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AB&T FINANCIAL CORPORATION

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 September 30, 2011

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

For the Transition Period from to

Commission File Number: 000-53249

AB&T FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

North Carolina

26-2588442

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

292 W. Main Avenue

Gastonia, North Carolina 28052

(Address of principal executive offices and zip code)

(704) 867-5828

(Registrant’s telephone number, including area code)

(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 x NO ¨

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.

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 November 14, 2011

AB&T FINANCIAL CORPORATION

INDEX


		Page No.
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets – September 30, 2011 and December 31, 2010	4

	Consolidated Statements of Operations – Nine and three months ended September 30, 2011 and 2010	5

	Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss) – Nine months ended September 30, 2011 and 2010	6

	Consolidated Statements of Cash Flows – Nine months ended September 30, 2011 and 2010	7

	Notes to Consolidated Financial Statements	8-23

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23-30

Item 4.	Controls and Procedures	31

PART II – OTHER INFORMATION

Item 3.	Defaults Upon Senior Securities	31

Item 6.	Exhibits	31

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

AB&T FINANCIAL CORPORATION

Consolidated Balance Sheets


	September 30, 2011			December 31, 2010
	(Unaudited)			(Audited)
Assets
Cash and cash equivalents
Cash and due from banks	$	3,347,080		$	3,924,571
Federal funds sold		3,242,967			4,150,670
Time deposits with other banks		3,297,829			789,721

Total cash and cash equivalents		9,887,876			8,864,962

Securities available for sale at fair value		29,381,244			17,756,616
Nonmarketable equity securities		1,014,780			1,267,280

Total investments		30,396,024			19,023,896

Loans receivable		165,358,902			148,289,512
Less allowance for loan losses		(3,450,759	)		(5,225,914	)

Loans, net		161,908,143			143,063,598

Premises, furniture and equipment, net		3,780,006			3,861,622
Accrued interest receivable		645,346			676,898
Deferred tax asset		1,958,123			2,059,926
Other real estate owned		6,309,706			6,402,263
Other assets		462,445			535,664

Total assets	$	215,347,669		$	184,488,829

Liabilities
Deposits
Noninterest-bearing transaction accounts	$	12,025,721		$	7,225,888
Interest-bearing transaction accounts		7,934,474			6,773,623
Savings and money market		66,544,475			41,551,912
Time deposits $100,000 and over		10,798,406			7,742,179
Other time deposits		89,125,800			85,690,137

Total deposits	$	186,428,876		$	148,983,739

Borrowed funds		—			360,143
FHLB advances		9,500,000			13,500,000
Accrued interest payable		55,842			66,787
Other liabilities		173,218			223,258

Total liabilities		196,132,934			163,133,927


Shareholders’ equity
Preferred stock, no par value, 1,000,000 shares authorized, issued and outstanding – 3,500 at September 30, 2011 and at December 31, 2010		3,428,454			3,410,220
Common stock, $1.00 par value; 11,000,000 shares authorized, 2,678,205 issued at September 30, 2011 and December 31, 2010		2,678,205			2,678,205
Treasury stock, at cost (10,000 shares at September 30, 2011 and December 31, 2010)		(55,600	)		(55,600	)
Warrants		136,850			136,850
Capital surplus		21,871,532			21,787,729
Retained deficit		(8,966,893	)		(6,540,739	)
Accumulated other comprehensive income (loss)		97,185			(61,763	)

Total shareholders’ equity		19,189,733			21,354,902


Total liabilities and shareholders’ equity	$	215,347,669		$	184,488,829

See notes to consolidated financial statements

-4-

Consolidated Statements of Operations

(Unaudited)


	For the three months ended September 30						For the nine months ended September 30
	2011			2010			2011			2010
Interest income:
Loans, including fees	$	1,994,278		$	1,582,034		$	5,717,502		$	4,920,922
Investment securities, taxable		126,342			104,652			309,308			294,467
FHLB, interest and dividends		2,098			1,501			7,019			3,309
Federal funds sold		3,850			4,568			16,059			20,043
Time deposits with other banks		5,095			5,132			10,910			13,283

Total		2,131,663			1,697,887			6,060,798			5,252,024


Interest expense:
Time deposits $100,000 and over		33,118			55,711			101,889			147,799
Other deposits		442,416			366,481			1,249,220			1,213,868
Other interest expense		58,730			80,006			178,411			237,746

Total		534,264			502,198			1,529,520			1,599,413


Net interest income		1,597,399			1,195,689			4,531,278			3,652,611
Provision for loan losses		1,451,998			105,199			1,689,858			541,727


Net interest income after provision for loan losses		145,401			1,090,490			2,841,420			3,110,884


Other operating income:
Service charges on deposit accounts		114,101			94,773			289,715			282,461
Rental income		7,573			3,000			20,633			6,000
Gain on sale of investment securities		—			134,975			29,117			410,187
Other service charges, commissions and fees		20,816			12,998			60,247			35,955

Total		142,490			245,746			399,712			734,603


Other operating expenses:
Salaries and employee benefits		667,869			619,290			2,011,093			1,761,892
Occupancy expense		48,440			51,759			147,014			142,226
Furniture and equipment expense		55,955			42,883			117,498			133,659
Discount on purchased loans		—			—			1,002,136			—
Other real estate expense		354,642			250,864			770,991			312,123
Loss on sale of loans		79,395			—			79,395			—
Deposit insurance premium		81,566			109,231			243,569			350,566
Other operating expenses		389,107			348,094			1,259,564			1,022,149

Total		1,676,974			1,422,121			5,631,260			3,722,615


Income (loss) before income taxes		(1,389,083	)		(85,885	)		(2,390,128	)		122,872
Income tax expense (benefit)		—			(35,962	)		17,792			40,548


Net income (loss)	$	(1,389,083	)	$	(49,923	)	$	(2,407,920	)	$	82,324


Accretion of preferred stock to redemption value		6,078			6,078			18,234			18,234
Preferred stock dividends (accrued)		43,750			43,750			131,250			131,250

Net loss available to common shareholders	$	(1,438,911	)	$	(99,751	)	$	(2,557,404	)	$	(67,160	)


Loss per common share
Basic loss per common share	$	(0.54	)	$	(0.04	)	$	(0.96	)	$	(0.03	)
Diluted loss per common share	$	(0.54	)	$	(0.04	)	$	(0.96	)	$	(0.03	)

See notes to consolidated financial statements

-5-

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

For the nine months ended September 30, 2011 and 2010

(dollars in thousands except for share data)

(Unaudited)


	Common Stock				Preferred Stock				Treasury					Capital			Accumulated Other Comprehensive Income			Retained
	Shares		Amount		Shares		Amount		Stock			Warrants		Surplus			(Loss)			Deficit			Total

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																		(61	)					(61	)


Comprehensive income																								21

Accretion of preferred stock to redemption value								18													(18	)		—

Dividends paid, preferred															(131	)								(131	)

Stock-based employee compensation															171									171

Balance September 30, 2010		2,678,205	$	2,678		3,500	$	3,404	$	(56	)	$	137	$	21,774		$	19		$	(3,003	)	$	24,954


Balance, December 31, 2010		2,678,205	$	2,678		3,500	$	3,410	$	(56	)	$	137	$	21,787		$	(62	)	$	(6,540	)	$	21,355

Net loss																					(2,408	)		(2,408	)

Other comprehensive income, net of tax																		159						159


Comprehensive loss																								(2,249	)

Accretion of preferred stock to redemption value								18													(18	)		—

Dividends paid, preferred															(43	)								(43	)

Stock-based employee compensation expense															128									128


Balance September 30, 2011		2,678,205	$	2,678		3,500	$	3,428	$	(56	)	$	137	$	21,872		$	97		$	(8,966	)	$	19,190

See notes to consolidated financial statements

-6-

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2011 and 2010

(Unaudited)


	For the nine months ended September 30,
	2011			2010
Cash flows from operating activities:
Net income (loss)	$	(2,407,920	)	$	82,234
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Provision for loan losses		1,689,858			541,727
Loss on sale of other real estate		76,000			9,016
Loss on write-down of other real estate		233,711			143,236
Gain on sale of investment securities		(29,117	)		(410,187	)
Loss on sale of loans		79,395			—
Depreciation and amortization expense		125,209			131,699
Discount accretion and premium amortization		174,176			11,398
Deferred income tax benefit		—			(68,201	)
Increase (decrease) in interest receivable		31,552			(98,234	)
Increase (decrease) in interest payable		(10,945	)		4,554
Decrease in other assets		73,219			424,208
Increase (decrease) in other liabilities		(50,040	)		66,074
Discount on purchased loans		1,002,136			—
Stock based compensation expense		127,553			171,184

Net cash provided by operating activities		1,114,787			1,008,708


Cash flows from investing activities:
Purchase of securities available for sale		(17,974,457	)		(22,758,233	)

Calls and maturities of securities available for sale		1,451,768			1,091,244

Net decrease (increase) in loans receivable		(26,736,786	)		2,575,842
Proceeds from sale of loans		4,283,458			—
Proceeds from sale of available for sale securities		5,013,753			11,051,541
Proceeds from sale of equity securities		252,500			98,100
Proceeds from sale of other real estate		993,056			320,841
Capitalized other real estate expenses		(372,816	)		—
Purchases of premises, furniture, and equipment		(43,593	)		(65,657	)

Net cash used in investing activities		(33,133,117	)		(7,686,322	)


Cash flows from financing activities:
Net increase in demand deposits, interest- bearing transaction accounts and savings accounts		30,953,247			10,704,998
Net increase (decrease) in certificates of deposit and other time deposits		6,491,890			(18,298,352	)
Net (increase) decrease in borrowed funds and FHLB advances		(4,360,143	)		3,077,097
Dividends paid		(43,750	)		(131,250	)

Net cash provided (used) by financing activities		33,041,244			(4,647,507	)


Net increase (decrease) in cash and cash equivalents	$	1,022,914		$	(11,325,121	)

Cash and cash equivalents, beginning of period	$	8,864,962		$	22,728,132


Cash and cash equivalents, end of period	$	9,887,876		$	11,403,011


Supplemental disclosure of cash flow information:
Transfer of loans to real estate acquired in settlement of loans	$	837,394		$	3,098,311

Interest paid	$	1,540,465		$	1,594,859

Taxes paid	$	—		$	—

See notes to consolidated financial statements

-7-

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 2010 Annual Report on Form 10-K. The financial statements as of September 30, 2011 and for the interim periods ended September 30, 2011 and 2010 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, 2010 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 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2011.

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

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and disclosure of financial information by the Company.

In July 2010, the Receivables topic of the Accounting Standards Codification (“ASC”) was amended by Accounting Standards Update (“ASU”) 2010-20 to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis. The Company is required to include these disclosures in their interim and annual financial statements. See Note. 8.

Disclosures about Troubled Debt Restructurings (“TDRs”) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) in ASU 2011-01 issued in January 2011. In April 2011 FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR.

-8-

Notes to Consolidated Financial Statements

(Unaudited)

Note 3 – Recently Issued Accounting Pronouncements – continued

The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present.

Disclosures related to TDRs under ASU 2010-20 have been presented in Note 9.

In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03. The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control. The other criteria to assess effective control were not changed. The amendments are effective for the Company beginning January 1, 2012 but are not expected to have a material effect on the financial statements.

ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments will be effective for the Company beginning January 1, 2012 but are not expected to have a material effect on the financial statements.

The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity. The amendment requires consecutive presentation of the statement of net income and other comprehensive income and requires an entity to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements. The amendments will be applicable to the Company on January 1, 2012 and will be applied retrospectively.

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.

Note 4 – Comprehensive Income (Loss)

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 and nine month periods ended September 30, 2011 and 2010:


	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Unrealized gains (losses) on securities available for sale	$	162,748		$	115,051		$	289,863		$	309,590
Reclassification of (gains) losses recognized in net income		—			(134,975	)		(29,117	)		(410,187	)
Income tax benefit (expense)		(63,631	)		(16,394	)		(101,801	)		39,182


Other comprehensive income (loss)	$	99,117		$	3,530			158,945		$	(61,415	)

-9-

Notes to Consolidated Financial Statements

(Unaudited)

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. No dilutive common share equivalents were included in the calculation because their effect would be anti-dilutive for the three and nine month periods ended September 30, 2011 and 2010.

		000000000			000000000		000000000
	Three months ended September 30, 2011
	Income (Numerator)			Shares (Denominator)		Per Share Amount
Basic loss per share
Loss available to common shareholders	$	(1,438,911	)		2,668,205	$	(0.54	)

Effect of dilutive securities
Stock options		—			—

Dilutive loss per share
Loss available to common shareholders plus assumed conversions	$	(1,438,911	)		2,668,205	$	(0.54	)

		000000000		000000000		000000000
	Three months ended September 30, 2010
	Income (Numerator)		Shares (Denominator)		Per Share Amount
Basic loss per share
Loss available to common shareholders	$	(99,751)		2,668,205	$	(0.04)

Effect of dilutive securities
Stock options		—		—

Dilutive loss per share
Loss available to common shareholders plus assumed conversions	$	(99,751)		2,668,205	$	(0.04)

		000000000			000000000		000000000
	Nine months ended September 30, 2011
	Income (Numerator)			Shares (Denominator)		Per Share Amount
Basic loss per share
Loss available to common shareholders	$	(2,557,404	)		2,668,205	$	(0.96	)

Effect of dilutive securities
Stock options		—			—

Dilutive loss per share
Loss available to common shareholders plus assumed conversions	$	(2,557,404	)		2,668,205	$	(0.96	)

		000000000		000000000		000000000
	Nine months ended September 30, 2010
	Income (Numerator)		Shares (Denominator)		Per Share Amount
Basic income per share
Loss available to common shareholders	$	(67,160)		2,668,205	$	(0.03)

Effect of dilutive securities
Stock options		—		—

Dilutive income per share
Loss available to common shareholders plus assumed conversions	$	(67,160)		2,668,205	$	(0.03)

-10-

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 bonds, 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. Our available for sale investments are valued using a pricing service through our bond record keeper, which we have verified with a third party.

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 September 30, 2011:


	Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Available for sale investments:
Mortgage-backed securities	$	—	$	29,381,244	$	—


Total	$	—	$	29,381,244	$	—

-11-

Notes to Consolidated Financial Statements

(Unaudited)

Note 6 – Fair Value Measurements (continued)

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


	Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Available for sale investments:
Mortgage-backed securities	$	—	$	17,756,616	$	—


Total	$	—	$	17,756,616	$	—

The Company had no liabilities carried at fair value or measured at fair value on a recurring basis at September 30, 2011 or December 31, 2010.

Assets measured at fair value on a non-recurring basis are as follows as of September 30, 2011:


	Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)

Impaired loans	$	—	$	25,295,479	$	—
Other real estate owned		—		6,309,706		—


Total	$	—	$	31,605,185	$	—

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


	Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)

Impaired loans	$	—	$	14,338,761	$	—
Other real estate owned		—		6,402,263		—


Total	$	—	$	20,741,024	$	—

The Company had no liabilities carried at fair value or measured at fair value on a non-recurring basis at September 30, 2011 or December 31, 2010.

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. Appraisals are updated annually, and adjusted downward for estimated selling costs.

-12-

Notes to Consolidated Financial Statements

(Unaudited)

Note 6 – Fair Value Measurements (continued)

Other real estate owned is adjusted to fair value upon transfer of the loans at foreclosure. Subsequently, the assets are carried at the lower of carrying value or fair value less costs to sell. Fair value is based upon independent market prices, fair values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or current appraised value, the Company records the asset as nonrecurring Level 2 inputs.

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 September 30, 2011 and December 31, 2010 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 September 30, 2011 and December 31, 2010.

In accordance with ASC Topic 825, the Company has not included assets and liabilities that are not financial instruments in its disclosure, such as the value of the long-term relationships with the Company’s deposit, net premises and equipment, net core deposit intangibles, deferred taxes and other assets and liabilities. Additionally, the amounts in the table have not been updated since the date indicated; therefore the valuations may have 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 September 30, 2011, and December 31, 2010 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.

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. For deposits with no stated maturities, the carrying amount was considered to approximate fair value and does not take into account the significant value of the cost advantage and stability of the Company’s long-term relationships with depositors.

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

-13-

Notes to Consolidated Financial Statements

(Unaudited)

Note 6 – Fair Value Measurements (continued)

The carrying and fair values of certain financial instruments at September 30, 2011 and December 31, 2010 were as follows:


	September 30, 2011				December 31, 2010
Dollars in thousands	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets:
Loans receivable, net	$	161,908	$	142,520	$	143,064	$	143,375

Financial Liabilities:
Total deposits	$	186,429	$	183,215	$	148,984	$	145,952
FHLB advances	$	9,500	$	9,424	$	13,500	$	14,007

Note 7 – Investment Securities

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


	Amortized Cost		Gross Unrealized				Estimated Fair Value
	Amortized Cost		Gains		Losses		Estimated Fair Value
September 30, 2011
Mortgage-backed securities	$	29,221,660	$	178,303	$	18,719	$	29,381,244

Total	$	29,221,660	$	178,303	$	18,719	$	29,381,244


December 31, 2010
Mortgage-backed securities	$	17,857,784	$	40,753	$	141,921	$	17,756,616

Total	$	17,857,784	$	40,753	$	141,921	$	17,756,616

The following is a summary of maturities of securities available for sale as of September 30, 2011. 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	$	27,553	$	28,617
Due after one year but within five years		6,944,757		6,972,187
Due after five years but within ten years		9,871,929		9,923,976
Due after ten years		12,377,421		12,456,464

	$	29,221,660	$	29,381,244

-14-

Notes to Consolidated Financial Statements

(Unaudited)

Note 7 – Investment Securities (continued)

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 September 30, 2011 and December 31, 2010.


	Less than twelve months				Twelve months or more				Total
	Fair Value		Unrealized losses		Fair Value		Unrealized losses		Fair Value		Unrealized losses
September 30, 2011
Mortgage-backed securities	$	4,464,932	$	12,540	$	2,169,941	$	6,179	$	6,634,873	$	18,719

Total	$	4,464,932	$	12,540	$	2,169,941	$	6,179	$	6,634,873	$	18,719


	Less than twelve months				Twelve months or more				Total
	Fair Value		Unrealized losses		Fair Value		Unrealized losses		Fair Value		Unrealized losses
December 31, 2010
Mortgage-backed securities	$	12,247,383	$	141,921	$	—	$	—	$	12,247,383	$	141,921

Total	$	12,247,383	$	141,921	$	—	$	—	$	12,247,383	$	141,921

Proceeds from available for sale securities totaled $5,013,753 for the nine months ended September 30, 2011, resulting in gross gains of $29,117. There were no sales of securities for the three months ended September 30, 2011.

Securities classified as available-for-sale are recorded at fair market value. Securities in a continuous loss position for twelve months or more at September 30, 2011, consisted of two securities. Of the securities in an unrealized loss position as of September 30, 2011, the Company does not intend to sell the 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.

Note 8 – Loans Receivable

Major classifications of loans receivable at September 30, 2011 and December 31, 2010 are summarized as follows:


	2011		2010
Real estate – construction	$	15,733,524	$	23,068,291
Real estate – commercial		62,363,518		61,412,742
Real estate – residential		66,949,030		43,561,911
Commercial and industrial		18,216,125		19,350,893
Consumer and other		2,096,705		895,675


Total gross loans	$	165,358,902	$	148,289,512

-15-

Notes to Consolidated Financial Statements

(Unaudited)

Note 8 – Loans Receivable (continued)

As of September 30, 2011 and December 31, 2010, loans individually evaluated and considered impaired were as follows:


	2011		2010

Total loans considered impaired at period end	$	25,295,479	$	14,338,761

Loans considered impaired for which there is a related allowance for loan loss:
Outstanding loan balance		10,454,851		11,489,267
Related allowance established		1,826,371		2,783,404

Loans considered impaired for which no related allowance for loan loss was established		14,840,628		2,849,495

Average annual investment in impaired loans		30,275,176		14,370,750

Interest income recognized on impaired loans
During the period of impairment
Cash basis		682,942		219,029

The following table represents the balance in the allowance for loan losses and recorded investment in loans by portfolio segment on impairment method as of September 30, 2011:


	Real Estate						Commercial & Industrial		Consumer & Other		Total
	Construction		Commercial		Residential		Commercial & Industrial		Consumer & Other		Total
Allowance for loan and lease losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	452,477	$	714,447	$	607,473	$	51,974	$	—	$	1,826,371
Loans:
Loans individually evaluated for impairment	$	6,086,847	$	12,845,288	$	5,484,292	$	856,289	$	22,763	$	25,295,479
Loans collectively evaluated for impairment	$	9,646,677	$	49,518,230	$	61,464,738	$	17,359,836	$	2,073,942	$	140,063,423

-16-

Notes to Consolidated Financial Statements

(Unaudited)

Note 8 – Loans Receivable (continued)

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


	Real Estate						Commercial & Industrial		Consumer & Other		Total
	Construction		Commercial		Residential		Commercial & Industrial		Consumer & Other		Total
Allowance for loan and lease losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	823,975	$	637,723	$	878,725	$	442,981	$	—	$	2,783,404
Loans:
Loans individually evaluated for impairment	$	5,048,519	$	3,540,487	$	4,331,447	$	1,418,308	$	—	$	14,338,761
Loans collectively evaluated for impairment	$	18,019,772	$	57,872,255	$	39,230,464	$	17,932,585	$	895,675	$	133,950,751

As of September 30, 2011 and December 31, 2010, loans in nonaccrual status were approximately $13,256,000 and $10,257,000, respectively. Loans ninety days or more past due, and still accruing interest, as of September 30, 2011 and December 31, 2010 were approximately $1,736,000 and $1,869,000 respectively.

The following table presents loans individually evaluated for impairment as of September 30, 2011:


	Unpaid Principal Balance		Recorded Investment		Allowance Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	266,800	$	246,800	$	—	$	279,618	$	5,038
Consumer and other		22,763		22,763		—		26,538		1,399
Real estate:
Construction		3,855,568		3,855,568		—		3,874,226		98,133
Mortgage – residential		3,157,722		1,732,001		—		2,671,792		43,258
Mortgage – commercial		9,407,502		8,635,422		—		11,539,618		330,331
With an allowance recorded:
Commercial, and industrial		609,489		609,489		51,974		621,274		22,386
Real estate:
Construction		2,231,279		2,231,279		452,477		2,508,520		24,448
Mortgage – residential		3,752,291		3,752,291		607,473		4,526,063		45,972
Mortgage – commercial		4,209,866		4,209,866		714,447		4,227,527		111,977

Total	$	27,513,280	$	25,295,479	$	1,826,371	$	30,275,176	$	682,942

-17-

Notes to Consolidated Financial Statements

(Unaudited)

Note 8 – Loans Receivable (continued)

Transactions in the allowance for loan losses for the nine months ended September 30, 2011 are summarized as follows:


	Real Estate
	Construction			Commercial			Residential			Commercial and Industrial			Consumer & Other			Unallocated			Total
Balance, beginning of year	$	1,133,180		$	1,532,386		$	1,690,850		$	636,627		$	6,676		$	226,195		$	5,225,914
Provision (recovery) charged to operations		(613,062	)		565,605			690,557			1,038,568			52,282			(44,092	)		1,689,858
Recoveries		—			—			—			19,789			71,562			—			91,351
Charge-offs		—			(899,477	)		(1,284,709	)		(1,246,774	)		(125,404	)		—			(3,556,364	)

Balance, end of year	$	520,118		$	1,198,514		$	1,096,698		$	448,210		$	5,116		$	182,103		$	3,450,759

Transactions in the allowance for loan losses for the three months ended September 30, 2011 are summarized as follows:


	Real Estate
	Construction		Commercial			Residential			Commercial and Industrial			Consumer & Other			Unallocated		Total
Balance, beginning of year	$	498,684	$	1,349,373		$	1,508,838		$	596,859		$	6,057		$	166,330	$	4,126,141
Provision (recovery) charged to operations		21,434		696,221			813,022			(132,643	)		38,191			15,773		1,451,998
Recoveries		—		—			—			4,000			14,092			—		18,092
Charge-offs		—		(847,080	)		(1,225,162	)		(20,006	)		(53,224	)		—		(2,145,472	)

Balance, end of year	$	520,118	$	1,198,514		$	1,096,698		$	448,210		$	5,116		$	182,103	$	3,450,759

The following table depicts the activity in the allowance for loan losses for the nine months ended September 30, 2011:


	September 30, 2011			September 30, 2010
Balance, January 1	$	5,225,914		$	2,408,990
Provision for loan losses for the period		1,689,858			541,727
Net loans (charged-off) recovered during the period		(3,465,013	)		(499,402	)


Balance, September 30,	$	3,450,759		$	2,451,315


Gross loans outstanding, September 30,	$	165,358,902		$	133,801,358


Allowance for loan losses to loans outstanding		2.09	%		1.83	%

The following table presents the investment in nonaccrual and accruing loans delinquent for 90 days or more as of September 30, 2011:


	Nonaccrual		Accruing loans delinquent for 90 days or more

Commercial and industrial	$	286,718	$	—
Real estate:
Construction		4,440,810		152,110
Mortgage – residential		3,846,519		471,689
Mortgage – commercial		4,632,504		1,111,708
Consumer		49,465		901

Total	$	13,256,016	$	1,736,408

-18-

Notes to Consolidated Financial Statements

(Unaudited)

Note 8 – Loans Receivable (continued)

The following table presents the investment in nonaccrual and accruing loans delinquent for 90 days or more as of December 31, 2010:


	Nonaccrual		Accruing loans delinquent for 90 days or more

Commercial and industrial	$	1,207,596	$	433,325
Real estate:
Construction		1,285,564		24,575
Mortgage – residential		4,223,726		1,056,621
Mortgage – commercial		3,540,488		349,867
Consumer		—		4,963

Total	$	10,257,374	$	1,869,351

The following table presents the aging of the recorded investment in past due loans and leases as of September 30, 2011:


	30 – 89 Days Past Due		Greater than 90 Days Past Due & Still Accruing		Nonaccrual Loans		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	1,281,290	$	—	$	286,718	$	1,568,008	$	16,648,117	$	18,216,125
Real estate:
Construction		474,321		152,110		4,440,810		5,067,241		10,666,283		15,733,524
Mortgage - residential		1,312,840		471,689		3,846,519		5,631,048		61,317,982		66,949,030
Mortgage - commercial		2,099,497		1,111,708		4,632,504		7,843,709		54,519,809		62,363,518
Consumer		37,095		901		49,465		87,461		2,009,244		2,096,705

Total	$	5,205,043	$	1,736,408	$	13,256,016	$	20,197,467	$	145,161,435	$	165,358,902

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


	30 – 89 Days Past Due		Greater than 90 Days Past Due & Still Accruing		Nonaccrual Loans		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	148,926	$	433,325	$	1,207,596	$	1,789,847	$	17,561,046	$	19,350,893
Real estate:
Construction		2,469,828		24,575		1,285,564		3,779,967		19,288,324		23,068,291
Mortgage - residential		837,087		1,056,621		4,223,726		6,117,434		37,444,477		43,561,911
Mortgage - commercial		642,994		349,867		3,540,488		4,533,349		56,879,393		61,412,742
Consumer		22,326		4,963		—		27,289		868,386		895,675

Total	$	4,121,161	$	1,869,351	$	10,257,374	$	16,247,886	$	132,041,626	$	148,289,512

-19-

Notes to Consolidated Financial Statements

(Unaudited)

Note 8 – Loans Receivable – continued

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $0.5 million or $1.0 million, depending on loan type, and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis with the most recent analysis performed at September 30, 2011. The Company uses the following definitions for risk ratings:

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

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans and leases. As of September 30, 2011 and December 31, 2010, the risk category of loans and leases is as follows:

-20-

Notes to Consolidated Financial Statements

(Unaudited)

Note 8 – Loans Receivable (continued)

September 30, 2011


	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial and industrial	$	14,726,662	$	2,633,174	$	856,289	$	—	$	—	$	18,216,125
Real estate:
Construction		8,622,523		1,021,154		5,828,350		261,497				15,733,524
Mortgage - residential		56,182,317		5,630,496		5,136,217		—				66,949,030
Mortgage - commercial		46,284,987		3,233,243		12,845,288		—				62,363,518
Consumer and other		2,049,297		24,653		22,755		—				2,096,705

Total	$	127,865,786	$	12,542,720	$	24,688,899	$	261,497	$	—	$	165,358,902

December 31, 2010


	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial and industrial	$	17,317,162	$	624,237	$	524,303	$	885,191	$	—	$	19,350,893
Real estate:
Construction		16,578,691		2,395,478		3,618,125		475,997		—		23,068,291
Mortgage - residential		33,862,736		2,269,002		6,269,672		1,160,501		—		43,561,911
Mortgage - commercial		49,470,261		3,367,398		8,575,083		—		—		61,412,742
Consumer		871,691		15,138		8,846		—		—		895,675

Total	$	118,100,541	$	8,671,253	$	18,996,029	$	2,521,689	$	—	$	148,289,512

At September 30, 2011, the Company does not have any loans defined as subprime.

Note 9 – Troubled Debt Restructures

As a result of adopting the amendments in ASU 2011-02, the Bank reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they are considered troubled debt restructurings (TDRs) under the amended guidance. The Bank identified as TDRs certain loans for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying those loans as TDRs, the Bank identified them as impaired under the guidance in ASC 310-10-35. The amendments in ASU 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those loans newly identified as impaired. At the end of the first interim period of adoption (September 30, 2011), the recorded investment in loans for which the allowance was previously measured under a general allowance methodology and are now impaired under ASC 310-10-35 was $9,964,635, and the allowance for loan losses associated with those loans, on the basis of a current evaluation of loss was $218,663. During the third quarter, the Bank charged $468,997 to the allowance relating to impairment charges on restructured loans.

-21-

Notes to Consolidated Financial Statements

(Unaudited)

Note 9 – Troubled Debt Restructures – continued


	For the nine months ended September 30, 2011
	Number of Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Troubled Debt Restructurings
Commercial and industrial		1	$	82,748	$	82,748
Consumer and other		—		—		—
Real estate:
Construction		—		—		—
Mortgage - residential		—		—		—
Mortgage - commercial		1		1,161,576		1,161,576

There were no loans modified during the three months ended September 30, 2011 classified as troubled debt restructurings. The Bank only modifies loans that are considered troubled debt restructurings, as no such loans were modified during the three months ended September 30, 2011. Restructured loans must perform for six months prior to being returned to accrual status.

During the nine months ended September 30, 2011, we modified two loans that were considered to be troubled debt restructurings. We shortened the terms for both of these loans and the interest rate was lowered for one of these loans.

The following table by loan category, presents loans determined to be troubled debt restructurings in the last twelve months during the nine months ended September 30, 2011, none of which defaulted during the quarter ended September 30, 2011.


	Nine months ended September 30, 2011
	Number of Contracts		Recorded Investment
Troubled Debt Restructurings
That Subsequently Defaulted
During the Period:
Commercial and industrial		1	$	28,464
Consumer and other		—		—
Real estate:
Construction		1		258,991
Mortgage - residential		5		2,670,482
Mortgage - commercial		—		—

In the determination of the allowance for loan losses, all TDRs are reviewed to ensure that one of the three proper valuation methods (fair market value of the collateral, present value of cash flows, or observable market price) is adhered to. All nonaccrual loans are written down to their corresponding collateral value. All TDR accruing loans where the loan balance exceeds the present value of cash flow will have a specific allocation. All TDR loans are considered impaired. Under ASC 310-10, a loan is impaired when it is probable that the bank will be unable to collect all amounts due including both principal and interest according to the contractual terms of the loan agreement.

-22-

Notes to Consolidated Financial Statements

(Unaudited)

Note 10 – Loan Portfolio Acquisition

On March 25, 2011, the Company completed a loan “swap” transaction accounted for as a transfer of financial assets, which included the purchase of a pool of residential mortgage home equity loans with a par value of $27,095,572 (an estimated fair value of $26,093,437). The residential mortgage home equity loan portfolio (portfolio) was purchased from a private equity firm in exchange for a combination of $4,058,458 in carrying value of certain non-performing loans and cash of $20,328,049. The non-performing loans were transferred without recourse and were carried at fair value prior to the exchange, in accordance with accounting standards. The Company will amortize approximately $850,000 in loan purchase adjustment (as a result of the fair value measurement) as a yield adjustment over the expected life of the loans. As a result of the transaction, the Company recorded a discount on the purchased loans of $1,002,136 and was able to recover $1,046,479 in recorded loan loss reserves.

Note 11 – Dividends on Series A Preferred Stock Issued to the U.S. Treasury

At the request of the Federal Reserve Bank of Richmond, the Company deferred the quarterly dividend payment on the shares of Series A Preferred Stock issued to the U.S. Treasury pursuant to the Capital Purchase Program (the “CPP”) commencing with the payment due May 15, 2011. This payment was the first dividend payment deferred. As part of the CPP, the Company entered into a letter agreement with the Treasury on January 23, 2009, which includes a Securities Purchase Agreement-Standard Terms. The Company also amended its articles of incorporation to set forth the terms of the Series A Preferred Stock. Under the Company’s amended articles of incorporation, dividends compound if they accrue and are not paid. A failure to pay a total of six such dividends, whether or not consecutive, gives the Treasury the right to elect two directors to the Company’s Board of Directors. That right would continue until the Company pays all dividends in arrears. As of the date of this report, the total arrearage was $87,500. The Company anticipates paying the accrued dividends in the future to avoid triggering the Treasury’s ability to elect directors to the Company’s Board of Directors

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 September 30, 2011 compared to December 31, 2010, and the results of operations for the three and nine month periods ended September 30, 2011 and 2010. 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 2010 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.

Impact of Dodd-Frank Act

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

•

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

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

•

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

•

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

•

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

•

the elimination of certain trading activities by banks;

•

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

•

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

•

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

The Company is unable to predict the extent to which the Dodd-Frank Act or the forthcoming rules and regulations will impact the Company’s business. However, the Company believes that certain aspects of the legislation, including, without limitation, the additional cost of higher deposit insurance coverage and the costs of compliance with disclosure and reporting requirements and examinations could have a significant impact on the Company’s business, financial condition, and results of operations. Additionally, the Company cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced, or how such changes may affect the Company.

Results of Operations

Net Interest Income

For the three months ended September 30, 2011, net interest income was $1,597,399 as compared to $1,195,689 for the same period in 2010. The average rate paid on interest-bearing liabilities for the three months ended September 30, 2011 and 2010 was 1.15% and 1.43%, respectively. The average rate realized on interest-earning assets was 4.17% and 4.24% for the three months ended September 30, 2011 and 2010, respectively.

The net interest margin was 3.13% and 2.99% for the three month periods ended September 30, 2011 and 2010, respectively.

For the nine months ended September 30, 2011, net interest income was $4,531,278 as compared to $3,652,611 for the same period in 2010. The average rate paid on interest-bearing liabilities for the nine months ended September 30, 2011 and 2010 was 1.16% and 1.50%, respectively. The average rate realized on interest-earning assets was 4.11% and 4.30% for the nine months ended September 30, 2011 and 2010, respectively.

The net interest margin was 3.07% and 3.00% for the nine month periods ended September 30, 2011 and 2010, respectively. The increase is due to the decrease in the average rate paid on interest-bearing liabilities.

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

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 September 30, 2011 and 2010 the provision was $1,451,998 and $105,199 respectively. For the nine month periods ended September 30, 2011 and 2010 the provision was $1,689,858 and $541,727 respectively. On September 30, 2011, there were $13,256,016 in loans in nonaccrual status. On September 30, 2010, there were $9,374,955 in loans in nonaccrual status. Based on present information, management believes the allowance for loan losses is adequate at September 30, 2011 to meet presently known and inherent risks in the loan portfolio. The allowance for loan losses was 2.09% and 1.83% of total loans at September 30, 2011 and 2010, respectively. The increase in the allowance from prior year (as a percentage of total loans) is a result of the increase in nonaccrual and classified loans over prior year. 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 September 30, 2011 was $142,490 or 42.02% less than total noninterest income for the same period last year. The largest component of noninterest income for the three month period ended September 30, 2011 was service charges on deposit accounts which were $114,101 for the three month period ended September 30, 2011 or 20.39% higher than the same period last year. Rental income for the three months ended September 30, 2011 was $7,573 or 152.43% more than the three month period ended September 30, 2010. Other service charges, commissions and fees for the three months ended September 30, 2011 were $20,816 or 60.15% more than the same period last year.

Total noninterest income for the nine months ended September 30, 2011 was $399,712 or 45.59% less than total noninterest income for the same period last year. The largest component of noninterest income for the nine month period ended September 30, 2011 was service charges on deposit accounts which were $289,715 for the nine month period ended September 30, 2011 or 2.57% higher than the same period last year. Rental income for the nine months ended September 30, 2011 was $20,633 or 243.88% more than the nine month period ended September 30, 2011. Other service charges, commissions and fees for the nine months ended September 30, 2011 was $60,247 or 67.56% more than the same period last year.

Noninterest Expense

Total noninterest expense for the three months ended September 30, 2011 was $1,674,974 or 17.92% less than total noninterest expense for the same period last year. The primary recurring component of noninterest expense is salaries and benefits, which were $667,869 and $619,290 for the three months ended September 30, 2011 and 2010, respectively. Salaries and benefits increased due to the increase in the number of active employees. Other real estate expenses were $354,642 and $250,864 for the three months ended September 30, 2011 and 2010, respectively. Other operating expenses were $389,107 and $348,094 for the three months ended September 30, 2011 and 2010, respectively.

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

Total noninterest expense for the nine months ended September 30, 2011 was $5,631,260 or 51.27% more than total noninterest expense for the same period last year. The main component of the increase over prior year is a $1,002,136 nonrecurring charge to operations related to the discount on the purchased loan portfolio relating to our asset swap (See Note 10 of the notes to consolidated financial statements included with Item 1 above). The primary recurring component of noninterest expense is salaries and benefits, which were $2,011,093 and $1,761,892 for the nine months ended September 30, 2011 and 2010, respectively. Salaries and benefits increased due to the increase in the number of active employees. Other operating expenses were $1,259,564 and $1,022,149 for the nine months ended September 30, 2011 and 2010, respectively

Income Taxes

For the three months ended September 30, 2011 and 2010, the effective income tax rate was .00% and 41.87%, respectively. The income tax expense was $0, for the three months ended September 30, 2011 compared to an income tax benefit of $35,962 for the three months ended September 30, 2010.

For the nine months ended September 30, 2011 and 2010, the effective income tax rate was .74% and 33.00%, respectively. The income tax expense was $17,792, for the nine months ended September 30, 2011 compared to an income tax expense of $40,548 for the nine months ended September 30, 2010.

Net Income (loss)

The combination of the above factors resulted in net loss of $1,389,083 for the three months ended September 30, 2011 compared to net loss of $49,923 for the comparable period in 2010.

For the nine months ended September 30, 2011 and 2010, there was a net loss of $2,407,920 and net income of $82,324, respectively.

Assets and Liabilities

During the first nine months of 2011, total assets increased $30,858,840 or 16.73% when compared to December 31, 2010. The increase is primarily due to an increase in loans outstanding due to the loan portfolio acquisition. Total investments increased $11,372,128, or 59.78% during the nine months ended September 30, 2011. In addition, we experienced an increase in time deposits with other banks of $2,508,108, or 317.59% during the nine months ended September 30, 2011.

Investment Securities

Investment securities totaled $30,396,024 as of September 30, 2011 as compared to $19,023,896 at December 31, 2010. Of this amount, $29,381,244 was designated as available for sale as of September 30, 2011. The other investments were nonmarketable equity securities consisting of $969,600 in Federal Home Loan Bank stock and a $45,180 investment in Community Bankers Bank stock as of September 30, 2011.

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

Loans

Loans increased $17,069,390, or 11.51%, during the period. As shown below, the largest increase was in residential real estate loans which increased $23,387,119 or 53.69%, to $66,949,030 at September 30, 2011, due to our loan portfolio acquisition in the first quarter of 2011. Real estate – construction loans decreased $7,334,767 or 31.80% to $15,733,524. Real estate – commercial loans increased $950,776, or 1.55%, to $62,363,518. Consumer and other loans which increased $1,201,030 or 134.09%, to $2,096,705 at September 30, 2011. Commercial and industrial loans decreased $1,134,768 or 5.86% to $18,216,125 at September 30, 2011. Balances within the major loans receivable categories as of September 30, 2011 and December 31, 2010 are as follows:


	September 30, 2011		December 31, 2010
Real estate – construction	$	15,733,524	$	23,068,291
Real estate – commercial		62,363,518		61,412,742
Real estate – residential		66,949,030		43,561,911
Commercial and industrial		18,216,125		19,350,893
Consumer and other		2,096,705		895,675


Total gross loans	$	165,358,902	$	148,289,512

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 September 30, 2011 and December 31, 2010, the Company had criticized loans totaling $12,542,720 and $8,671,253, respectively. At September 30, 2011 and December 31, 2010, the Company had classified loans totaling $24,950,396 and $21,517,718, respectively. At September 30, 2011, the Company had $13,256,016 or 8.02% of total gross loans in nonaccrual status and $1,736,408 in loans that were 90 days or more past due and still accruing. Based upon the increase in impaired loans in the portfolio from December 31, 2010 to September 30, 2011 the Bank increased the provision for loan losses to $1,689,858 for the nine months ended September 30, 2011. This is an increase over the same period last year of $1,148,131 or 211.94%. In the same period, the Bank charged $2,207,168 of specific reserves in the allowance related to impairment charges on impaired loans. In addition, loans with specific reserves of approximately $1,040,000 were sold at par during the first quarter, In the determination of the allowance for loan losses, all significant (typically greater than $100,000) criticized and classified loans are reviewed for impairment to ensure that one of the three proper valuation methods (fair market value of the collateral, present value of cash flows, or observable market price) is adhered to.

The following table depicts the activity in the allowance for loan losses for the nine months ended September 30, 2011 and 2010:

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


	September 30, 2011			September 30, 2010
Balance, January 1	$	5,225,914		$	2,408,990
Provision (recovery) for loan losses for the period		1,689,858			541,727
Net loans (charged-off) recovered during the period		(3,465,013	)		(499,402	)


Balance, September 30,		3,450,759			2,451,315


Gross loans outstanding, September 30,	$	165,358,902		$	133,801,358


Allowance for loan losses to loans outstanding		2.09	%		1.83	%

Deposits

Total deposits increased $37,445,137 or 25.13%, from December 31, 2010 to $186,428,876 at September 30, 2011. Total time deposits increased $6,491,890, or 6.95% to $99,924,206 at September 30, 2011. This increase was due to the decision of management to increase the concentration of brokered deposits to fund the HELOC purchase. Total interest-bearing and non-interest bearing transaction accounts increased $5,960,684 or 42.58% since December 31, 2010. There was an increase in savings and money market accounts as well, which increased $24,992,563 or 60.15%, to $66,544,475 at September 30, 2011. 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 initiative 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 September 30, 2011 and December 31, 2010 are as follows:


	September 30, 2011		December 31, 2010
Noninterest-bearing transaction accounts	$	12,025,721	$	7,225,888
Interest-bearing transaction accounts		7,734,474		6,773,623
Savings and money market		66,544,475		41,551,912
Time deposits $100,000 and over		10,798,406		7,742,179
Other time deposits		89,125,800		85,690,137

Total deposits	$	186,428,876	$	148,983,739

Advances from Federal Home Loan Bank

The Bank repaid $4,000,000 in funds borrowed from the Federal Home Loan Bank of Atlanta (FHLB) during the first nine months of 2011. Advances from the FHLB total $9,500,000 as of September 30, 2011 and $13,500,000 at December 31, 2010. The Bank utilizes the advances to fund loans and for general liquidity purposes. Advances from the Federal Home Loan Bank consisted of the following at September 30, 2011:


Description	Interest Rate			Amount
Convertible rate advances maturing:
August 22, 2012		Variable		$	1,500,000
November 3, 2014		3.86	%		8,000,000

				$	9,500,000

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


2012	$	1,500,000
2014		8,000,000

Total	$	9,500,000

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

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 September 30, 2011, the Company’s primary sources of liquidity included cash and due from banks of $3,347,080, federal funds sold totaling $3,242,967, time deposits with other banks of $3,297,829 and securities available-for-sale totaling $29,381,244, credit availability with the Federal Home Loan Bank of $20,600,000 and unused lines of credit with correspondent banks to purchase federal funds totaling $6,500,000 at September 30, 2011.

Capital Resources

Total shareholders’ equity decreased $2,165,169 to $19,189,733 for the nine month period ended September 30, 2011. This is primarily the result of the net loss for the period of $2,407,920, and stock based compensation expense of $127,553 offset by $43,750 in dividends paid on preferred stock.

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 September 30, 2011 as well as the ratios to be considered “well capitalized.”

The following table summarizes the Company’s risk-based capital at September 30, 2011:


Shareholders’ equity	$	19,189,733
Plus – unrealized (gain) loss on available-for-sale securities		(97,185	)
Less – disallowed deferred tax assets		(1,579,000	)


Tier 1 capital	$	17,513,548

Plus – allowance for loan losses⁽¹⁾		1,989,000


Total capital	$	19,502,548


Risk-weighted assets	$	157,644,000

Risk-based capital ratios:
Tier 1 capital (to risk-weighted assets)		11.11	%
Total capital (to risk-weighted assets)		12.37	%
Leverage ratio		8.13	%

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

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

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 September 30, 2011, the Company had issued commitments to extend credit of $9,418,976 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 September 30, 2011 (amounts in thousands):


	Within One Month		After One Through Three Months		After Three Through Twelve Months		Greater Than One Year		Total

Unused commitments to extend credit	$	685	$	2,215	$	1,351	$	9,516	$	13,767
Standby letters of credit		—		—		14		—		14


Totals	$	685	$	2,215	$	1,365	$	9,516	$	13,781

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, 2010 as contained in our 2010 Annual Report 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 2010 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.

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Item 4. 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 September 30, 2011, 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 3. Default Upon Senior Securities

As discussed in Note 11 of the Notes to Consolidated Financial Statements included with Part 1, Item 1, the Company deferred the payment of its regular quarterly cash dividends on its fixed rate cumulative perpetual preferred stock, series A, issued to the United States Department of the Treasury in connection with the Company’s participation in the Treasury’s Capital Purchase Program. Therefore, the Company is currently in arrears with the dividend payments on the series A preferred stock. As of September 30, 2011, the amount of the arrearage on the dividend payments for the series A preferred stock was $87,500.

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

101		Interactive data files providing financial information from the Quarterly Report on Form 10-Q of AB&T Financial Corporation for the quarterly period ended September 30, 2011, in XBRL (eXtensible Business Reporting Language)*

Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.

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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)


By:		/s/ Daniel C. Ayscue
		Daniel C. Ayscue
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: November 14, 2011

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

101		Interactive data files providing financial information from the Quarterly Report on Form 10-Q of AB&T Financial Corporation for the quarterly period ended September 30, 2011, in XBRL (eXtensible Business Reporting Language)*

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