for the year ended December 31,
2008.  The increase in other operating expenses was due primarily to
the increase in professional fees and expenses associated with other real estate
owned. In addition the Company incurred expenses of approximately $200,000
relating to the unconsummated merger with 1st
Financial.





20


Noninterest Income and
Expense-
continued





The
following table sets forth the primary components of noninterest expense for the
years ended December 31, 2009 and 2008.





2009
            
            
            2008Salaries
      and employee benefits
            
            $
            2,205,329
            
            
            $
            2,245,302Net
      occupancy expense
            
            
            196,708
            
            
            
            195,599FDIC
      insurance
            
            
            275,002
            
            
            
            83,763Other
      insurance
            
            
            38,099
            
            
            
            19,276Advertising
      and marketing expense
            
            
            23,212
            
            
            
            13,485Office
      supplies, stationary and printing
            
            
            100,429
            
            
            
            84,550Data
      processing
            
            
            134,147
            
            
            
            110,313Professional
      fees
            
            
            458,485
            
            
            
            331,365Furniture
      and equipment expense
            
            
            193,599
            
            
            
            190,646Telephone
            
            
            47,708
            
            
            
            53,322Postage
            
            
            63,621
            
            
            
            41,110Other
      real estate expense
            
            
            104,246
            
            
            
            24,609Loss
      on sale of other real estate
            
            
            1,114,380
            
            
            
            190,470Other
            
            
            505,241
            
            
            
            472,829Total noninterest
      expense
            
            $
            5,457,206
            
            
            $
            4,056,639








Balance
Sheet Review





General.  At December 31,
2009, we had total assets of $176,730,998, consisting 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 compared to December 31, 2008 when the Bank had total
assets of $170,310,305, an increase of 3.77%.  Total assets in 2008
consisted principally of $137,734,564 in net loans, $6,009,494 in investments,
$9,008,817 in federal funds sold, $4,157,724 in net premises, furniture and
equipment and $8,159,812 in cash and due from banks.





At
December 31, 2009, the Bank had liabilities totaling $151,837,292, consisting
principally of $143,669,792 in deposits, and $8,000,000 in advances from the
Federal Home Loan Bank. This was an increase of 3.92% over the total liabilities
at December 31, 2008 which totaled $146,116,204 and consisted principally of
$121,318,018 in deposits, $1,068,339 in federal funds purchased and securities
sold under agreements to repurchase, and $23,570,000 in advances from Federal
Home Loan Bank.





At
December 31, 2009 shareholders’ equity equaled $24,893,706, an increase of 2.89%
over the 2008 year ending equity balance of $24,194,101. This increase is
primarily due to the inclusion of TARP funds acquired during 2009 in the form of
preferred stock, less current year losses.





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 $140,593,385 in 2009 as compared to
$134,393,383 in 2008.  At December 31, 2009 total loans were
$139,974,913 or .22% higher than the December 31, 2008 balance of
$139,670,266.





The
following table sets forth the composition of the loan portfolio by category at
December 31, 2009 and 2008 and highlights our general emphasis on real-estate
lending.

































21


Balance Sheet Review- continued


Composition
of Loan Portfolio


(Dollars in
thousands)2009                                               
 2008


Amount
            
            
            Percent
      of
              Total
            
            
            Amount
            
            
            Percent
      of
              TotalCommercial
      and industrial
            
            $
            15,220
            
            
            
            10.87
            %
            
            $
            18,320
            
            
            
            13.12
            %Real
      EstateMortgage
            
            
            94,439
            
            
            
            67.47
            %
            
            
            91,708
            
            
            
            65.66
            %Construction
            
            
            29,444
            
            
            
            21.04
            %
            
            
            28,594
            
            
            
            20.47
            %Consumer
            
            
            872
            
            
            
            0.62
            %
            
            
            1,048
            
            
            
            0.75
            %Total Loans
            
            $
            139,975
            
            
            
            100.00
            %
            
            $
            139,670
            
            
            
            100.00
            %Allowance
      for Loan Losses
            
            
            (2,409
            )
            
            
            
            
            
            
            (1,936
            )Net Loans
            
            $
            137,566
            
            
            
            
            
            
            $
            137,734





The
largest component of loans in our loan portfolio is real estate mortgage
loans.  At December 31, 2009 real estate mortgage loans totaled
$94,439,000 and represented 67.47% of the total loan portfolio.  At
December 31, 2008, real estate mortgage loans totaled $91,708,000 and
represented 65.66% 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 $46,869,000 at December 31, 2009 and
$48,815,000 at December 31, 2008.  Residential 1 to 4 family real
estate loans consist of first and second mortgages on single or multi-family
residential dwellings.  Nonresidential real estate loans, which
include commercial loans and other loans secured by multi- family
properties and farmland, totaled $77,014,000 at December 31, 2009 and
$71,487,000 at December 31, 2008.  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, 2009 and
2008, consumer loans totaled $872,000 and $1,048,000 and represented 0.62% and
0.75% 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, 2009.





Loan
Maturity Schedule and Sensitivity to Changes in Interest Rates





December
      31, 2009
              (Dollars
      in thousands)
            
            One
      Year
              or
      Less
            
            
            Over
      One
              Year
              Through
              Five
      Years
            
            
            Over
              Five
      Years
            
            
            TotalCommercial
      and industrial
            
            $
            10,250
            
            
            
            4,900
            
            
            
            70
            
            
            
            15,220Real
      estate
            
            
            72,310
            
            
            
            47,839
            
            
            
            3,733
            
            
            
            123,883Consumer
      and other
            
            
            269
            
            
            
            604
            
            
            
            -
            
            
            
            872$
            82,829
            
            
            $
            53,342
            
            
            $
            3,803
            
            
            $
            139,975Loans
      maturing after one year with:Fixed
      interest rates
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            54,069Floating
      interest rates
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,076$
            57,145





22


Balance Sheet Review- continued





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 $5,085,032
in 2009 as compared to $3,975,873 in 2008.  Total nonmarketable equity
securities averaged $1,403,078 in 2009 as compared to $1,186,370 in
2008.  At December 31, 2009, the total securities portfolio was
$6,444,594 as compared to $6,009,494 at December 31, 2008.





The
following table sets forth the scheduled maturities and average yields of
securities available for sale at December 31, 2009.  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
            
            
            YieldUS
      Government agencies
            
            $
            -
            
            
            
            -
            
            
            $
            1,039
            
            
            
            4.05
            %
            
            $
            -
            
            
            
            -Mortgage-backed
      securities
            
            
            105
            
            
            
            5.08
            %
            
            $
            1,230
            
            
            
            5.31
            %
            
            $
            2,657
            
            
            
            5.38
            %





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 $3,641,423 in 2009 and $10,263,858 in 2008.  At December 31,
2009 and 2008, short-term investments totaled $16,729,661 and $9,008,817,
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 $123,196,725 during 2009 as compared to $113,340,910 during
2008.  At December 31, 2009, total deposits were $143,669,792 as
compared to $121,318,018 at December 31, 2008.  Average
interest-bearing liabilities totaled $137,169,755 in 2009 as compared to
$131,427,862 in 2008.





The
following table sets forth our deposits by category as of December 31, 2009 and
2008.





Deposits





2009
            
            
            2008Amount
            
            
            Percent
      of Deposits
            
            
            Amount
            
            
            Percent
      of DepositsNoninterest-bearing
      demand deposits
            
            $
            5,626,494
            
            
            
            3.92
            %
            
            $
            5,235,742
            
            
            
            4.31
            %NOW
      interest bearing deposits
            
            
            4,759,708
            
            
            
            3.31
            
            
            
            4,593,973
            
            
            
            3.79Savings
      and money market accounts
            
            
            24,279,357
            
            
            
            16.90
            
            
            
            22,233,022
            
            
            
            18.33Time
      deposits less than $100,000
            
            
            102,069,318
            
            
            
            71.04
            
            
            
            69,949,192
            
            
            
            57.66Time
      deposits $100,000 and over
            
            
            6,934,915
            
            
            
            4.83
            
            
            
            19,306,089
            
            
            
            15.91Total Deposits
            
            $
            143,669,792
            
            
            
            100
            %
            
            $
            121,318,018
            
            
            
            100
            %





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 $136,734,877 at December 31,
2009.





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 97.43% and 115.13% at December 31, 2009 and 2008,
respectively.  The maturity distribution of our time deposits over
$100,000 at December 31, 2009, is set forth in the following
table:


23


Balance Sheet Review- continued





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
            
            $
            1,604
            
            
            $
            302
            
            
            $
            3,486
            
            
            $
            1,543
            
            
            $
            6,935








Time
deposits over $100,000 in the aggregate amount of $1,604,000 had scheduled
maturities within three months, and approximately $5,392,000, or 78%, 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.





Federal Home Loan
Bank Advances.Total advances from the Federal Home Loan Bank
were $8,000,000 at December 31, 2009, compared to $23,570,000 at December 31,
2008.  The average of Federal Home Loan Bank advances outstanding was
$18,834,411 during 2009, compared to $19,796,421 during
2008.  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 $957,510
in 2009 as compared to $2,739,648 in 2008 and totaled $0 at December 31, 2009
and $1,068,339 at December 31, 2008.  The maximum amount at any month
end in 2009 was $14,783,069 and had a weighted average interest rate during the
year of .24%.  The maximum amount at any month end in 2008 was
$8,567,865 and had a weighted average interest rate during the year of
3.30%.  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.


























24


Capital- continued





We
exceeded the regulatory capital requirements at December 31, 2009 and 2008 as
set forth in the following table.





Analysis
of Capital and Capital Ratios


December
      31,
            
            2009
            
            
            2008(Dollars
      in thousands)Tier
      1 capital
            
            $
            23,688
            
            
            $
            24,425Tier
      2 capital
            
            
            1,750
            
            
            
            1,587Total qualifying
      capital
            
            $
            25,438
            
            
            $
            26,012Risk-adjusted
      total assets (including off-balance sheet exposures)
            
            $
            171,360
            
            
            $
            135,409Tier
      1 risk-based capital ratio
            
            
            17.01
            %
            
            
            18.04
            %Total
      risk-based capital ratio
            
            
            18.26
            %
            
            
            19.21
            %Tier
      1 leverage ratio
            
            
            13.82
            %
            
            
            14.01
            %








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, 2009, we had
issued commitments to extend credit of $10,358,000 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 $180,000.





The
following table sets forth the length of time until maturity for unused
commitments to extend credit at December 31, 2009.





(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
            
            $
            836
            
            
            $
            164
            
            
            $
            3,554
            
            
            $
            4,554
            
            
            $
            5,804
            
            
            $
            10,358





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, 2009 as filed with our 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.


25


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 $18,500,000 at December 31, 2009.  These
lines may be withdrawn at their discretion.  In addition, we have the
ability to borrow from the Federal Home Loan Bank.  Our available
credit with the Federal Home Loan Bank was $16,576,000 at December 31,
2009.





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.





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.


26





ITEM
8.       FINANCIAL STATEMENTS AND
SUPPLEMENTAL DATA











AB&T
FINANCIAL CORPORATION AND


ALLIANCE
BANK & TRUST COMPANY





Consolidated
Financial Statements





Years
ended December 31, 2009 and 2008























Table
of Contents





Page
      No.Report
      of Independent Registered Public Accounting Firm
            28Consolidated
      Balance Sheets
            29Consolidated
      Statements of Operations
            30Consolidated
      Statements of Changes in Shareholders’ Equity and Comprehensive
      Income
            31Consolidated
      Statements of Cash Flows
            32Notes
      to Consolidated Financial Statements
            33-49





















































27


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, Alliance Bank & Trust Company, (the Company) as
of December 31, 2009 and 2008, 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.  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 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, 2009 and 2008 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.
 
 We were
not engaged to examine management's assessment about the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2009
included in the accompanying Form 10-K, item 9 and, accordingly, we do not
express an opinion thereon.
 
 /s/ Elliott Davis,
PLLC
 
 
 Elliott
Davis, PLLC
 Charlotte,
North Carolina
 March 29,
2010
































28
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY


Consolidated
Balance Sheets





December
      31,Assets:
            
            2009
            
            
            2008Cash
      and cash equivalents:Cash
      and due from banks
            
            $
            4,701,944
            
            
            $
            8,159,812Federal
      funds sold
            
            
            16,729,661
            
            
            
            9,008,817Total
      cash and cash equivalents
            
            
            21,431,605
            
            
            
            17,168,629Time
      deposits with other banks
            
            
            1,296,527
            
            
            
            1,260,199Investments:Securities
      available for sale
            
            
            5,031,414
            
            
            
            4,638,214Nonmarketable
      equity securities
            
            
            1,413,180
            
            
            
            1,371,280Total
      investments
            
            
            6,444,594
            
            
            
            6,009,494Loans
      receivable
            
            
            139,974,913
            
            
            
            139,670,266Less
      allowance for loan losses
            
            
            (2,408,990
            )
            
            
            (1,935,702
            )Loans,
      net
            
            
            137,565,923
            
            
            
            137,734,564Premises,
      furniture and equipment, net
            
            
            3,952,877
            
            
            
            4,157,724Accrued
      interest receivable
            
            
            566,318
            
            
            
            518,504Other
      real estate owned
            
            
            2,050,272
            
            
            
            2,296,290Other
      assets
            
            
            3,422,882
            
            
            
            1,164,901Total
      assets
            
            $
            176,730,998
            
            
            $
            170,310,305Liabilities:Deposits:Noninterest-bearing
      transaction accounts
            
            $
            5,626,494
            
            
            $
            5,235,742Interest-bearing
      transaction accounts
            
            
            4,759,708
            
            
            
            4,593,973Savings
      and money market
            
            
            24,279,357
            
            
            
            22,233,022Time
      deposits $100,000 and over
            
            
            6,934,915
            
            
            
            19,306,089Other
      time deposits
            
            
            102,069,318
            
            
            
            69,949,192Total
      deposits
            
            
            143,669,792
            
            
            
            121,318,018Federal
      funds purchased and securities soldunder
      agreements to repurchase
            
            
            -
            
            
            
            1,068,339Advances
      from the Federal Home Loan Bank
            
            
            8,000,000
            
            
            
            23,570,000Accrued
      interest payable
            
            
            55,169
            
            
            
            109,043Other
      liabilities
            
            
            112,331
            
            
            
            50,804Total
      liabilities
            
            
            151,837,292
            
            
            
            146,116,204Commitments
      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, 2009, and 0at
      December 31, 2008
            
            
            3,385,908
            
            
            
            -Common
      stock, $1.00 par value, 11,000,000 shares authorized;and
      2,678,205 shares issued and outstandingat
      December 31, 2009 and 2008
            
            
            2,678,205
            
            
            
            2,678,205Treasury
      stock, at cost (10,000 shares at December 31, 2009 andno
      shares in 2008)
            
            
            (55,600
            )
            
            
            -Warrants
            
            
            136,850
            
            
            
            -Capital
      surplus
            
            
            21,734,686
            
            
            
            21,607,455Retained
      earnings (deficit)
            
            
            (3,066,700
            )
            
            
            (157,424
            )Accumulated
      other comprehensive income
            
            
            80,357
            
            
            
            65,865Total
      shareholders’ equity
            
            
            24,893,706
            
            
            
            24,194,101Total
      liabilities and shareholders’ equity
            
            $
            176,730,998
            
            
            $
            170,310,305


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


29
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY


Consolidated
Statements of Operations


For
the years ended December 31, 2009 and 2008





2009
            
            
            2008Interest
      income:Loans, including
    fees
            
            $
            6,763,059
            
            
            $
            8,267,849Securities available-for-sale,
      taxable and
              nonmarketable equity
      securities
            
            
            267,240
            
            
            
            252,287Federal funds
sold
            
            
            11,433
            
            
            
            205,415Money Market
    deposit
            
            
            23,480
            
            
            
            73,938Time deposits with other
      banks
            
            
            36,328
            
            
            
            10,197Total interest
    income
            
            
            7,101,540
            
            
            
            8,809,686Interest
      expense:Time deposits $100,000 and
      over
            
            
            1,795,139
            
            
            
            2,563,890Other deposits
            
            
            765,275
            
            
            
            1,237,594Federal Home Loan Bank
      advances
            
            
            676,754
            
            
            
            698,111Other borrowings
            
            
            7,697
            
            
            
            67,114Total interest
      expense
            
            
            3,244,865
            
            
            
            4,566,709Net
      interest income
            
            
            3,856,675
            
            
            
            4,242,977Provision
      for loan losses
            
            
            3,478,372
            
            
            
            1,312,969Net
      interest income after provision for loan losses
            
            
            378,303
            
            
            
            2,930,008Noninterest
      income:Service charges on deposit
      accounts
            
            
            382,327
            
            
            
            254,257Other
            
            
            69,142
            
            
            
            83,691Total noninterest
      income
            
            
            451,469
            
            
            
            337,948Noninterest
      expenses:Salaries and employee
      benefits
            
            
            2,205,329
            
            
            
            2,245,302Net occupancy
            
            
            196,708
            
            
            
            195,599Furniture and
      equipment
            
            
            193,599
            
            
            
            190,646FDIC Insurance
      premiums
            
            
            275,002
            
            
            
            83,763Losses on sale and write
      down  of Other Real Estate
            
            
            1,114,380
            
            
            
            190,470Other operating
            
            
            1,472,188
            
            
            
            1,150,859Total noninterest
      expense
            
            
            5,457,206
            
            
            
            4,056,639Loss
      before income taxes
            
            
            (4,627,434
            )
            
            
            (788,683
            )Income
      tax benefit
            
            
            (1,740,916
            )
            
            
            (274,886
            )Net
      loss
            
            $
            (2,886,518
            )
            
            $
            (513,797
            )Accretion
      of preferred stock to redemption value
            
            
            22,758
            
            
            
            -Preferred
      stock dividends
            
            
            163,040
            
            
            
            -Net
      loss available to common shareholders
            
            $
            (3,072,316
            )
            
            $
            (513,797
            )Losses
      per common share
              Basic
            
            $
            (1.15
            )
            
            $
            (0.19
            )Diluted
            
            $
            (1.15
            )
            
            $
            (0.19
            )Average
      common shares outstanding
              Basic
            
            
            2,678,205
            
            
            
            2,678,205Diluted
            
            
            2,678,205
            
            
            
            2,678,205





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


30
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY


Consolidated Statements of Changes in
Shareholders’ Equity and Comprehensive Loss


For
the years ended December 31, 2009 and 2008


(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,
2007
            
            
            2,678,205
            
            
            $
            2,678
            
            
            
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            21,425
            
            
            $
            356
            
            
            $
            14
            
            
            $
            24,474Net
      loss from  operations
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (514
            )
            
            
            
            
            
            
            (514
            )Other
      comprehensive income
              net
      of tax
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            52
            
            
            
            52Total
      Comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (462
            )Stock-based
      employee
              compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            182
            
            
            
            
            
            
            
            
            
            
            
            182Balance
              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
            
            
            $
            24,893





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




31
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY


Consolidated
Statements of Cash Flows


For
the years ended December 31, 2009 and 2008





2009
            
            
            2008Cash
      flows from operating activities:Net
      loss
            
            $
            (2,886,518
            )
            
            $
            (513,797
            )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Provision for loan
      losses
            
            
            3,478,372
            
            
            
            1,312,969Depreciation and amortization
      expense
            
            
            202,934
            
            
            
            192,715Discount accretion and premium
      amortization
            
            
            (9,627
            )
            
            
            (2,068
            )Loss on sale of other real
      estate
            
            
            79,545
            
            
            
            190,470Loss on write down of other real
      estate
            
            
            1,034,917
            
            
            
            -Deferred income tax
      benefit
            
            
            (1,486,296
            )
            
            
            (35,831
            )Decrease (increase) in accrued
      interest receivable
            
            
            (47,814
            )
            
            
            195,858Increase (decrease) in accrued
      interest payable
            
            
            (53,874
            )
            
            
            28,268Increase in other
      assets
            
            
            (780,979
            )
            
            
            (628,484
            )Increase (decrease) in other
      liabilities
            
            
            61,527
            
            
            
            (214,310
            )Stock-based compensation
      expense
            
            
            269,175
            
            
            
            182,095Net cash provided by operating
      activities
            
            
            (138,638
            )
            
            
            707,885Cash
      flows from investing activities:Purchases of securities available
      for sale
            
            
            (1,045,600
            )
            
            
            (1,007,931
            )Calls and maturities of
      securities available for sale
            
            
            685,764
            
            
            
            432,101Purchases of nonmarketable equity
      securities
            
            
            (41,900
            )
            
            
            (809,100
            )Proceeds from sale of
      nonmarketable equity securities
            
            
            -
            
            
            
            270,000Purchases of time deposits with
      other banks
            
            
            (36,328
            )
            
            
            1,250,000Net increase in loans
      receivable
            
            
            (4,576,458
            )
            
            
            (23,076,358
            )Purchases of premises, furniture
      and equipment
            
            
            (26,324
            )
            
            
            (635,148
            )Proceeds from sale of furniture
      and equipment
            
            
            28,238
            
            
            
            -Capitalized other real estate
      expenses
            
            
            (133,184
            )
            
            
            -Proceeds from sale of other real
      estate
            
            
            531,515
            
            
            
            516,101Net cash used by investing
      activities
            
            
            (4,614,277
            )
            
            
            (25,560,335
            )Cash
      flows from financing activities:Net increase in
      deposits
            
            
            22,351,774
            
            
            
            17,532,535Decrease in federal funds
      purchased
            
            
            (1,068,339
            )
            
            
            (4,542,072
            )Increase (decrease) in Federal
      Home Loan Bank advances
            
            
            (15,570,000
            )
            
            
            10,570,000Proceeds from issuance of
      preferred stock, net
            
            
            3,363,150
            
            
            
            -Preferred dividends
      paid
            
            
            (141,944
            )
            
            
            -Purchase of Treasury
      stock
            
            
            (55,600
            )
            
            
            -Proceeds from issuance of stock
      warrants
            
            
            136,850
            
            
            
            -Net cash provided by financing
      activities
            
            
            9,015,891
            
            
            
            23,560,463Net
      increase (decrease) in cash and cash equivalents
            
            
            4,262,976
            
            
            
            (1,291,987
            )Cash
      and cash equivalents, beginning of year
            
            
            17,168,629
            
            
            
            18,460,616Cash
      and cash equivalents, end of year
            
            $
            21,431,605
            
            
            $
            17,168,629





Supplemental
disclosure of cash flow information:


Transfer of loans to real estate
      acquired in settlement of loans
            
            $
            1,266,727
            
            
            $
            2,182,016Interest paid
            
            $
            3,298,739
            
            
            $
            4,538,441Taxes paid
            
            $
            -
            
            
            $
            166,350








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


32
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY


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 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.


33
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY


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





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.





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, 2009 and 2008, the
Company's investment in Federal Home Loan Bank stock was $1,368,000 and
$1,326,100, respectively.  At December 31, 2009 and 2008, 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, 2009 and 2008, loans in impaired status totaled $6,066,187 and $5,043,946,
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.


34
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY





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





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
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.





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 $63,000 and $73,000 were included in the Company's results of
operations for 2009 and 2008, 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 for 2008,
the fair value of options granted is estimated as of the date granted using the
Black-Scholes option pricing model with the following weighted-average
assumptions: dividend yield of 0 percent; expected volatility of 18.50 percent;
risk-free interest rate of 4.43 percent; and expected life of 10
years.  There were no options granted in 2009.
 
 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.


35
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY





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







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).





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 June
2009, the Financial Accounting Standards Board (“FASB”) issued guidance which
restructured generally accepted accounting principles (“GAAP”) and simplified
access to all authoritative literature by providing a single source of
authoritave nongovernmental GAAP.  The guidance is presented in a
topically organized structure referred to as the FASB Accounting Standareds
Codification (“ASC”). The new structure is effective for interim or annual
periods ending after September 15, 2009. All existing accounting standards have
been superseded and all other accounting literature not included is considered
nonauthoritative.





The FASB
issued new accounting guidance on accounting for transfers of financial assets
in June 2009.  The guidance limits the circumstances in which a
financial asset should be derecognized when the transferor has not transferred
the entire financial asset by taking into consideration the transferor’s
continuing involvement.  The standard requires that a transferor
recognize and initially measure at fair value all assets obtained (including a
transferor’s beneficial interest) and liabilities incurred as a result of a
transfer of financial assets accounted for as a sale.  The concept of
a qualifying special-purpose entity is no longer applicable.  The
standard is effective for the first annual reporting period that begins after
November 15, 2009, for interim periods within the first annual reporting period,
and for interim and annual reporting periods thereafter.  Earlier
application is prohibited.  The Company does not expect the guidance
to have any impact on the Company’s financial statements.  The ASC was
amended in December, 2009, to include this guidance.




Guidance
was issued in June 2009 requiring a company to analyze whether its interest in a
variable interest entity (“VIE”) gives it a controlling financial interest that
should be included in consolidated financial statements.  A company
must assess whether it has an implicit financial responsibility to ensure that
the VIE operates as designed when determining whether it has the power to direct
the activities of the VIE that significantly impact its economic performance,
making it the primary beneficiary.  Ongoing reassessments of whether a
company is the primary beneficiary are also required by the
standard.  This guidance amends the criteria to qualify as a primary
beneficiary as well as how to determine the existence of a VIE.  The
standard also eliminates certain exceptions that were previously
available.  This guidance is effective as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter.  Earlier application
is prohibited.  Comparative disclosures will be required for periods
after the effective date.  The Company does not expect the guidance to
have any impact on the Company’s financial position.  An update was
issued in December, 2009, to include this guidance in the ASC.
 
 In
October, 2009, updated guidance was issued to provide for accounting and
reporting for own-share lending arrangements issued in contemplation of a
convertible debt issuance.  At the date of issuance, a share-lending
arrangement entered into on an entity’s own shares should be measured at fair
value in accordance with prior guidance and recognized as an issuance cost, with
an offset to additional paid-in capital.  Loaned shares are excluded
from basic and diluted earnings per share unless default of the share-lending
arrangement occurs.  The amendment also requires several disclosures
including a description and the terms of the arrangement and the reason for
entering into the arrangement.  The effective dates of the amendment
are dependent upon the date the share-lending arrangement was entered into and
include retrospective application for arrangements outstanding as of the
beginning of fiscal years beginning on or after December 15, 2009. The Company
has no plans to issue convertible debt and, therefore, does not expect the
update to have an impact on its financial statements.


36
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY


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







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.





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 2008 financial statements were
reclassified to conform with the 2009 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.
 
 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, 2009 and 2008,
the requirement was met by the cash balance in the vault.


37
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY





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, 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
            
            
            $
            5,031,414December
      31, 2008Mortgage-backed
      securities
            
            $
            4,530,327
            
            
            $
            107,932
            
            
            $
            45
            
            
            $
            4,638,214Total
            
            $
            4,530,327
            
            
            $
            107,932
            
            
            $
            45
            
            
            $
            4,638,214





The
following is a summary of maturities of securities available-for-sale as of
December 31, 2009.  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
            
            $
            -
            
            
            $
            -Due
      after one year but within five years
            
            
            100,980
            
            
            
            104,604Due
      after five years but within ten years
            
            
            2,293,749
            
            
            
            2,269,386Due
      after ten years
            
            
            2,505,061
            
            
            
            2,657,424$
            4,899,790
            
            
            $
            5,031,414





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, 2009 and
2008:





Less
      than
                twelve
      months
            
            
            Twelve
      months
                or
      more
            
            
            TotalDecember
      31, 2009
            
            Fair
      value
            
            
            Unrealized
              Losses
            
            
            Fair
      value
            
            
            Unrealized
              Losses
            
            
            Fair
      value
            
            
            Unrealized
              LossesMortgage-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
            
            
            $
            24,363December
      31, 2008Mortgage-backed
      securities
            
            $
            -
            
            
            $
            -
            
            
            $
            1,360,449
            
            
            $
            45
            
            
            $
            1,360,449
            
            
            $
            45Total
            
            $
            -
            
            
            $
            -
            
            
            $
            1,360,449
            
            
            $
            45
            
            
            $
            1,360,449
            
            
            $
            45





Securities
classified as available-for-sale are recorded at fair market
value.   All of the unrealized losses, or two individual
securities, consisted of securities in a continuous loss position for twelve
months or less at December 31, 2009.  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, 2009 and 2008, investment securities with a book value of $341,937
and $1,768,936 and a market value of $356,584 and $1,825,982, respectively, were
pledged as collateral for the securities sold under agreements to repurchase. At
December 31, 2008, investment securities with a book value of $3,677,513 and a
market value of $3,718,310 were pledged as collateral for Federal Home Loan Bank
advances.  At December 31, 2009, there were no investment securities
pledged as collateral for Federal Home Loan Bank advances.


38
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY





NOTE 4 - LOANS
RECEIVABLE





Major
classifications of loans receivable at December 31, 2009 and 2008 are summarized
as follows:





2009
            
            
            2008Real
      estate – construction
            
            $
            29,444,000
            
            
            $
            28,594,000Real
      estate – mortgage
            
            
            94,439,000
            
            
            
            91,708,000Commercial
      and industrial
            
            
            15,220,000
            
            
            
            18,320,000Consumer
      and other
            
            
            871,913
            
            
            
            1,048,266Total gross
    loans
            
            $
            139,974,913
            
            
            $
            139,670,266





As of
December 31, 2009 and 2008, loans individually evaluated and considered impaired
were as follows:





December
      31,2009
            
            
            2008Total
      loans considered impaired at period end
            
            $
            6,066,187
            
            
            $
            5,043,946Loans
      considered impaired forwhich
      there is a related allowancefor
      loan loss:Outstanding loan
      balance
            
            
            4,972,626
            
            
            
            5,043,946Related allowance
      established
            
            
            863,742
            
            
            
            553,575Loans
      considered impaired for whichno
      related allowance for loan losswas
      established
            
            
            1,093,561
            
            
            
            -Average
      annual investment in impaired loans
            
            
            9,365,634
            
            
            
            5,252,522Interest
      income recognized on impaired loans during
      the period of impairmentCash
      basis
            
            $
            183,264
            
            
            $
            9,223





As of
December 31, 2009 and 2008, loans in nonaccrual status were approximately
$6,001,000 and $2,693,000, respectively.  Loans ninety days or more
past due and still accruing interest as of December 31, 2009 and 2008, were
approximately $63,000 and $9,000, respectively.





Transactions
in the allowance for loan losses for the years ended December 31, 2009 and 2008
are summarized as follows:





2009
            
            
            2008Balance,
      beginning of year
            
            $
            1,935,702
            
            
            $
            1,370,235Provision
      charged to operations
            
            
            3,478,372
            
            
            
            1,312,969Recoveries
            
            
            135,830
            
            
            
            116,000Charge-offs
            
            
            (3,140,914
            )
            
            
            (863,502
            )Balance, end of
      year
            
            $
            2,408,990
            
            
            $
            1,935,702


NOTE 5 - PREMISES, FURNITURE
AND EQUIPMENT
 
 Premises,
furniture and equipment consisted of the following at December 31, 2009 and
2008:
 2009
              
              
              2008Buildings
              
              $
              2,834,862
              
              
              $
              2,825,445Land
              
              
              1,014,787
              
              
              
              1,014,787Leasehold
      and land improvements
              
              
              104,450
              
              
              
              104,450Furniture
      and equipment
              
              
              620,117
              
              
              
              606,710Software
              
              
              63,373
              
              
              
              59,873Transportation
      equipment
              
              
              -
              
              
              
              37,656Total
              
              
              4,637,589
              
              
              
              4,648,921Less,
      accumulated depreciation
              
              
              (684,712
              )
              
              
              (491,197
              )Premises, furniture and
      equipment, net
              
              $
              3,952,877
              
              
              $
              4,157,724
 Depreciation
expense for the years ended December 31, 2009 and 2008 was $202,934 and
$192,715, respectively.
 39
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY





NOTE 6 -
DEPOSITS





At
December 31, 2009, the scheduled maturities of certificates of deposit and
individual retirement accounts were as follows:





Maturing In:
            
            Amount2010
            
            $
            100,147,2322011
            
            
            7,865,2352012
            
            
            412,0432013
            
            
            508,9402014
            
            
            70,783Total
            
            $
            109,004,233








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,
2009 there were no securities sold under agreements to repurchase.  At
December 31, 2009, the amortized cost of securities pledged to collateralize the
repurchase when there is a balance, was $341,937 and the estimated fair value
was $356,584.  The securities underlying the agreements are held by a
third-party custodian.  At December 31, 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, 2009
and 2008:
 
 Description
              
              Interest
                Rate
              
              
              2009
              
              
              2008Fixed
      rate advances maturing:September 20,
2012
              
              
              3.86
              %
              
              $
              8,000,000
              
              
              $
              8,000,000December 17, 2009
              
              
              3.71
              %
              
              
              -
              
              
              
              5,000,000June 29, 2009
              
              
              3.15
              %
              
              
              -
              
              
              
              3,000,000July 28, 2009
              
              
              3.04
              %
              
              
              -
              
              
              
              4,570,000August 28, 2009
              
              
              3.02
              %
              
              
              -
              
              
              
              3,000,000$
              8,000,000
              
              
              $
              23,570,000
 
 Scheduled principal
reductions of Federal Home Loan Bank advances are as follows:
 
 2012
              
              $  8,000,000
  As
collateral, the Company has pledged first mortgage loans on one to four family
residential loans totaling $29,889,276, multifamily loans totaling $6,066,323
and commercial real estate loans totaling $53,672,181 at December 31, 2009 (see
Note 4).  The Company’s Federal Home Loan Bank stock, in the amount of
$1,368,000, is pledged to secure the borrowings.  Certain advances are
subject to prepayment penalties.


40
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY




NOTE 9 - INCOME
TAXES





Income
tax expense (benefit) for the years ended December 31, 2009 and 2008 is
summarized as follows:


2009
            
            
            2008Current
      portionFederal
            
            $
            (254,620
            )
            
            $
            (130,182
            )State
            
            
            -
            
            
            
            -Total current
            
            
            (254,620
            )
            
            
            (130,182
            )Deferred
      income tax expense (benefit)
            
            
            (1,486,296
            )
            
            
            (144,704
            )Income
      tax expense (benefit)
            
            $
            (1,740,916
            )
            
            $
            (274,886
            )





The gross
amounts of deferred tax assets and deferred tax liabilities are as follows at
December 31, 2009 and 2008:





2009
            
            
            2008Deferred
      tax assets:Allowance for loan
      losses
            
            $
            802,489
            
            
            $
            464,955Organization and start-up
      costs
            
            
            85,287
            
            
            
            34,113Nonaccrual interest on
      loans
            
            
            99,069
            
            
            
            48,401Net operating loss
      carryforward
            
            
            645,103
            
            
            
            -Stock
compensation
            
            
            160,429
            
            
            
            101,271Other Real Estate Owned
      allowance
            
            
            289,724
            
            
            
            -Other
            
            
            5,599
            
            
            
            3,961Total deferred tax
      assets
            
            
            2,087,700
            
            
            
            652,701Deferred
      tax liabilities:Accumulated
      depreciation
            
            
            73,836
            
            
            
            98,401Unrealized gain on
      securities
            
            
            50,741
            
            
            
            42,022Other
            
            
            25,641
            
            
            
            52,373Total deferred tax
      liabilities
            
            
            150,218
            
            
            
            192,796Net deferred tax
      asset
            
            $
            1,937,482
            
            
            $
            459,905





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
realizable value.  As of December 31, 2009, management believes it
will fully realize 100% of the Company’s deferred tax asset.





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
      31,2009
            
            
            2008Tax
      expense (benefit) at statutory rate
            
            $
            (1,573,328
            )
            
            $
            (254,205
            )State
      income tax, net of federal income tax benefit
            
            
            (204,381
            )
            
            
            -Stock
      compensation expense
            
            
            39,344
            
            
            
            21,904Other,
      net
            
            
            (2,551
            )
            
            
            (28,638
            )$
            (1,740,916
            )
            
            $
            (274,886
            )





The
Company had 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, 2009.





41
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY





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.  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, 2009 and December 31, 2008 was $37,308 and $43,072,
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, 2009 and 2008, the
Company had related party loans totaling approximately $7,485,902 and
$6,446,723, respectively.





Deposits
by directors, officers and their related interests, as of December 31, 2009 and
2008 approximated $2,586,000 and $3,523,000, 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
PLAN





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, 2009, 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, 2009, 243,911 options had
been granted under the Nonstatutory Plan.





A summary
of the status of our stock option plans as of December 31, 2009 and 2008, and
changes during the periods then ended are presented below.





December
      31, 2009
            
            
            December
      31, 2008Shares
            
            
            Weighted-
              Average
              Exercise
              Price
            
            
            Shares
            
            
            Weighted-
              Average
              Exercise
              PriceOutstanding
      at beginning of year
            
            
            427,833
            
            
            $
            7.65
            
            
            
            193,769
            
            
            $
            8.80Granted
            
            
            -
            
            
            
            -
            
            
            
            274,072
            
            
            
            7.00Exercised
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -
            
            
            
            (40,008
            )
            
            
            8.80Outstanding
      at end of year
            
            
            427,833
            
            
            $
            7.65
            
            
            
            427,833
            
            
            $
            7.65





42
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY


NOTE 13 -
STOCK COMPENSATION PLAN -continued





The
following table summarizes information about stock options outstanding under the
Company’s plan at December 31, 2009:





Outstanding
            ExercisableNumber
      of options
            427,833
            147,131Weighted
      average remaining life
            7.9
      years
            7.3
      yearsWeighted
      average exercise price
            $
      7.65
            $
      8.84





The
aggregate intrinsic value (the difference between the Company’s closing stock
price on the last trading day of 2009 and the exercise price, multiplied by the
number of in-the-money options) for options outstanding and exercisable at
December 31, 2009 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, 2009.  The intrinsic value changes 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.





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 2008 and
2009, the dilutive common share equivalents outstanding were antidilutive;
therefore, basic loss per share and diluted earnings per share were the
same.





2009
            
            
            2008Basic
      earnings (losses) per share computation:Net
      earnings (loss) available to common shareholders
            
            $
            (3,072,316
            )
            
            $
            (513,797
            )Average
      common shares outstanding – basic
            
            
            2,678,205
            
            
            
            2,678,205Basic
      net earnings (losses) per share
            
            $
            (1.15
            )
            
            $
            (0.19
            )Diluted
      earnings (losses) per share computation:
            
            
            2009
            
            
            
            2008Net
      earnings (loss) available to common shareholders
            
            $
            (3,072,316
            )
            
            $
            (513,797
            )Average
      common shares outstanding – basic
            
            
            2,678,205
            
            
            
            2,678,205Incremental
      shares from assumed conversions:
              Stock
      options and warrants
            
            
            -
            
            
            
            -Average
      common shares outstanding – diluted
            
            
            2,678,205
            
            
            
            2,678,205Diluted
      earnings (loss) per share
            
            $
            (1.15
            )
            
            $
            (0.19
            )





43
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY


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, 2009, 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.





The
following table summarizes the capital amounts and ratios of the Company and the
Bank and the regulatory minimum requirements at December 31, 2009 and
2008.


Actual
            
            
            For
      Capital Adequacy Purposes
            
            
            To
      Be Well-Capitalized Under Prompt Corrective Action
    Provisions(Dollars
      in thousands)
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioDecember
      31, 2009The
      CompanyTotal
      capital (to risk-weighted assets)
            
            $
            25,438
            
            
            
            18.26
            %
            
            $
            11,143
            
            
            
            8.00
            %
            
            $
            13,928
            
            
            
            10.00
            %Tier
      I capital (to risk-weighted assets)
            
            
            23,688
            
            
            
            17.01
            %
            
            
            5,571
            
            
            
            4.00
            %
            
            
            8,357
            
            
            
            6.00
            %Tier
      I capital (to average assets)
            
            
            23,688
            
            
            
            13.82
            %
            
            
            6,854
            
            
            
            4.00
            %
            
            
            8,568
            
            
            
            5.00
            %The
      BankTotal
      capital (to risk-weighted assets)
            
            $
            25,438
            
            
            
            18.26
            %
            
            $
            11,143
            
            
            
            8.00
            %
            
            $
            13,928
            
            
            
            10.00
            %Tier
      I capital (to risk-weighted assets)
            
            
            23,688
            
            
            
            17.01
            %
            
            
            5,571
            
            
            
            4.00
            %
            
            
            8,357
            
            
            
            6.00
            %Tier
      I capital (to average assets)
            
            
            23,688
            
            
            
            13.82
            %
            
            
            6,854
            
            
            
            4.00
            %
            
            
            8,568
            
            
            
            5.00
            %December
      31, 2008The
      CompanyTotal
      capital (to risk-weighted assets)
            
            $
            26,012
            
            
            
            19.31
            %
            
            $
            10,833
            
            
            
            8.00
            %
            
            $
            13,540
            
            
            
            10.00
            %Tier
      I capital (to risk-weighted assets)
            
            
            24,425
            
            
            
            18.14
            %
            
            
            5,416
            
            
            
            4.00
            %
            
            
            8,124
            
            
            
            6.00
            %Tier
      I capital (to average assets)
            
            
            24,425
            
            
            
            14.19
            %
            
            
            6,974
            
            
            
            4.00
            %
            
            
            8,716
            
            
            
            5.00
            %The
      BankTotal
      capital (to risk-weighted assets)
            
            $
            26,012
            
            
            
            19.21
            %
            
            $
            10,833
            
            
            
            8.00
            %
            
            $
            13,540
            
            
            
            10.00
            %Tier
      I capital (to risk-weighted assets)
            
            
            24,425
            
            
            
            18.04
            %
            
            
            5,416
            
            
            
            4.00
            %
            
            
            8,124
            
            
            
            6.00
            %Tier
      I capital (to average assets)
            
            
            24,425
            
            
            
            14.01
            %
            
            
            6,974
            
            
            
            4.00
            %
            
            
            8,716
            
            
            
            5.00
            %


44
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY





NOTE 16 -
UNUSED LINES OF CREDIT





At
December 31, 2009, the Company had lines of credit to purchase federal funds up
to $18,500,000 from unrelated financial institutions.  At December 31,
2009, 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 $26,510,000 as of December 31,
2009.  As of December 31, 2009, the Bank had $8,000,000 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.





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, 2009 and
2008:





2009
            
            
            2008Commitments
      to extend credit
            
            $
            10,358,000
            
            
            $
            12,131,000Financial
      standby letters of credit
            
            
            180,000
            
            
            
            180,000$
            10,538,000
            
            
            $
            12,311,000





45
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY





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.




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
      investments
            
            $
            -
            
            
            $
            5,031,414
            
            
            $
            -Total
            
            $
            -
            
            
            $
            5,031,414
            
            
            $
            -





46
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY





NOTE 20 -
FAIR VALUE OF FINANCIAL INSTRUMENTS-
continued





Assets
measured at fair value on a recurring basis are as follows as of December 31,
2008:





Quoted
      market price in active markets
              (Level
      1)
            
            
            Significant
      other observable inputs
              (Level
      2)
            
            
            Significant
      unobservable inputs
              (Level
      3)Available-for-sale
      investments
            
            $
            -
            
            
            $
            4,638,214
            
            
            $
            -Total
            
            $
            -
            
            
            $
            4,638,214
            
            
            $
            -





The
Company had no liabilities carried at fair value or measured at fair value on a
recurring basis at December 31, 2009 or 2008.





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
            
            
            $
            -Real
      estate acquired through foreclosure
            
            
            
            
            
            
            2,050,272Total
            
            $
            -
            
            
            $
            8,116,459
            
            
            $
            -





Assets
measured at fair value on a non-recurring basis are as follows as of December
31, 2008:





Quoted
      market price in active markets
              (Level
      1)
            
            
            Significant
      other observable inputs
              (Level
      2)
            
            
            Significant
      unobservable inputs
              (Level
      3)Impaired
      loans
            
            $
            -
            
            
            $
            5,043,946
            
            
            $
            -Real
      estate acquired through foreclosure
            
            
            
            
            
            
            2,296,290Total
            
            $
            -
            
            
            $
            7,340,236
            
            
            $
            -





The
Company had no liabilities carried at fair value or measured at fair value on a
non-recurring basis at December 31, 2009 or 2008.





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


47
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY





NOTE 20 - FAIR VALUE OF FINANCIAL
INSTRUMENTS -continued






The
following table summarizes fair value estimates as of December 31, 2009 and 2008
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, 2009.





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, 2009 and 2008 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 Corporation 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.





Long-TermDebt -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
carrying and fair values of certain financial instruments at December 31,
2009 and 2008 were as follows:




December
      31, 2009
              
              
              December
      31, 2008Carrying
      Amount
              
              
              Estimated
      Fair Value
              
              
              Carrying
      Amount
              
              
              Estimated
      Fair ValueFinancial
      Assets:Loans
      receivable, net
              
              $
              137,566,000
              
              
              $
              137,205,000
              
              
              $
              137,735,000
              
              
              $
              137,740,000Financial
      Liabilities:Total
      deposits
              
              $
              143,670,000
              
              
              $
              139,206,000
              
              
              $
              121,318,000
              
              
              $
              121,451,000FHLB
      advances
              
              $
              8,000,000
              
              
              $
              8,004,000
              
              
              $
              23,570,000
              
              
              $
              23,570,000





48
 AB&T
FINANCIAL CORPORATION AND SUBSIDIARY





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





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





Condensed
Balance Sheet


December
      31,2009
            
            
            2008Assets:
              Investment in banking
      subsidiary
            
            $
            24,893,706
            
            
            $
            24,194,101Liabilities
      and stockholders’ equity:Liabilities
            
            
            -
            
            
            
            -Stockholders’
      equity
            
            $
            24,893,706
            
            
            $
            24,194,101Total
      liabilities and stockholders’ equity
            
            $
            24,893,706
            
            
            $
            24,194,101





Condensed
Statement of Operations


For
the years ended December 31, 2009 and 2008


2009
              
              
              2008Income
              
              $
              -
              
              
              $
              -Expenses
              
              
              269,175
              
              
              
              182,095Loss
      before income equity in
                undistributed losses of banking
      subsidiary
              
              
              (269,175
              )
              
              
              (182,095
              )Equity
      in undistributed losses of banking subsidiary
              
              
              (2,617,343
              )
              
              
              (331,702
              )Net loss
              
              $
              (2,886,518
              )
              
              $
              (513,797
              )


Condensed
Statement of Cash Flows


For
the years ended December 31, 2009 and 2008


2009
            
            
            2008Cash
      flows from operating activities:Net loss
            
            $
            (2,886,518
            )
            
            $
            (513,797
            )Adjustments to reconcile net loss
      to net cash
              provided by operating
      activities:Stock based compensation
      expense
            
            
            269,175
            
            
            
            182,095Equity in undistributed losses of
      banking subsidiary
            
            
            2,617,343
            
            
            
            331,702Net
      cash used by operating activities
            
            
            -
            
            
            
            -Cash
      flows from investing activities:Dividends received from banking
      subsidiary
            
            
            141,944
            
            
            
            -Investment in banking
      subsidiary
            
            
            (3,500,000
            )
            
            
            -Net
      cash used by investing activities
            
            
            (3,358,056
            )
            
            
            -Cash
      flows from financing activities:Dividends, paid
            
            
            (141,944
            )
            
            
            -Proceeds from issuance of
      preferred stock, net
            
            
            3,363,150
            
            
            
            -Proceeds from issuance of stock
      warrants
            
            
            136,850
            
            
            
            -Net
      cash provided by financing activities
            
            
            3,358,056
            
            
            
            -Increase
      (decrease) in cash
            
            
            -
            
            
            
            -Cash
      and cash equivalents, beginning of year
            
            
            -
            
            
            
            -Cash
      and cash equivalents, end of year
            
            $
            -
            
            
            $
            -




49


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





None.





ITEM
9A(T).                                           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,
      2009.





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
      temporary rules of the Securities and Exchange Commission that permit the
      Company to provide only management’s report in this annual
      report.








ITEM
      9B.
            OTHER
      INFORMATION





None.




















50


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 2010 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 2010 annual
meeting of shareholders, to be filed with the Securities and Exchange
Commission.




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 2010 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
              
              427,833
              
              $7.65
              
              107,677Equity
      compensation plans not approved by security holders
              
              n/a
              
              n/a
              
              n/aTotal
              
              427,833
              
              $7.65
              
              107,677




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 2010 annual meeting of shareholders,
to be filed with the Securities and Exchange Commission.




51


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 2010 annual meeting of shareholders, to be
filed with the Securities and Exchange Commission.










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, 2009 and 2008





Consolidated
Statements of Operations for the Years Ended


December
31, 2009 and 2008





Consolidated
Statements of Changes in Shareholders’ Equity and


Comprehensive
Loss for the Years Ended December 31, 2009 and 2008





Consolidated
Statements of Cash Flows for the Years Ended


December
31, 2009 and 2008





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)





52


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)*





10.4
            Employment
      Agreement of Eric Dixon (incorporated by reference from Exhibit 10.03 to
      Registrant’s Form 8-K as filed with the Securities and Exchange Commission
      on May 20, 2008)*





10.5
            Employment
      Agreement of Matthew J. Triplett (incorporated by reference from Exhibit
      10.04 to Registrant’s Form 8-K as filed with the Securities and Exchange
      Commission on May 20, 2008)*





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 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 (filed
herewith)





99.1
            Certification
      of Principal Executive Officer pursuant to section 111(b)(4) of the
      Emergency Economic Stabilization Act of 2008, as amended (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 report or
      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
30, 2010





54


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
      30, 2010/s/Roger
      Mobley
              Roger
      Mobley, Executive Vice President and Chief Financial Officer
              (Principal
      Financial Officer and Principal Accounting Officer)
            March
      30, 2010/s
      /Joseph H. Morgan
              Joseph
      H. Morgan, Director
            March
      30, 2010/s
      /Wayne F. Shovelin
              Wayne
      F. Shovelin., Director
            March
      30, 2010/s/
      David W. White
              David
      W. White, Director
            March
      30, 2010











55


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*





10.4
            Employment
      Agreement of Eric Dixon*





10.5
            Employment
      Agreement of Matthew J. Triplett*





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








Exhibit
21.1





Subsidiaries





Alliance
      Bank & Trust Company, a North Carolina banking
    corporation





56


Exhibit
23.1





CONSENT
OF INDEPENDENT REGISTERED
 PUBLIC
ACCOUNTING FIRM
 
 Board of
Directors
 AB&T
Financial Corporation
 
 
 We
consent to the incorporation by reference in the registration statement No.
333-157471 on Form S-8 of our report dated March 29, 2010 with
respect to the consolidated financial statements of AB&T Financial
Corporation which report appears in this Annual Report on Form 10-K of AB&T
Financial Corporation for the year ended December 31, 2009.
 
 
 /s/
Elliott Davis, PLLC
 
 Elliott
Davis, PLLC
 Charlotte,
North Carolina
 March 29,
2010


57


Exhibit
31.1





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





I, Daniel
C. Ayscue, certify that:





1.
            I
      have reviewed this annual report on Form 10-K of AB&T Financial
      Corporation;





2.
            Based
      on my knowledge, this report does not contain any untrue statement of a
      material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;





3.
            Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the
      financial condition, results of operations and cash flows of the
      registrant as of, and for, the periods presented in this
      report;





4.
            The
      registrant’s other certifying officer and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and
  have:





a.
            Designed
      such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to
      ensure that material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;b.
            Designed
      such internal control over financial reporting, or caused such internal
      control over financial reporting to be designed under our
      supervision, 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;





c.
            Evaluated
      the effectiveness of the registrant's disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness
      of the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation;
  and





d.
            Disclosed
      in this report any change in the registrant’s internal control over
      financial reporting that occurred during the registrant’s most recent
      fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect, the registrant’s internal control over financial
      reporting; and





5.
            The
      registrant’s other certifying officer and I have disclosed, based
      on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of
      registrant's board of directors (or persons performing the equivalent
      functions):a.
            All
      significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information;
  and





b.
            Any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal control
      over financial reporting.





Date: March 30,
2010            
/s/Daniel
C.
Ayscue


Daniel
C. Ayscue


President
and Chief Executive Officer


(Principal
Executive Officer)





58


Exhibit
31.2





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





I, Roger
A. Mobley, certify that:





1.
            I
      have reviewed this annual report on Form 10-K of AB&T Financial
      Corporation;2.
            Based
      on my knowledge, this report does not contain any untrue statement of a
      material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;





3.
            Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the
      financial condition, results of operations and cash flows of the
      registrant as of, and for, the periods presented in this
      report;





4.
            The
      registrant’s other certifying officer and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and
  have:





a.
            Designed
      such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to
      ensure that material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;b.
            Designed
      such internal control over financial reporting, or caused such internal
      control over financial reporting to be designed under our
      supervision, 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;





c.
            Evaluated
      the effectiveness of the registrant's disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness
      of the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation;
  and





d.
            Disclosed
      in this report any change in the registrant’s internal control over
      financial reporting that occurred during the registrant’s most recent
      fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect, the registrant’s internal control over financial
      reporting; and





5.
            The
      registrant’s other certifying officer and I have disclosed, based
      on our most recent evaluation of internal control over financial
      reporting, to the registrant's auditors and the audit committee of
      registrant's board of directors (or persons performing the equivalent
      functions):a.
            All
      significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information; andb.
            Any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal control
      over financial reporting.







Date: March 30,
2010            
/s/ Roger A.
Mobley


Roger
A. Mobley


Executive
Vice President and Chief Financial Officer


(Principal
Financial Officer)





59


Exhibit
32.1





Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002








The
undersigned hereby certify that, to his knowledge, (i) the Form 10-K filed by
AB&T Financial Corporation (the “Issuer”) for the year ended December 31,
2009, fully complies with the requirements of Section 13 (a) or 15 (d) of the
Securities Exchange Act of 1934 and (ii) the information contained in that
report fairly presents, in all material respects, the financial condition and
results of operations of the Issuer on the dates and for the periods presented
therein.




















Date:  March
30, 2010


/s/Daniel C. AyscueDaniel
      C. AyscuePresident
      and Chief Executive Officer(Principal
      Executive Officer)/s/Roger A. MobleyRoger
      A. MobleyExecutive
      Vice President andChief
      Financial Officer(Principal
      Financial Officer)











60


Exhibit
99.1





Certification
of Principal Executive Officer


Pursuant
to


Section 111(b)(4)


of
the


Emergency
Economic Stabilization Act of 2008, as Amended





I, Daniel
C. Ayscue, certify, based on my knowledge, that:





(i)
            The
      compensation committee of AB&T Financial Corporation has discussed,
      reviewed, and evaluated with senior risk officers at least every six
      months during the period beginning on September 14, 2009, and ending on
      December 31, 2009 (the “Applicable Period”), the senior executive officer
      (“SEO”) compensation plans and employee compensation plans and the risks
      these plans pose to AB&T Financial
  Corporation;




(ii)
            The
      compensation committee of AB&T Financial Corporation has identified
      and limited during the Applicable Period any features of the SEO
      compensation plans that could lead SEOs to take unnecessary and excessive
      risks that could threaten the value of AB&T Financial Corporation, and
      during that same Applicable Period has identified any features of the
      employee compensation plans that pose risks to AB&T Financial
      Corporation and has limited those features to ensure that AB&T
      Financial Corporation is not unnecessarily exposed to
    risks;




(iii)
            The
      compensation committee has reviewed, at least every six months during the
      Applicable Period, the terms of each employee compensation plan and
      identified any features of the plan that could encourage the manipulation
      of reported earnings of AB&T Financial Corporation to enhance the
      compensation of an employee and has limited any such
    features;




(iv)
            The
      compensation committee of AB&T Financial Corporation will certify to
      the reviews of the SEO compensation plans and employee compensation plans
      required under (i) and (iii) above;




(v)
            The
      compensation committee of AB&T Financial Corporation will provide a
      narrative description of how it limited during any part of the most
      recently completed fiscal year that included a TARP period the features
      in




(A)
            SEO
      compensation plans that could lead SEOs to take unnecessary and excessive
      risks that could threaten the value of AB&T Financial
      Corporation;




(B)
            Employee
      compensation plans that unnecessarily expose AB&T Financial
      Corporation to risks; and




(C)
            Employee
      compensation plans that could encourage the manipulation of reported
      earnings of AB&T Financial Corporation to enhance the compensation of
      an employee;




61


(vi)
            AB&T
      Financial Corporation has required that bonus payments, as defined in the
      regulations and guidance established under section 111 of EESA (“bonus
      payments”), of the SEOs and twenty next most highly compensated employees
      be subject to a recovery or ‘‘clawback’’ provision during any part of the
      most recently completed fiscal year that was a TARP period if the bonus
      payments were based on materially inaccurate financial statements or any
      other materially inaccurate performance metric
  criteria;




(vii)
            AB&T
      Financial Corporation has prohibited any golden parachute payment, as
      defined in the regulations and guidance established under section 111 of
      EESA, to an SEO or any of the next five most highly compensated employees
      during the period beginning on June 15, 2009 and ending on December 31,
      2009;




(viii)
            AB&T
      Financial Corporation has limited bonus payments to its applicable
      employees in accordance with section 111 of EESA and the regulations and
      guidance established thereunder during the period beginning on June 15,
      2009 and ending on December 31,
2009.




(ix)
            The
      board of directors of AB&T Financial Corporation has established an
      excessive or luxury expenditures policy, as defined in the regulations and
      guidance established under section 111 of EESA, by September 14, 2009;
      this policy has been provided to Treasury and its primary regulatory
      agency; AB&T Financial Corporation and its employees have complied
      with this policy during the applicable period; and any expenses that,
      pursuant to this policy, required approval of the board of directors, a
      committee of the board of directors, an SEO, or an executive officer with
      a similar level of responsibility were properly
  approved;




(x)
            AB&T
      Financial Corporation will permit a non-binding shareholder resolution in
      compliance with any applicable Federal securities rules and regulations on
      the disclosures provided under the Federal securities laws related to SEO
      compensation paid or accrued during the period beginning June 15, 2009 and
      ending on December 31, 2009;




(xi)
            AB&T
      Financial Corporation will disclose the amount, nature, and justification
      for the offering during the period beginning June 15, 2009 and ending with
      December 31, 2009 of any perquisites, as defined in the regulations and
      guidance established under section 111 of EESA, whose total value exceeds
      $25,000 for any employee who is subject to the bonus payment limitations
      identified in paragraph (viii);




(xii)
            AB&T
      Financial Corporation will disclose whether AB&T Financial
      Corporation, the board of directors of AB&T Financial Corporation, or
      the compensation committee of AB&T Financial Corporation has engaged
      during the period beginning June 15, 2009 and ending December 31, 2009, a
      compensation consultant; and the services the compensation consultant or
      any affiliate of the compensation consultant provided during this
      period;




(xiii)
            AB&T
      Financial Corporation has prohibited the payment of any gross-ups, as
      defined in the regulations and guidance established under section 111 of
      EESA, to the SEOs and the next twenty most highly compensated employees
      during the period beginning June 15, 2009 and ending December 31,
      2009;




(xiv)
            AB&T
      Financial Corporation has substantially complied with all other
      requirements related to employee compensation that are provided in the
      agreement between AB&T Financial Corporation and Treasury, including
      any amendments;




(xv)
            AB&T
      Financial Corporation has submitted to Treasury a complete and accurate
      list of the SEOs and the twenty next most highly compensated employees for
      the current fiscal year and the most recently completed fiscal year, with
      the non-SEOs ranked in descending order of level of annual compensation,
      and with the name, title, and employer of each SEO and most highly
      compensated employee identified;
and




(xvi)
            I
      understand that a knowing and willful false or fraudulent statement made
      in connection with this certification may be punished by fine,
      imprisonment, or both.








March 30,
2010             
/s/ Daniel C.
Ayscue


Daniel C.
Ayscue


President and Chief Executive Officer


62


Exhibit
99.2





Certification
of Principal Financial Officer


Pursuant
to


Section 111(b)(4)


of
the


Emergency
Economic Stabilization Act of 2008, as Amended





I, Roger
A. Mobley, certify, based on my knowledge, that:





(i)
            The
      compensation committee of AB&T Financial Corporation has discussed,
      reviewed, and evaluated with senior risk officers at least every six
      months during the period beginning on September 14, 2009, and ending on
      December 31, 2009 (the “Applicable Period”), the senior executive officer
      (“SEO”) compensation plans and employee compensation plans and the risks
      these plans pose to AB&T Financial
  Corporation;




(ii)
            The
      compensation committee of AB&T Financial Corporation has identified
      and limited during the Applicable Period any features of the SEO
      compensation plans that could lead SEOs to take unnecessary and excessive
      risks that could threaten the value of AB&T Financial Corporation, and
      during that same Applicable Period has identified any features of the
      employee compensation plans that pose risks to AB&T Financial
      Corporation and has limited those features to ensure that AB&T
      Financial Corporation is not unnecessarily exposed to
    risks;




(iii)
            The
      compensation committee has reviewed, at least every six months during the
      Applicable Period, the terms of each employee compensation plan and
      identified any features of the plan that could encourage the manipulation
      of reported earnings of AB&T Financial Corporation to enhance the
      compensation of an employee and has limited any such
    features;




(iv)
            The
      compensation committee of AB&T Financial Corporation will certify to
      the reviews of the SEO compensation plans and employee compensation plans
      required under (i) and (iii) above;




(v)
            The
      compensation committee of AB&T Financial Corporation will provide a
      narrative description of how it limited during any part of the most
      recently completed fiscal year that included a TARP period the features
      in




(A)
            SEO
      compensation plans that could lead SEOs to take unnecessary and excessive
      risks that could threaten the value of AB&T Financial
      Corporation;




(B)
            Employee
      compensation plans that unnecessarily expose AB&T Financial
      Corporation to risks; and




(C)
            Employee
      compensation plans that could encourage the manipulation of reported
      earnings of AB&T Financial Corporation to enhance the compensation of
      an employee;




63


(vi)
            AB&T
      Financial Corporation has required that bonus payments, as defined in the
      regulations and guidance established under section 111 of EESA (“bonus
      payments”), of the SEOs and twenty next most highly compensated employees
      be subject to a recovery or ‘‘clawback’’ provision during any part of the
      most recently completed fiscal year that was a TARP period if the bonus
      payments were based on materially inaccurate financial statements or any
      other materially inaccurate performance metric
  criteria;




(vii)
            AB&T
      Financial Corporation has prohibited any golden parachute payment, as
      defined in the regulations and guidance established under section 111 of
      EESA, to an SEO or any of the next five most highly compensated employees
      during the period beginning on June 15, 2009 and ending on December 31,
      2009;




(viii)
            AB&T
      Financial Corporation has limited bonus payments to its applicable
      employees in accordance with section 111 of EESA and the regulations and
      guidance established thereunder during the period beginning on June 15,
      2009 and ending on December 31,
2009.




(ix)
            The
      board of directors of AB&T Financial Corporation has established an
      excessive or luxury expenditures policy, as defined in the regulations and
      guidance established under section 111 of EESA, by September 14, 2009;
      this policy has been provided to Treasury and its primary regulatory
      agency; AB&T Financial Corporation and its employees have complied
      with this policy during the applicable period; and any expenses that,
      pursuant to this policy, required approval of the board of directors, a
      committee of the board of directors, an SEO, or an executive officer with
      a similar level of responsibility were properly
  approved;




(x)
            AB&T
      Financial Corporation will permit a non-binding shareholder resolution in
      compliance with any applicable Federal securities rules and regulations on
      the disclosures provided under the Federal securities laws related to SEO
      compensation paid or accrued during the period beginning June 15, 2009 and
      ending on December 31, 2009;




(xi)
            AB&T
      Financial Corporation will disclose the amount, nature, and justification
      for the offering during the period beginning June 15, 2009 and ending with
      December 31, 2009 of any perquisites, as defined in the regulations and
      guidance established under section 111 of EESA, whose total value exceeds
      $25,000 for any employee who is subject to the bonus payment limitations
      identified in paragraph (viii);




(xii)
            AB&T
      Financial Corporation will disclose whether AB&T Financial
      Corporation, the board of directors of AB&T Financial Corporation, or
      the compensation committee of AB&T Financial Corporation has engaged
      during the period beginning June 15, 2009 and ending December 31, 2009, a
      compensation consultant; and the services the compensation consultant or
      any affiliate of the compensation consultant provided during this
      period;




(xiii)
            AB&T
      Financial Corporation has prohibited the payment of any gross-ups, as
      defined in the regulations and guidance established under section 111 of
      EESA, to the SEOs and the next twenty most highly compensated employees
      during the period beginning June 15, 2009 and ending December 31,
      2009;


(xiv)
              AB&T
      Financial Corporation has substantially complied with all other
      requirements related to employee compensation that are provided in the
      agreement between AB&T Financial Corporation and Treasury, including
      any amendments;
  (xv)
              AB&T
      Financial Corporation has submitted to Treasury a complete and accurate
      list of the SEOs and the twenty next most highly compensated employees for
      the current fiscal year and the most recently completed fiscal year, with
      the non-SEOs ranked in descending order of level of annual compensation,
      and with the name, title, and employer of each SEO and most highly
      compensated employee identified;
and
  (xvi)
              I
      understand that a knowing and willful false or fraudulent statement made
      in connection with this certification may be punished by fine,
      imprisonment, or both.
 
 
 March 30,
2010
 /s/ Roger A.
Mobley
 Roger
A. Mobley
 Executive Vice President
 and Chief Financial Officer


64