- Quarterly Report (10-Q)

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2010

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from _________to_________

 

Commission File Number:                        000-53249

 

AB&T FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

North Carolina	26-2588442
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

 

292 W. Main Avenue

Gastonia, North Carolina 28052

(Address of principal executive offices and zip code)

 

[phone]

                         (Registrant's telephone number, including area code)

 

NA

(Former name, former address and former fiscal year, if changed since last report)

________________________________________________

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES    X       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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES___  NO____

 

 

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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 .

Large accelerated filer___                                                                  Accelerated filer_ ___

Non-accelerated filer___ (Do not check if a smaller reporting company)            Smaller reporting company   X

 

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

YES  ___   NO    X

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

State the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.

 

2,668,205 shares of common stock, $1.00 par value, as of May 14, 2010

 

 

 

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INDEX

 

PART I – FINANCIAL INFORMATION	Page No.
Item 1.  Financial Statements (Unaudited)
Consolidated Balance Sheets – March 31, 2010 and December 31, 2009	3
Consolidated Statements of Operations – Three months ended March 31, 2010 and 2009	4
Consolidated Statements of Changes in Shareholders’ Equity and  Comprehensive
Income (Loss) -  Three months ended March 31, 2010 and 2009	5
Consolidated Statements of Cash Flows – Three months ended March 31, 2010 and 2009	6
Notes to Consolidated Financial Statements	7-12
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	13-17
Item 4T.  Controls and Procedures	18
PART II – OTHER INFORMATION
Item 6.              Exhibits	18

 

 

 

 

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PART I - FINANCIAL INFORMATION

 

Item 1 - Financial Statements

AB&T FINANCIAL CORPORATION
Consolidated Balance Sheets

		March 31, 2010				December 31, 2009
		(Unaudited)				(Audited)
Assets
Cash and cash equivalents
Cash and due from banks		$	3,091,388			$	4,701,944
Federal funds sold			9,258,877				16,729,661
Time deposits with other banks			1,037,518				1,296,527
Total cash and cash equivalents			13,387,783				22,728,132
Securities available for sale at fair value			12,521,238				5,031,414
Nonmarketable equity securities			1,413,180				1,413,180
Total investments			14,971,936				6,444,594
Loans receivable			137,640,105				139,974,913
Less allowance for loan losses			(2,521,012	)			(2,408,990	)
Loans, net			135,119,093				137,565,923
Premises, furniture and equipment, net			3,938,115				3,952,877
Accrued interest receivable			553,048				566,318
Deferred tax asset			2,649,540				1,937,482
Other real estate owned			3,135,185				2,050,272
Other assets			697,208				1,485,400
Total assets		$	173,414,390			$	176,730,998
Liabilities
Deposits
Noninterest-bearing transaction accounts		$	6,248,528			$	5,626,494
Interest-bearing transaction accounts			5,452,464				4,759,708
Savings and money market			28,205,770				24,279,357
Time deposits $100,000 and over			7,460,145				6,934,915
Other time deposits			92,803,092				102,069,318
Total deposits			140,169,999				143,669,792
Borrowed funds			21,374				-
FHLB advances			8,000,000				8,000,000
Accrued interest payable			70,379				55,169
Other liabilities			156,245				112,331
Total liabilities			148,417,997				151,837,292
Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized, issued and  outstanding – 3,500 at March 31, 2010 and at December 31, 2009			3,391,986				3,385,908
Common stock, $1.00 par value; 11,000,000 shares authorized, issued and outstanding – 2,678,205 at March 31, 2010 and December 31, 2009			2,678,205				2,678,205
Treasury stock, at cost (10,000 shares at March 31, 2010 and December 31, 2009)			(55,600	)			(55,600	)
Warrants			136,850				136,850
Capital surplus			21,757,432				21,734,686
Retained deficit			(2,991,146	)			(3,066,700	)
Accumulated other comprehensive income			78,666				80,357
Total shareholders’ equity			24,996,393				24,893,706
Total liabilities and shareholders’ equity		$	173,414,390			$	176,730,998

See notes to consolidated financial statements                           

 

3

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AB&T FINANCIAL CORPORATION

Consolidated Statements of Operations

(Unaudited)

		For the three months ended March 31,
		2010				2009
Interest income:
Loans, including fees		$	1,689,925			$	1,644,474
Investment securities, taxable			63,302				61,962
FHLB, interest and dividends			931				-
Federal funds sold			10,941				3,663
Time deposits with other banks			3,683				19,167
Total			1,768,782				1,729,266
Interest expense:
Time deposits $100,000 and over			41,971				624,574
Other deposits			446,634				158,449
Other interest expense			76,407				200,827
Total			565,012				983,850
Net interest income			1,203,770				745,416
Provision for loan losses			36,528				341,314
Net interest income after provision
for loan losses			1,167,242				404,102
Other operating income:
Service charges on deposit accounts			89,425				82,872
Residential mortgage application fees			-				12,405
Rental income			750				900
Other service charges, commission and fees			10,449				13,003
Total			100,624				109,180
Other operating expenses:
Salaries and employee benefits			557,418				595,942
Occupancy expense			46,539				47,351
Furniture and equipment expense			42,718				51,606
Loss on sale of other real estate			448				-
Other operating expenses			486,522				341,459
Total			1,133,645				1,036,358
Income (loss) before income taxes			134,221				(523,076	)
Income tax expense (benefit)			51,982				(200,598	)
Net income (loss)		$	82,239			$	(322,478	)
Accretion of preferred stock to redemption value			6,078				4,524
Preferred stock dividends			43,750				43,750
Net income (loss) available to
common shareholders		$	32,411			$	(370,752	)
Income (loss) per common share
Basic income (loss) per common share		$	0.01			$	(0.14	)
Diluted income (loss) per common share		$	0.01			$	(0.14	)

 

See notes to consolidated financial statements

 

4

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AB&T FINANCIAL CORPORATION

Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (Loss)

For the three months ended March 31, 2010 and 2010

(dollars in thousands except for share data)

(Unaudited)

	Common Stock		Preferred Stock					Accumu- lated Other Compre- hensive	Retained
	Shares	Amount	Shares	Amount	Treasury Stock	Warrants	Capital Surplus	Income (loss)	Earnings (Deficit)	Total
Balance,  December 31, 2008	2,678,205	$ 2,678	-	$ -	$ -	$ -	$ 21,607	$ 66	$ (157)	$ 24,194
Net loss									(322)	(322)
Other comprehensive   income, net of tax								24		24
Comprehensive  loss										(298)
Issuance of   preferred stock			3,500	3,363						3,363
Issuance of common   stock warrants						137				137
Accretion of   preferred stock to   redemption value				5					(5)	-
Dividends, preferred							(11)			(11)
Purchase of Treasury   stock (10,000 shares)					(56)					(56)
Stock-based employee  compensation							66			66
Balance
March 31, 2009	2,678,205	$ 2,678	3,500	$ 3,368	$ (56)	$ 137	$ 21,662	$ 90	$ (484)	$ 27,395
Balance,  December 31, 2009	2,678,205	$ 2,678	3,500	$ 3,386	$ (56)	$ 137	$ 21,734	$ 80	$ (3,067)	$ 24,893
Net income									82	82
Other comprehensive    loss, net of tax								(1)		(1)
Comprehensive income										81
Accretion of   preferred stock to   redemption value				6					(6)	-
Dividends, preferred							(44)			(44)
Stock-based employee   compensation expense							67			67
Balance
March 31, 2010	2,678,205	$ 2,678	3,500	$ 3,392	$  (56)	$ 137	$ 21,757	$ 79	$ (2,991)	$24,996

See notes to consolidated financial statements

 

5

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AB&T FINANCIAL CORPORATION

Consolidated Statements of Cash Flows

For the three months ended March 31, 2010 and 2009

(Unaudited)

		For the three months ended March 31,
		2010				2009
Cash flows from operating activities:
Net income (loss)		$	82,239			$	(322,478	)
Adjustments to reconcile net income (loss) to net   cash provided by operating activities
Provision for loan losses			36,528				341,314
Loss on sale of other real estate			448				-
Depreciation and amortization expense			41,923				54,431
Discount accretion and premium amortization			1,471				110,063
Deferred income tax benefit			(1,079	)			(216,280	)
Decrease in interest receivable			13,270				35,110
Increase in interest payable			15,210				22,214
Decrease in other assets			78,292				10,391
Increase in other liabilities			64,681				91,150
Stock based compensation expense			66,496				66,371
Net cash provided by operating activities			399,479				192,286
Cash flows from investing activities:
Purchase of securities available for sale			(7,536,998	)			-
Purchase of nonmarketable equity securities			-				(41,900	)
Redemption (purchase) of certificates of deposit from other banks			259,009				(11,449	)
Calls and maturities of securities available for sale			42,933				-
Net decrease (increase) in loans receivable			1,269,635				(161,901	)
Proceeds from sale of other real estate			55,306				370,246
Purchases of premises, furniture, and equipment			(27,161	)			(2,976	)
Net cash provided (used) by investing activities			(5,936,276	)			152,020
Cash flows from financing activities:
Net increase (decrease) in demand deposits, interest-      bearing transaction accounts and savings accounts			5,241,203				(1,262,834	)
Net decrease in certificates of deposit and other time deposits			(8,740,996	)			(1,458,467	)
Net decrease in borrowed funds			-				(1,066,883	)
Proceeds from issuance of preferred stock, net			-				3,363,150
Dividends paid			(43,750	)			(10,694	)
Purchase of treasury stock			-				(55,600	)
Proceeds from issuance of stock warrants			-				136,850
Net cash used by financing activities			(3,543,543	)			(354,478	)
Net decrease in cash and cash equivalents		$	(9,081,340	)		$	(10,172	)
Cash and cash equivalents, beginning of period		$	22,728,132			$	17,168,629
Cash and cash equivalents, end of period		$	13,387,783			$	17,158,457

Supplemental disclosure of cash flow information:

Transfer of loans to real estate acquired in settlement of loans		$	1,140,667			$	1,266,727
Interest paid		$	549,802			$	3,298,739
Taxes paid		$	-			$	-

See notes to consolidated financial statements

 

6

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AB&T FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 – 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.

 

Note 2 – Basis of Presentation

 

The accompanying financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are consolidated to omit disclosures, which would substantially duplicate those contained in the Company’s 2009 Annual Report on Form 10-K.  The financial statements as of March 31, 2010 and for the interim periods ended March 31, 2010 and 2009 are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation. The financial information as of December 31, 2009 has been derived from the audited financial statements as of that date.  For further information, refer to the financial statements and the notes included in the Company’s 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2010.

 

The preparation of the consolidated financial statements are in conformity with accounting principles generally accepted in the United States of America (GAAP) which requires management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements.  In addition, they affect the reported amounts of income and expense during the reporting period.  Actual results could differ from these estimates and assumptions.

 

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

 

Note 3 – Recently Issued Accounting Pronouncements

 

In January 2010, fair value guidance was amended to require disclosures for significant amounts transferred in and out of Levels 1 and 2 and the reasons for such transfers and to require that gross amounts of purchases, sales, issuances and settlements be provided in the Level 3 reconciliation.  The new disclosures are effective for the Company for the current quarter and have been reflected in the Fair Value footnote.

 

Guidance related to subsequent events was amended in February 2010 to remove the requirement for an SEC filer to disclose the date through which subsequent events were evaluated.  The amendments were effective upon issuance and had no significant 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.

 

7

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AB&T FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

Note 4 – Comprehensive Income

 

Comprehensive income includes net income and other comprehensive income, which is defined as nonowner related transactions in equity.  The following table sets forth the amounts of other comprehensive income included in equity along with the related tax effect for the three month periods ended March 31, 2010 and 2009:

 

		Three months ended March 31,
		2010				2009
Unrealized gains (losses) on securities available for sale		$	(2,772	)		$	40,198
Reclassification of (gains) losses recognized in net income			-				-
Income tax expense (benefit)			1,078				(15,657	)
Other comprehensive income (loss)		$	(1,694	)		$	24,541

 

Note 5 – Income (loss) per common share

 

Basic income per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding.  Diluted income per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding and dilutive common share equivalents using the treasury stock method.

 

                                                                                                                                                                                                                                     Three months ended March 31, 2010

		Income (Numerator)				Shares (Denominator)				Per Share Amount
Basic loss per share
Income available to common shareholders		$	32,411				2,668,205			$	0.01
Effect of dilutive securities
Stock options			-				-
Dilutive income per share
Income available to common shareholders plus assumed conversions		$	32,411				2,668,205			$	0.01

 

 

 

                                                                                                                                                                                                                                         Three months ended March 31, 2009

		Income (Numerator)				Shares (Denominator)				Per Share Amount
Basic loss per share
Loss available to common shareholders		$	(370,752	)			2,668,205			$	(0.14	)
Effect of dilutive securities
Stock options			-				-
Dilutive loss per share
Loss available to common shareholders plus assumed conversions		$	(370,752	)			2,668,205			$	(0.14	)

 

 

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AB&T FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 6 – Fair Value Measurements

 

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 March 31, 2010:

 

		Quoted market price in active markets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs  (Level 3)
Available for sale investments		$	-			$	12,521,238			$	-
Total		$	-			$	12,521,238			$	-

 

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			$	-

 

 

 

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AB&T FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 6 – Fair Value Measurements - continued

 

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

 

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

		Quoted market price in active markets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs  (Level 3)
Impaired loans		$	-			$	6,249,354			$	-
Real estate acquired through foreclosure							3,135,185
Total		$	-			$	9,384,539			$	-

 

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							2,050,272
Total		$	-			$	8,116,459			$	-

 

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

 

 

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

 

The following table summarizes fair value estimates as of March 31, 2010 and December 31, 2009 for financial instruments, as defined by ASC Topic 825, excluding short-term financial assets and liabilities, for which carrying amounts approximate fair value, and financial instruments recorded at fair value on a recurring basis at March 31, 2010 and 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 changed 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 March 31, 2010, and December 31, 2009 are not carried at fair value in its entirety on the Company’s Consolidated Balance Sheet.

 

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

 

 

10

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AB&T FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

Note 6 – Fair Value Measurements - continued

 

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.

 

 

Long-Term Debt  - 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 March 31, 2010 and December 31, 2009 were as follows:

 

		March 31, 2010								December 31, 2009
		Carrying				Estimated				Carrying				Estimated
		Amount				Fair Value				Amount				Fair Value
Financial Assets:
Loans receivable, net		$	133,560,000			$	137,565,923			$	137,205,000			$	135,119,093
Financial Liabilities:
Total deposits		$	135,462,000			$	143,669,792			$	139,206,000			$	140,169,999
FHLB advances		$	8,000,000			$	8,248,000			$	8,000,000			$	8,004,000

 

Note 7 – Investment Securities

 

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

						Gross Unrealized
		Amortized Cost				Gains				Losses				Estimated Fair Value
March 31, 2010
Mortgage-backed securities		$	10,348,629			$	150,052			$	15,175			$	10,483,506
Agencies			1,041,282				3,849				-				1,045,132
Municipals			1,002,471				-				9,871				992,600
Total		$	12,392,382			$	153,901			$	25,046			$	12,521,238
December 31, 2009
Mortgage-backed securities		$	3,857,417			$	155,987			$	21,581			$	3,991,823
Agencies			1,042,373				-				2,782				1,039,591
Total		$	4,899,790			$	155,987			$	24,363			$	5,031,414

 

 

 

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AB&T FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 7 – Investment Securities - continued

 

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

		Securities Available-for-Sale
		Amortized Cost				Estimated Fair Value
Due in one year or less		$	892,666			$	922,971
Due after one year but within five years			1,446,288				1,520,688
Due after five years but within ten years			7,725,461				7,759,465
Due after ten years			2,327,969				2,318,113
		$	12,392,384			$	12,521,238

 

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 March 31, 2010 and December 31, 2009.

 

		Less than twelve months								Twelve months or more								Total
		Fair Value				Unrealized losses				Fair Value				Unrealized losses				Fair Value				Unrealized losses
March 31, 2010
Mortgage-backed securities		$	2,243,082			$	15,175			$	-			$	-			$	2,243,082			$	15,175
Agencies			-				-				-				-				-				-
Municipals			992,600				9,871				-				-				992,600				9,871
Total		$	2,269,387			$	25,046			$	-			$	-			$	2,269,387			$	25,046

 

		Less than twelve months								Twelve months or more								Total
		Fair Value				Unrealized losses				Fair Value				Unrealized losses				Fair Value				Unrealized losses
December 31, 2009
Mortgage-backed securities		$	1,229,796			$	21,581			$	-			$	-			$	1,229,796			$	21,581
Agencies			1,039,591				2,782				-								1,039,591				2,782
Total		$	2,269,387			$	24,363			$	-			$	-			$	2,269,387			$	24,363

 

Note 8 – United States Department of the Treasury Capital Purchase Program

 

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.

 

12

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Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations

 

The following is a discussion of the Company’s financial condition as of March 31, 2010 compared to December 31, 2009, and the results of operations for the three month periods ended March 31, 2010 and 2009.  This discussion should be read in conjunction with the Company’s consolidated financial statements and accompanying notes appearing in this report and in conjunction with the financial statements and related notes and disclosures in the Company’s 2009 Annual Report on Form 10-K. This report contains “forward-looking statements” relating to, without limitation, future economic performance, plans and objectives of management for future operations, and projections of revenues and other financial items that are based on the beliefs of the Company's management, as well as assumptions made by and information currently available to the Company’s management.  The words “expect,” “estimate,” “anticipate,” "plan," and “believe,” as well as similar expressions, are intended to identify forward-looking statements.  The Company’s actual results may differ materially from the results discussed in the forward-looking statements, and the Company’s operating performance each quarter is subject to various risks and uncertainties that are discussed in detail in the Company’s filings with the Securities and Exchange Commission.

 

Results of Operations

 

Net Interest Income

 

For the three months ended March 31, 2010, net interest income was $1,203,770 as compared to $745,416 for the same period in 2009.  The average rate paid on interest-bearing liabilities for the three months ended March 31, 2010 and 2009 was 1.56% and 2.71%, respectively.  The average rate realized on interest-earning assets was 4.43% and 4.49% for the three months ended March 31, 2010 and 2009, respectively.  This increase in the net interest income was primarily due to the reduction in interest rates paid by the Bank as liabilities repriced over the remainder of 2009 and the first quarter of 2010.

 

The net interest spread was 2.87% and 1.78% for the three month periods ended March 31, 2010 and 2009, respectively.

 

Provision and Allowance for Loan Losses

 

The provision for loan losses is the charge to operating earnings that in management’s judgment is necessary to maintain the allowance for loan losses at an adequate level in relation to the risk of future losses inherent in the loan portfolio.  For the three month periods ended March 31, 2010 and 2009 the provision was $36,528 and $341,314, respectively.  On March 31, 2010, there were $7,424,481 in loans in nonaccrual status.  On March 31, 2009, there were $1,166,791 in loans in nonaccrual status.  Based on present information, management believes the allowance for loan losses is adequate at March 31, 2010 to meet presently known and inherent risks in the loan portfolio.  The allowance for loan losses is 1.83% and 1.26% of total loans at March 31, 2010 and 2009, respectively.  There are risks inherent in making all loans, including risks with respect to the period of time over which loans may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers, and, in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.  The Company maintains an allowance for loan losses based on, among other things, historical experience, including management’s experience at other institutions, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Management’s judgment about the adequacy of the allowance is based upon a number of assumptions about future events, which it believes to be reasonable, but which may not prove to be accurate.  Thus, there is a risk that charge-offs in future periods could exceed the allowance for loan losses or that substantial additional increases in the allowance for loan losses could be required.  Additions to the allowance for loan losses would result in a decrease in the Company’s net income and, possibly, a reduction of its capital.

 

Noninterest Income

 

Total noninterest income for the three months ended March 31, 2010 was $100,624 or 7.84% less than total noninterest income for the same period last year.  This decrease was due to the decrease in residential mortgage application fees.  There were no such fees for the three month period ended March 31, 2010 and $12,405 for the three month period ended March 31, 2009.  The largest component of noninterest income for the three month period ended March 31, 2010 was service charges on deposit accounts, which totaled $89,425 or 7.91% higher than those for the three month period ended March 31, 2009.  This increase was driven largely by the Company’s expanded efforts in the acquisition of retail demand deposit accounts.  Rental income for the three months ended March 31, 2010 was $750 or 16.67% less than the three month period ended March 31, 2009.

 

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Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations - continued

 

Noninterest Expense

 

Total noninterest expense for the three months ended March 31, 2010 was $1,133,645 or 9.39% more than total noninterest expense for the same period last year. The primary component of noninterest expense is salaries and benefits, which were $557,418 and $595,942 for the three months ended March 31, 2010 and 2009, respectively. Salaries and benefits decreased due to the decrease in the number of active employees and the reduction in the expense of accrued bonuses and other benefits.  Other operating expenses were $486,522 and $341,459 for the three months ended March 31, 2010 and 2009, respectively. The increase in other operating expense for the three months ended March 31, 2010 was primarily the result of effects of the additional deposit insurance assessments imposed by the FDIC during 2009.

 

Income Taxes

 

For the three months ended March 31, 2010 and 2009, the effective income tax rate was 38.73% and 38.35%, respectively.  The income tax expense was $51,982, for the three months ended March 31, 2010 compared to an income tax benefit of $200,598 for the three months ended March 31, 2009.

 

Net Income (loss)

 

The combination of the above factors resulted in net income of $82,239 for the three months ended March 31, 2010 compared to net loss of $322,478 for the comparable period in 2009..

 

Assets and Liabilities

 

During the first three months of 2010, total assets decreased $3,316,608 or 1.88% when compared to December 31, 2009.  The decrease is primarily due to a decrease in loans outstanding.  In addition, we experienced a decrease in federal funds sold of $7,470,784, or 44.66% during the three months ended March 31, 2010. This is primarily a result of investing excess liquidity in investment securities in order to increase our net interest margin.

 

Investment Securities

 

Investment securities totaled $14,971,936 as of March 31, 2010 as compared to $6,444,594 at December 31, 2009.  Of this amount, $12,521,238 was designated as available for sale as of March 31, 2010.  The other investments were nonmarketable equity securities consisting of $1,368,000 in Federal Home Loan Bank stock and a $45,180 investment in Community Bankers Bank stock.

 

Loans

 

Loans decreased $2,334,808, or 1.67%, during the period.  As shown below, the largest decrease was in real estate – construction loans which decreased $3,582,000 or 12.17%, to $25,862,000 at March 31, 2010.  Real estate – mortgage loans increased $688,000, or .73%, to $95,127,000.  Commercial and industrial loans increased $22,000 or .14% to $15,242,000 at March 31, 2010.  Consumer and other loans increased $537,192 or 61.61%, to $1,409,105. Balances within the major loans receivable categories as of March 31, 2010 and December 31, 2009 are as follows:

 

		March 31, 2010				December 31, 2009
Real estate – construction		$	25,862,000			$	29,444,000
Real estate – mortgage			95,127,000				94,439,000
Commercial and industrial			15,242,000				15,220,000
Consumer and other			1,409,105				871,913
Total gross loans		$	137,640,105			$	139,974,913

 

 

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Item 2 - Management's Discussion And Analysis of Financial Condition and Results of Operations – continued

 

 

Risk Elements in the Loan Portfolio

 

Criticized loans are loans that have potential weaknesses that deserve close attention and which could, if uncorrected, result in deterioration of the prospects for repayment of the Company’s credit position at a future date.  Classified loans are loans that are inadequately protected by the sound worth and paying capacity of the borrower or any collateral and as to which there is a distinct possibility or probability that we will sustain a loss if the deficiencies are not corrected.  At March 31, 2010 and December 31, 2009, the Company had criticized loans totaling $14,358,027 and $8,742,720, respectively.  At March 31, 2010 and December 31, 2009, the Company had classified loans totaling $9,268,463 and $9,112,635, respectively.  At March 31, 2010, the Company had $7,424,481 or 5.39% of total gross loans in nonaccrual status and $77,696 in loans that were 90 days or more past due and still accruing.

 

The following table depicts the activity in the allowance for loan losses for the three months ended March 31, 2010 and 2009:

 

		March 31, 2010				March 31, 2009
Balance, January 1		$	2,408,990			$	1,935,702
Provision for loan losses for the period			36,528				341,314
Net loans (charged-off) recovered during the period			75,494				(534,651	)
Balance,  March 31,		$	2,521,012			$	1,742,365
Gross loans outstanding, March 31,		$	137,640,105			$	138,240,108
Allowance for loan losses to loans outstanding			1.83	%			1.26	%

 

Deposits

 

Total deposits decreased $3,499,793 or 2.44%, from December 31, 2009 to $140,169,999 at March 31, 2010.  Total time deposits decreased $8,740,996, or 8.02% to $100,263,237 at March 31, 2010.  This decrease was due to the decision of management to decrease the concentration of brokered deposits and focus on increasing our local market penetration.  The decrease in time deposits was partially offset by increases in interest-bearing and non-interest bearing transaction accounts which, in total, increased $1,314,790 or 12.66% since December 31, 2009 There was an increase in savings and money market accounts as well, which increased $3,926,413 or 16.17%, to $28,205,770 at March 31, 2010.  This increase in non time deposit accounts is a combination of the Bank instituting a revised market pricing strategy to attract new deposit accounts and implementing a retail focusing on growing the core deposits of the Bank.  Brokered deposits represent a source of fixed rate funds priced competitively with Federal Home Loan Bank (“FHLB”) but do not require collateralization like FHLB borrowings.

 

Balances within the major deposit categories as of March 31, 2010 and December 31, 2009 are as follows:

 

		March 31, 2010				December 31, 2009
Noninterest-bearing transaction accounts		$	6,248,528			$	5,626,494
Interest-bearing transaction accounts			5,452,464				4,759,708
Savings and money market			28,205,770				24,279,357
Time deposits $100,000 and over			7,460,145				6,934,915
Other time deposits			92,803,092				102,069,318
Total deposits		$	140,169,999			$	143,669,792

 

 

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Item 2 - Management's Discussion And Analysis of Financial Condition and Results of Operations – continued

 

Advances from Federal Home Loan Bank

 

The Bank did not borrow additional funds from the Federal Home Loan Bank of Atlanta (FHLB) during the first three months of 2010.  The advances from the FHLB total $8,000,000 as of March 31, 2010 and December 31, 2009.  The Bank utilizes the advances to fund loans and general liquidity purposes.  Advances from the Federal Home Loan Bank consisted of the following at March 31, 2010:

 

Description		Interest Rate				Amount
Convertible rate advances maturing:
September 20, 2012			3.86	%		$	8,000,000
						$	8,000,000

 

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

2010		$	-
2011			-
2012			8,000,000
		$	8,000,000

 

Liquidity

 

Liquidity needs are met by the Company through cash and short-term investments, and scheduled maturities of loans on the asset side and through pricing policies on the liability side for interest-bearing deposit accounts.  The Company also has the capacity to pledge certain loans as collateral for additional borrowings from FHLB during times when the comparable interest rate is favorable to the interest rate on deposit products.  As of March 31, 2010, the Company’s primary sources of liquidity included cash and equivalents of $3,091,388, federal funds sold totaling $9,258,877 and securities available-for-sale totaling $12,521,238, credit availability with the Federal Home Loan Bank of $14,500,000 and unused lines of credit with correspondent banks to purchase federal funds totaling $18,500,000 at March  31, 2010.

 

Capital Resources

 

Total shareholders' equity increased $102,687 to $24,996,393 for the three month period ended March 31, 2010.  This is primarily the result of the net income for the period of $82,239, and stock based compensation expense of $66,496.

 

The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk-weights ranging from 0% to 100%.  Under the risk-based standard, capital is classified into two tiers.  Tier 1 capital consists of common shareholders' equity, excluding the unrealized gain (loss) on available-for-sale securities, minus certain intangible assets.  Tier 2 capital consists of the general reserve for loan losses subject to   certain limitations.  An institution's qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its   Tier 1 and Tier 2 capital.  The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

 

Banks and bank holding companies are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio.  The minimum requirement for the leverage ratio is 3%; however all but the highest rated institutions are required to maintain ratios 100 to 200 basis points above the minimum.  Both the Company and the Bank exceeded their minimum regulatory capital ratios as of March 31, 2010 as well as the ratios to be considered "well capitalized."

 

The following table summarizes the Company’s risk-based capital at March 31, 2010

 

 

 

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Item 2 - Management's Discussion And Analysis of Financial Condition and Results of Operations – continued

 

Shareholders' equity		$	24,996,393
Plus – unrealized (gain) loss on available-for-sale securities			(78,666	)
Tier 1 capital		$	24,917,727
Plus - allowance for loan losses (1)			1,707,000
Total capital		$	26,624,727
Risk-weighted assets		$	136,583,000
Risk-based capital ratios:
Tier 1 capital (to risk-weighted assets)			18.24	%
Total capital (to risk-weighted assets)			19.49	%
Leverage ratio			14.16	%

(1) Limited to 1.25% of risk-weighted assets

 

Off-Balance Sheet Risk

 

Through its operations, the Company has made contractual commitments to extend credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to the Company’s customers at predetermined interest rates for a specified period of time.  At March 31, 2010, the Company had issued commitments to extend credit of $9,932,270 through various types of commercial lending arrangements.  All of these commitments to extend credit had variable rates.

 

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at March 31, 2010

 

		Within One Month				After One Through Three Months				After Three Through Twelve Months				Greater Than One Year				Total
Unused commitments to extend credit		$	265,006			$	682,805			$	3,483,722			$	5,321,042			$	9,752,575
Standby letters of credit			179,695				-				-				-				179,695
Totals		$	444,701			$	682,805			$	3,483,722			$	5,321,042			$	9,932,270

 

Based on historical experience, many of the commitments and letters of credit will expire unfunded.  Accordingly, the amounts shown in the table above do not necessarily reflect the Company's need for funds in the periods shown.

 

The Company evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on its credit evaluation of the borrower.  Collateral varies but may include accounts receivable, inventory, property, plant and equipment, 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 notes to the financial statements at December 31, 2009 as contained in our 2009 Annual Report to on Form 10-K.  Certain accounting policies involve significant judgments and assumptions by us which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies.  The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances.  Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our 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 our financial statements.  Refer to the portions of the discussion in this report on Form 10-Q and in our 2009 Annual Report on Form 10-K that address our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.

 

17

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Item 4T.  Controls and Procedures

 

(a)	Based on their evaluation of the Company’s disclosure controls and procedures (as defined in 17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)) as of March 31, 2010, our chief executive officer and chief financial officer concluded that  such controls and procedures were effective.

 

(b)

There was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting subsequent to the date of its evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

PART II - OTHER INFORMATION

 

 

Item 6. Exhibits

 

 

 

Exhibit Number	Description of Exhibit
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a)
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a)
32	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 USC 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

18

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AB&T FINANCIAL CORPORATION

 

SIGNATURES

 

 

Pursuant to the requirements 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)

 

 

Date: May 17, 2010

 

 

 

                            /s/Daniel C. Ayscue

                             Daniel C. Ayscue

                             President and Chief Executive Office

                             (Principal Executive Officer)

 

 

 

 

 

19

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EXHIBIT INDEX

 

Exhibit

Number                                    Description of Exhibit

 

31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a)
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a)
32	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 USC 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002