UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 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 West Main Avenue, Gastonia, North Carolina		28052
(Address of Principal Executive Office)		(Zip Code)

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

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

NONE

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

COMMON STOCK, PAR VALUE $1.00 PER SHARE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act ¨ Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $4,269,128.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date: 2,668,205 shares of common stock outstanding as of April 5, 2012

Documents Incorporated by Reference:

Portions of the registrant’s definitive proxy statement for the 2012 annual meeting of shareholders are incorporated by reference in Part III of this Form 10-K where indicated. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.

PART I

ITEM 1.

BUSINESS

General

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

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

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

Primary Market Area

The Registrant’s Primary Market Area (“PMA”) consists of Gaston and Cleveland Counties. The PMA has a population of over 304,000 with an average median household income of over $41,000.

At June 30, 2011, total deposits in the Registrant’s PMA exceeded $3.6 billion. As of December 31, 2011, the PMA reported moderate levels of unemployment (10.9% in Gaston County and 11.0% in Cleveland County) compared to state and national averages (9.8% and 8.3%, respectively). The leading economic components of Gaston and Cleveland Counties are manufacturing, services and retail trade. The largest employers in the Registrant’s PMA include Caromont Health, Gaston County Schools, Wal-Mart Distribution Center, Freightliner, Wix Filtration Corp., American & Efird, Pharr Yarns, Cleveland County Schools, Cleveland Regional Medical Center, Gaston County Administration, Gardner-Webb University, Cleveland Community College and Cleveland County Administration.

Competition

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

Employees

The Registrant and the Bank currently employ 38 full-time employees and one part-time employee. None of the Registrant’s employees are covered by a collective bargaining agreement. The Registrant believes its relations with its employees to be good.

Regulation

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

Regulatory Developments

Consent Order. Effective February 1, 2012, the Bank entered into a Stipulation to the Issuance of a Consent Order (the “Stipulation”) with the Federal Deposit Insurance Corporation (the “FDIC”) and the North Carolina Office of the Commissioner of Banks (the “Commissioner”) and the FDIC and the Commissioner issued the related Consent Order (the “Order”). The description of the Stipulation and the Order set forth below is qualified in its entirety by reference to the Stipulation and the Order, copies of which are filed herewith as exhibits 10.8 and 10.9, respectively, and incorporated herein by reference.

Management. The Bank is required to assess management’s ability to (1) comply with the requirements of the Order; (2) operate the Bank in a safe and sound manner; (3) comply with all applicable laws and regulations; and (4) improve the Bank’s asset quality, capital adequacy, earnings, management effectiveness, risk management, liquidity, and sensitivity to market risk. To assist with this assessment, the Bank was required to retain a consultant to develop a written analysis and assessment of the Bank’s management needs within 30 days of the effective date of the Order. The consultant’s management report must be developed within 60 days from the effective date of the Order. Within 30 days from receipt of the management report, the Bank must formulate a written management plan that incorporates the findings of the management report, a plan of action in response to each recommendation contained in the management report, and a time frame for completing each action.

Capital Requirements. While the Order is in effect, the Bank must maintain a leverage ratio (the ratio of Tier 1 capital to total assets) of at least 8% and a total risk-based capital ratio (the ratio of qualifying total capital to risk-weighted assets) of at least 11%. If either of these capital ratios are below the required levels as of the date of any call report or regulatory examination, the Bank must, within 30 days from receipt of a written notice of capital deficiency from its regulators, present a plan to increase capital to meet the requirements of the Order.

Charge-Offs, Credits. The Order requires that the Bank eliminate from its books, by charge-off or collection, all assets or portions of assets classified “loss” and 50% of those assets classified “doubtful.” If an asset is classified “doubtful,” the Bank may alternatively charge off the amount that is considered uncollectible in accordance with the Bank’s written analysis of loan or lease impairment. The Order also prevents the Bank from extending, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been charged off or classified, in whole or in part, “loss” or “doubtful” and is uncollected. The Bank may not extend, directly or indirectly, any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been classified “substandard.” These limitations do not apply if the Bank’s failure to extend further credit to a particular borrower would be detrimental to the best interests of the Bank.

Allowance for Loan and Lease Losses. Within 60 days of the effective date of the Order, the board of directors must review the adequacy of the allowance for loan and lease losses (the “ALLL”) and establish a policy for determining the adequacy of the ALLL.

Concentrations of Credit. Within 90 days from the effective date of the Order, the Bank must perform a risk segmentation analysis with respect to its concentrations of credit and must develop a written plan for systematically reducing and monitoring the Bank’s concentration of credit in revolving 1–4 family residential property loans to an amount commensurate with the Bank’s business strategy, management, expertise, size, and location.

Asset Growth. While the Order is in effect, the Bank must notify its regulators at least 60 days prior to undertaking asset growth that exceeds 10% or more per year or initiating material changes in asset or liability composition. The Bank’s asset growth cannot result in noncompliance with the capital maintenance provisions of the Order unless the Bank receives prior written approval from its regulators.

Restriction on Dividends and Other Payments. While the Order is in effect, the Bank cannot declare or pay dividends, pay bonuses, or pay any form of payment outside the ordinary course of business resulting in a reduction of capital without the prior written approval of its regulators. In addition, the Bank cannot make any distributions of interest, principal, or other sums on subordinated debentures without prior regulatory approval.

Brokered Deposits. The Order provides that the Bank may not accept, renew, or roll over any brokered deposits unless it is in compliance with the requirements of the FDIC regulations governing brokered deposits.

Loan Review. Within 60 days from the effective date of the Order, the Bank must review and revise its internal loan review and grading system to provide for the effective periodic review of the Bank’s loan portfolio in order to identify and categorize the Bank’s loans and other extensions of credit on the basis of credit quality. Within 90 days from the effective date of the Order, the Bank must contract for an external loan review to assess the accuracy of the Bank’s loan grading system and the quality of credit underwriting and administrative practices.

HELOC Portfolio. Within 60 days from the effective date of the Order, the Bank must perform a comprehensive assessment of the risk posed by its home equity line of credit (“HELOC”) portfolio. The Bank must also develop and implement a plan to reduce the risk in the HELOC portfolio.

Call Reports. As required by the Order, the Bank has filed amended call report regarding the financial condition of the Bank as of March 31, 2011.

Written Plans and Other Material Terms. Under the terms of the Order, the Bank is required to prepare and submit the following written plans or reports to the FDIC and the Commissioner:

•

Plan to reduce assets of $250,000 or greater classified as “doubtful” or “substandard”

•

Plan and comprehensive budget for all categories of income and expense for the year 2012

•

Business/strategic plan covering the overall operation of the Bank

•

Plan to improve liquidity, contingency funding, interest rate risk, and asset liability management

•

Assessment of the Bank’s information technology function

•

Enterprise-wide disaster recovery/business continuity plan

•

Policy to provide adequate internal routines and controls within the Bank consistent with safe and sound banking practices

•

Independent testing of the Bank’s compliance with the Bank Secrecy Act and associated regulations

Under the Order, the Bank’s board of directors has agreed to increase its participation in the affairs of the Bank, including assuming full responsibility for the approval of policies and objectives for the supervision of all of the Bank’s activities. The Bank must also establish a board committee to monitor and coordinate compliance with the Order.

The Order will remain in effect until modified or terminated by the FDIC and the Commissioner.

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

•

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

•

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

•

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

•

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

•

the elimination of certain trading activities by banks;

•

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

•

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

•

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

The Dodd-Frank Act prohibits insured depository institutions and their holding companies from engaging in proprietary trading except in limited circumstances, and prohibits them from owning equity interests in excess of three percent (3%) of tier 1 capital in private equity and hedge funds (known as the “Volcker Rule”). The Federal Reserve released a final rule on February 9, 2011 (effective on April 1, 2011) which requires a “banking entity,” a term that is defined to include banks like the Registrant, to bring its proprietary trading activities and investments into compliance with the Dodd-Frank Act restrictions no later than two years after the earlier of: (1) July 21, 2012, or (2) 12 months after the date on which interagency final rules are adopted. Pursuant to the compliance date final rule, banking entities are permitted to request an extension of this timeframe from the Federal Reserve. On October 11, 2011, the federal banking agencies released for comment proposed regulations implementing the Volcker Rule. The public comment period closed on February 13, 2012. The proposal has been criticized and there is no consensus as to what the provisions will ultimately include. The Registrant will be reviewing the implications of the interagency rules on its investments once those rules are issued and will plan for any adjustments of its activities or its holdings in order to be in compliance by the announced compliance date.

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

Regulation of the Bank

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

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

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

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

On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program (the “TLGP”) to strengthen confidence and encourage liquidity in the banking system. The TLGP consists of two components: a temporary guarantee of newly-issued senior unsecured debt named the Debt Guarantee Program, and a temporary unlimited guarantee of funds in noninterest-bearing transaction accounts at FDIC insured institutions named the Transaction Account Guarantee Program (“TAG”). All newly-issued senior unsecured debt will be charged an annual assessment of up to 100 basis points (depending on term) multiplied by the amount of debt issued and calculated through the date of that debt or June 30, 2012, whichever is earlier. The Bank elected to opt out of the Debt Guarantee Program and elected to participate in the TAG Program. On August 26, 2009, the FDIC adopted a final rule extending the TAG portion of the TLGP for six months through June 30, 2010 and it was extended again through December 31, 2010. The Bank elected to continue to participate in the TAG Program through December 31, 2010. On July 21, 2010, the Dodd-Frank Act extended unlimited FDIC insurance coverage to noninterest-bearing transaction deposit accounts. It does not apply to accounts earning any level of interest with the exception of Interest on Lawyers’ Trust Accounts (“IOLTA”) accounts. This unlimited FDIC insurance coverage is applicable to all applicable deposits at any FDIC-insured financial institution. Therefore, there is no additional FDIC insurance surcharge related to this coverage after December 31, 2010.

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

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

Insurance of deposits may be terminated by the FDIC upon a finding that an insured institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

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

A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets. The regulators measure risk-adjusted assets, which include off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. “Tier 1,” or core capital, includes common equity, qualifying noncumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions. “Tier 2,” or supplementary capital, includes among other things, limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations and less required deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. Banks and bank holding companies subject to the risk-based capital guidelines are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at least 4% and a ratio of total capital to risk-weighted assets of at least 8%. The appropriate regulatory authority may set higher capital requirements when particular circumstances warrant. The Bank is subject to heightened capital requirements under the Consent Order issued by the FDIC and the Commissioner. The Consent Order requires the Bank to maintain a leverage ratio (the ratio of Tier 1 capital to total assets) of at least 8% and a total risk-based capital ratio (the ratio of qualifying total capital to risk-weighted assets) of at least 11%. As of December 31, 2011, the Bank had a leverage ratio of 7.68% and a total risk-based capital ratio of 12.23%.

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

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

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

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

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the establishment of uniform accounting standards by federal banking agencies,

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

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

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

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

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

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

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

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

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

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

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

Miscellaneous. The dividends that may be paid by the Bank are subject to legal limitations. In accordance with North Carolina banking law, dividends may not be paid unless a bank’s capital surplus is at least 50% of its paid-in capital. In addition, the Consent Order prohibits the Bank from declaring or paying dividends without the prior written approval of its regulators.

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

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

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

Regulation of the Registrant

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

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

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

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

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

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

•

making or servicing loans;

•

performing certain data processing services;

•

providing discount brokerage services;

•

acting as fiduciary, investment or financial advisor;

•

leasing personal or real property;

•

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

•

acquiring a savings and loan association.

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

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

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

Under the Modernization Act, the Federal Reserve Board serves as the primary “umbrella” regulator of financial holding companies, with supervisory authority over each parent company and limited authority over its subsidiaries. Expanded financial activities of financial holding companies generally will be regulated according to the type of such financial activity: banking activities by banking regulators, securities activities by securities regulators and insurance activities by insurance regulators. The Modernization Act also imposes additional restrictions and heightened disclosure requirements regarding private information collected by financial institutions.

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

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

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

Recent Regulatory Initiatives. Beginning in late 2008 and continuing into 2010, the federal government took sweeping actions in response to the deepening economic recession. As mentioned above, President Bush signed the Emergency Economic Stabilization Act of 2008 or “EESA” into law on October 3, 2008. Pursuant to EESA, the Department of the Treasury created the Troubled Asset Relief Program or “TARP” for the purpose of stabilizing the U.S. financial markets. On October 14, 2008, the Treasury announced the creation of the TARP Capital Purchase Program. The Capital Purchase

Program was designed to invest up to $250 billion (later increased to $350 billion) in certain eligible financial institutions in the form of nonvoting senior preferred stock initially paying quarterly dividends at a five percent annual rate. In connection with its investment in senior preferred stock, the Treasury also received ten-year warrants to purchase common shares of participating institutions.

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

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

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

For additional information about this transaction and the Company’s participation in the Capital Purchase Program, please see Note 19 to the Company’s audited consolidated financial statements included with this report and the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on January 28, 2009.

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

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

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

•

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

•

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

•

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

The leverage capital requirement consists of a minimum ratio of total capital to total assets of 4%, with an expressed expectation that banking organizations generally should operate above such minimum level. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital (which consists principally of shareholders’ equity). The Tier 1 leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated companies, with minimum requirements of 4% to 5% for all others. As of December 31, 2011, the Registrant had Tier 1 and Total Risk-Based Capital of 7.68% and 12.23%, respectively. As of December 31, 2011, the Company was considered “well capitalized” under regulatory definitions, but based upon the February consent agreement, the Company’s capital levels are considered “adequately capitalized”.

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

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

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

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

In addition, in March 2011, the federal banking agencies, along with the Federal Housing Finance Agency, and the Securities and Exchange Commission, released a proposed rule intended to ensure that regulated financial institutions design their incentive compensation arrangements to account for risk. Specifically, the proposed rule would require compensation practices of the Registrant to be consistent with the following principles: (1) compensation arrangements appropriately balance risk and financial reward; (2) such arrangements are compatible with effective controls and risk management; and (3) such arrangements are supported by strong corporate governance. In addition, financial institutions with $1 billion or more in assets would be required to have policies and procedures to ensure compliance with the rule and would be required to submit annual reports to their primary federal regulator. The comment period has closed and a final rule has not yet been published.

Privacy and Information Security. The Registrant is subject to many federal and state laws and regulations governing requirements for maintaining policies and procedures to protect the non-public personal information of its customers. The Gramm-Leach-Bliley Act requires banks to periodically disclose their privacy policies and practices relating to sharing such information and enables retail customers to opt out of a bank’s ability to market to affiliates and non-affiliates under certain circumstances. The Gramm-Leach-Bliley Act also requires banks to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information.

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

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

Dividends. As a bank holding company that does not, as an entity, currently engage in separate business activities of a material nature, the Registrant’s ability to pay cash dividends depends upon the cash dividends the Registrant receives from the Bank. At present, the Registrant’s only source of income is dividends paid by the Bank and interest earned on any investment securities the Registrant holds. The Registrant must pay all of its operating expenses from funds it receives from the Bank. Therefore, shareholders may receive dividends from the Registrant only to the extent that funds

are available after payment of our operating expenses and the board decides to declare a dividend. In addition, the Federal Reserve Board generally prohibits bank holding companies from paying dividends except out of operating earnings, and the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality and overall financial condition. We expect that, for the foreseeable future, any dividends paid by the Bank to us will likely be limited to amounts needed to pay any separate expenses of the Company and/or to make required payments on our debt obligations or to meet the dividend requirements on our preferred stock.

Interstate Branching

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

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

ITEM 1A.

RISK FACTORS

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

ITEM 1B.

UNRESOLVED STAFF COMMENTS

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

ITEM 2.

PROPERTIES

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

Office Location

Year
Opened

Approximate
Square Footage

Owned or Leased

Administrative Office

292 W. Main Ave.

Gastonia, NC 28052

2006

10,000

Own

Gastonia Office

2227 Union Rd.

Gastonia, NC 28054

2008

2,737

Own

Shelby Branch

412 S. DeKalb St.

Shelby, NC 28150

2006

3,800

Own

Kings Mountain Branch

209 South Battleground Ave.

Kings Mountain, NC 28086

2008

2,650

Lease

Proposed Branch

314 East King Street

Kings Mountain, NC 28086

Proposed Branch

405 Beatty Drive

Mt Holly, NC 28120

ITEM 3.

LEGAL PROCEEDINGS

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

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

Part II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Registrant’s common stock is not traded on any exchange. The common stock is quoted under the symbol “ABTO” on the OTC Bulletin Board and the OTCQB marketplace operated by OTC Markets Group Inc. Trading in stocks quoted on the OTC Bulletin Board and the OTCQB is often thin and may be characterized by wide fluctuations in trading prices due to many factors that may have little to do with a company’s operations or business prospectus. No assurances can be made that there will be a market for the Registrant’s common stock in the future.

OTC Bulletin Board and OTCQB securities are not listed or traded on the floor of an organized national or regional stock exchange. Instead, transactions are conducted through a telephone and computer network connecting dealers in stocks. OTC Bulletin Board and OTCQB issuers are traditionally smaller companies that do not meet the financial and other listing requirements of a regional or national stock exchange.

Known stock trading prices are presented in the following table:


	High		Low
2011
First quarter	$	2.25	$	1.67
Second quarter		2.25		1.56
Third quarter		2.00		1.10
Fourth quarter		1.10		0.22
2010
First quarter	$	3.50	$	2.00
Second quarter		3.50		2.12
Third quarter		2.90		1.20
Fourth quarter		2.25		1.50

As of December 31, 2011, there were 628 record holders of the Registrant’s Common Stock.

As a bank holding company that does not engage in separate business activities of a material nature, the Registrant’s ability to pay cash dividends depends upon the cash dividends the Registrants receives from the Bank. As a state-chartered bank subject to North Carolina banking law, the Bank may not pay cash dividends to the Registrant unless the Bank’s capital surplus is at least 50% of its paid-in capital. Further, the Bank may only pay dividends out of retained earnings. At December 31, 2011, the Bank had a retained deficit of $9,520,211. In addition, the Consent Order described in Item 1 of this report prohibits the Bank from declaring or paying dividends without the prior written consent of its regulators.

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

ITEM 6.

SELECTED FINANCIAL DATA

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

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion describes our results of operations for 2011 as compared to 2010, and 2010 as compared to 2009, and also analyzes our financial condition as of December 31, 2011 as compared to December 31, 2010. Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

We have included a number of tables to assist in our description of these measures. For example, the “Average Balances” table shows the average balance in 2011, 2010, and 2009 of each category of our assets and liabilities, as well as the yield we earned or the rate we paid with respect to each category. A review of this table shows that our loans typically provide higher interest yields than do other types of interest earning assets, which is why we channel a substantial percentage of our earning assets into our loan portfolio. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included an “Interest Sensitivity Analysis” table to help explain this. Finally, we have included a number of tables that provide detail about our investment securities, our loans, and our deposits and other borrowings.

Naturally, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the “Provision and Allowance for Loan Losses” section, we have included a detailed discussion of this process, as well as several tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans.

In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this noninterest income, as well as our noninterest expense, in the “Noninterest Income and Expense” section.

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

Selected Financial Data

The following selected financial data for the years ended December 31, 2011 and 2010 is derived from the consolidated financial statements and other data of AB&T Financial Corporation. The selected financial data should be read in conjunction with the Registrant’s financial statements, including the accompanying notes, included elsewhere herein.


	2011			2010
Income Statement Data:
Interest income	$	8,238,811		$	7,020,976
Interest expense		2,087,386			2,067,261

Net interest income		6,151,425			4,953,715
Provision for loan losses		2,229,856			3,346,727

Net interest income after provision for loan losses		3,921,569			1,606,988
Noninterest income		579,440			853,339
Noninterest expense		7,238,377			5,843,384

Loss before income taxes		(2,737,368	)		(3,383,057	)
Income tax (benefit) expense		517,792			66,063

Net loss	$	(3,255,160	)	$	(3,449,120	)
Accretion of preferred stock		24,312			24,312
Preferred dividends paid		175,000			175,000

Net loss available to common shareholders	$	(3,454,472	)	$	(3,648,432	)

Balance Sheet Data:
Assets	$	224,129,909		$	184,488,829
Earning assets		211,503,850			175,054,372
Securities (1)		37,771,076			19,023,896
Loans (2)		163,039,560			148,289,512
Allowance for loan losses		3,272,645			5,225,914
Deposits		186,450,932			148,983,739
Shareholders’ equity		18,317,380			21,354,902
Per-Share Data:
Loss per share – basic	$	(1.30	)	$	(1.37	)
Loss per share – diluted		(1.30	)		(1.37	)
Book value (period end)		5.58			6.72

⁽¹⁾	Marketable securities are all available for sale and recorded at their fair market value. Nonmarketable securities totaling $1,187,180 and $1,267,280 are included for 2011 and 2010, respectively. These securities are recorded at cost.

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

Basis of Presentation

The following discussion should be read in conjunction with the preceding “Selected Financial Data” and the Company’s Financial Statements and the Notes thereto and the other financial data included elsewhere in this Annual Report. The financial information provided in certain tables below has been rounded in order to simplify its presentation. However, the ratios and percentages provided below are calculated using the detailed financial information contained in the Financial Statements, the Notes thereto and the other financial data included elsewhere in this Annual Report.

General

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

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

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

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

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

Effective February 1, 2012, the Bank entered into a Stipulation to the Issuance of a Consent Order with the Federal Deposit Insurance Corporation and the North Carolina Office of the Commissioner of Banks and the FDIC and the Commissioner issued the related Consent Order with respect to the Bank. The Consent Order includes a number of requirements and restrictions applicable to the Bank. Among other things, the Bank is subject to heightened capital requirements and is prohibited from paying dividends, bonuses, or any other payment outside the ordinary course of business resulting in a reduction of capital without the prior written approval of its regulators. A more detailed description of the Consent Order is included under Item 1 of this report. Copies of the Stipulation and the Consent Order are filed with this report as exhibits 10.8 and 10.9, respectively, and are incorporated herein by reference. The Consent Order will remain in effect until modified or terminated by the FDIC and the Commissioner.

Results of Operations

For the year ended December 31, 2011, compared with year ended December 31, 2010

Net interest income increased $1,197,710 or 24.18% in 2011 from $4,953,715 in 2010. Average loans increased $26,547,838 or 19.26% from 2010 to 2011, the increase in net interest income was due primarily to an increase in net interest spread which increased from 2.84% in 2010 to 2.94% in 2011. The components of interest income were from loans, including fees of $7,734,845, federal funds sold of $20,547, and investment income of $466,278, and interest earning deposits of $17,141.

The Company’s net interest spread and net interest margin were 2.94% and 3.06%, respectively, in 2011 compared to 2.84% and 3.02%, respectively, in 2010. This represents a 4 basis point (1.32%) increase in net interest margin, primarily derived from the increase in the interest income from 2010. Yields on earning assets decreased in 2011. Yields on average earning assets decreased from 4.28% in 2010 to 4.10% in 2011 primarily as a result of a full year of depressed interest rates during 2011. At December 31, 2011 approximately 76.64% of the Company’s loans were variable rate loans tied to the prime rate, which reached its current low point of 3.25% in December 2008. Rates on average interest-bearing liabilities decreased from 1.45% in 2010 to 1.16% in 2011.

The provision for loan losses was $2,229,856 in 2011 compared to $3,346,727 in 2010. The charges to the provision were primarily to maintain the allowance for loan losses at a level management believes to be sufficient to cover possible future losses in the loan portfolio. Impaired loans as of December 31, 2011 increased to $24,312,809 from $14,338,761 as of December 31, 2010. Impaired loans as of December 31, 2011 were made up largely of credits secured by real estate. All impaired loans are currently within various stages of workouts and management feels that loss provisions placed against these credits are appropriate at this time.

Noninterest income decreased $273,899, or 32.10%, to $579,440 in 2011 from $853,339 in 2010. The largest component of noninterest income was from service charges on deposit accounts which increased $37,677 or 10.07%, to $411,724 for the year ended December 31, 2011, when compared to 2010. The primary reason for the decrease is a decrease in realized gains on sales of available for sale securities of $357,991 from 2010.

Noninterest expense increased $1,394,993 or 23.87%, to $7,238,377 in 2011 from $5,843,384 in 2010. In the first quarter of 2011, the Bank purchased a pool of home equity lines of credit (“HELOCs”). HELOC pool expense was $1,002,119 in 2011 and $0 in 2010. This amount represented the market value adjustment on the pool of HELOCs at the time of purchase. The largest component of noninterest expense was salaries and employee benefits which increased $239,449, or 9.85%, to

$2,671,261 for the year ended December 31, 2011. Losses and write downs on the sale of other real estate decreased $85,920 or 14.94%, to $489,080 in 2011 from $575,000 in 2010 due to the slowdown in the decrease in the value of foreclosed real estate in the markets we serve. The loss on sale of a real estate secured loan during 2011 and 2010 added an additional $79,395 and $281,293 noninterest expense. The sale of these two loans to independent investors, allowed the Company to forgo the costs of foreclosing on the property and additional time and disposition costs associated with its sale. FDIC Insurance premiums decreased $110,510 or 24.07% to $348,585 for the year ended December 31, 2011. The increase in other operating expenses in 2011 was also due to an increase in other real estate expense which increased from $375,897 in 2010 to $604,670 in 2011 and professional fees which increased from $302,234 in 2010 to $460,024 in 2011.

Our net loss was $3,255,160 in 2011 compared to a net loss of $3,449,120 in 2010. The net loss in 2011 is after the recognition of an income tax expense of $517,792, and the net loss in 2010 is after the recognition of an income tax expense of $66,063. The income tax expense and benefit was based on an effective tax rate of 1.22% and 2.01% for 2011 and 2010, respectively. The income tax expense reflects an increase in the deferred tax asset valuation allowance of $1,377,919. The decrease in the effective tax rates is due primarily to the valuation allowance on net operating loss carry forwards. Based on the Company’s projections of future taxable income over the next three years, cumulative tax losses over the previous three years, limitations on future utilization of various deferred tax assets under Internal Revenue Code, and available tax planning strategies, the Company has recorded a valuation allowance in the amount of $2.6 million. The Company has net operating loss carryfowards of approximately $6.7 million which will expire in 2031 if not utilized to offset taxable income prior to that date.

The decrease in income and subsequent net loss for 2011 was driven by multiple factors based upon the economic environment in which the Bank is currently operating. However, the primary factors in the decline of income continue to be losses associated with the loan portfolio and the extended margin compression associated with historically low levels of interest rates after 400 basis points of rate reductions by the Federal Reserve in 2008. As the Bank has been able to re-price deposits to decrease our cost of funds, the yield on our loan portfolio is still depressed as approximately 76.6% of our loan portfolio is variable based on the prime rate. A second factor was the provision for loan losses that the Bank added during the year along with the write down of other real estate owned of $234,000 to reflect changes in the value of real estate.

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

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

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

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

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

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

Our net loss was $3,449,120 in 2010 compared to a net loss of $2,886,518 in 2009. The net loss in 2010 is after the recognition of an income tax expense of $66,063, and the net loss in 2009 is after the recognition of an income tax benefit of $1,740,916. The income tax expense and benefit was based on an effective tax rate of 2.01% and 37.62% for 2010 and 2009, respectively. The decrease in the effective tax rates is due primarily to the valuation allowance on net operating loss carry forwards. The decrease in income and subsequent net loss for 2010 was driven by multiple factors based upon the economic environment in which the Bank is currently operating. However, the primary factors in the decline of income continue to be losses associated with the loan portfolio and the extended margin compression associated with historically low levels of interest rates after 400 basis points of rate reductions by the Federal Reserve in 2008. As the Bank has been able to re-price deposits to decrease our cost of funds, the yield on our loan portfolio is still depressed as approximately 77% of our loan portfolio is variable based on the prime rate. A second factor was the provision for loan losses that the Bank added during the year along with the write down of other real estate owned of $575,000 to reflect changes in the value of real estate.

Net Interest Income

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

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

Net Interest Income - continued


	For the year ended December 31, 2011								For the year ended December 31, 2010								For the year ended December 31, 2009
	Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate
Assets:
Earning Assets:
Loans¹	$	164,373,734		$	7,734,845		4.71	%	$	137,825,896		$	6,592,205		4.78	%	$	140,593,385		$	6,763,059		4.81	%
Securities, taxable		23,710,893			457,234		1.93	%		12,964,681			386,902		2.98	%		5,085,032			262,961		5.17	%
Federal funds sold		9,191,069			20,547		0.22	%		10,179,719			22,545		0.22	%		3,641,423			11,433		0.31	%
Interest earning deposits		2,625,018			17,141		0.65	%		1,541,386			14,735		0.96	%		5,670,272			59,808		1.05	%
Nonmarketable equity Securities		1,151,085			9,044		0.79	%		1,365,746			4,589		0.34	%		1,403,078			4,279		0.30	%

Total earning assets		201,051,799			8,238,811		4.10	%		163,877,428			7,020,976		4.28	%		156,393,190			7,101,540		4.54	%

Cash items		2,569,434								2,220,629								7,172,835
Premises and equipment		3,808,113								3,913,583								4,060,044
Other assets		9,567,132								7,550,145								4,928,829
Allowance for loan losses		(4,179,000	)							(2,773,232	)							(2,319,974	)

Total assets	$	212,817,478							$	174,788,553							$	170,234,924

Liabilities:
Interest-Bearing Liabilities:
Interest-bearing transaction accounts	$	7,769,577			54,891		0.71	%	$	5,758,500			46,382		0.81	%	$	4,818,359			46,145		0.96	%
Savings and money market deposits		57,101,926			823,307		1.44	%		30,000,288			438,187		1.46	%		20,921,873			247,372		1.18	%
Time deposits		104,109,806			954,037		0.92	%		97,461,495			1,275,940		1.31	%		91,637,602			2,266,897		2.47	%
Federal Home Loan Bank advances		11,413,699			253,906		2.22	%		9,249,315			304,332		3.29	%		18,834,411			676,754		3.59	%
Other borrowings		103,971			1,245		1.20	%		242,181			2,420		1.00	%		957,510			7,697		0.80	%

Total interest-bearing liabilities		180,498,979			2,087,386		1.16	%		142,711,779			2,067,261		1.45	%		137,169,755			3,244,865		2.37	%

Demand deposits		11,319,280								7,022,385								5,818,891
Accrued interest and other liabilities		277,134								230,289								242,999
Shareholders’ equity		20,722,085								24,824,100								27,003,279

Total liabilities and shareholders’ equity	$	212,817,478							$	174,788,553							$	170,234,924

Net interest spread							2.94	%							2.83	%							2.18	%

Net interest income				$	6,151,425							$	4,953,715							$	3,856,675

Net interest margin²							3.06	%							3.02	%							2.47	%

(1)

In 2011, the effect of fees collected on loans totaling $257,677 increased the annualized yield on loans by 0.16% from 4.55%. The effect on the annualized yield on earning assets was an increase of 0.13% from 3.97%. The effect on net interest spread and net interest margin was an increase of 0.13% and 0.13% from 2.81% and 2.93%, respectively. In 2011, the effect of nonaccrual loans averaging $13,064,974 decreased the annualized yield on loans by 0.40%.

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

Net Interest Income - continued

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


	2011 compared to 2010
	Due to increase (decrease) in
	Volume			Rate			Volume/Rate			Total
Interest income:
Loans	$	1,269,782		$	(106,607	)	$	(20,535	)	$	1,142,640
Securities, taxable ⁽¹⁾		287,710			(122,729	)		(90,194	)		74,787
Federal funds sold and other		302			105			1			408

Total interest income		1,557,794			(229,231	)		(110,728	)		1,217,835

Interest expense:
Interest-bearing deposits		472,583			(316,025	)		(84,832	)		71,726
Federal Home Loan Bank advances		71,215			(98,574	)		(23,067	)		(50,426	)
Short-term borrowings		(1,381	)		480			(274	)		(1,175	)

Total interest expense		542,417			(414,119	)		(108,173	)		20,125

Net interest income	$	1,015,377		$	184,888		$	(2,555	)	$	1,197,710


	2010 compared to 2009
	Due to increase (decrease) in
	Volume			Rate			Volume/Rate			Total
Interest income:
Loans	$	(133,126	)	$	(38,485	)	$	758		$	(170,853	)
Securities, taxable ⁽¹⁾		323,019			(89,992	)		(108,775	)		124,252
Federal funds sold and other		18,434			(41,624	)		(10,770	)		(33,960	)

Total interest income		208,327			(170,101	)		(118,787	)		(80,561	)

Interest expense:
Interest-bearing deposits		345,578			(1,009,263	)		(136,220	)		(799,905	)
Federal Home Loan Bank advances		(344,410	)		(57,042	)		29,029			(372,423	)
Short-term borrowings		(5,750	)		1,871			(1,398	)		(5,277	)

Total interest expense		(4,582	)		(1,064,434	)		(108,589	)		(1,177,605	)

Net interest income	$	212,909		$	894,333		$	(10,198	)	$	1,258,166


	2009 compared to 2008
	Due to increase (decrease) in
	Volume			Rate			Volume/Rate			Total
Interest income:
Loans	$	381,423		$	(1,803,033	)	$	(83,180	)	$	(1,504,790	)
Securities, taxable ⁽¹⁾		64,797			(39,658	)		(10,186	)		14,953
Federal funds sold and other		(102,983	)		(178,985	)		63,659			(218,309	)

Total interest income		343,237			(2,021,676	)		(29,707	)		(1,708,146	)

Interest expense:
Interest-bearing deposits		296,253			(1,426,180	)		(111,143	)		(1,241,070	)
Federal Home Loan Bank advances		(33,925	)		13,210			(642	)		(21,357	)
Short-term borrowings		(43,658	)		(45,091	)		29,332			(59,417	)

Total interest expense		218,670			(1,458,061	)		(82,453	)		(1,321,844	)

Net interest income	$	124,567		$	(563,615	)	$	52,746		$	(386,302	)

⁽¹⁾	Securities include nonmarketable equity securities.

Interest Sensitivity. We monitor and manage the pricing and maturity of our assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on our net interest income. The principal monitoring technique employed by us is the measurement of our interest sensitivity “gap”, which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available for sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in this same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates.

Net Interest Income - continued

The following table sets forth our interest rate sensitivity at December 31, 2011

Interest Sensitivity Analysis


(Dollars in thousands)	Within Three Months			After Three Through Twelve Months			One Through Five Years			Greater Than Five Years			Total
Assets
Earning assets:
Loans	$	51,817		$	21,254		$	61,043		$	28,926		$	163,040
Securities available for sale		—			21			12,415			24,148			36,584
Nonmarketable securities		1,187			—			—			—			1,187
Interest-bearing deposits in other banks		4,749			—			—			—			4,749
Federal funds sold		5,944			—			—			—			5,944

Total earning assets		63,697			21,275			73,458			53,074			211,504

Liabilities
Interest-bearing liabilities:
Interest - bearing deposits:
Demand deposits		8,613			—			—			—			8,613
Savings and money market deposits		72,594			—			—			—			72,594
Time deposits		18,455			35,866			39,908			—			94,229
Federal Home Loan Bank advances		—			—			19,000			—			19,000
Other borrowings		—			—			—			—			—

Total interest-bearing liabilities		99,662			35,866			58,908			—			194,436

Period gap		(35,965	)		(14,591	)		14,550			53,074			17,015

Cumulative gap		(35,965	)		(50,556	)		(36,006	)		17,068

Ratio of cumulative gap to total earning assets		(17.00	)%		(23.90	)%		(17.02	)%		8.07	%

The above table reflects the balances of interest-earning assets and interest-bearing liabilities at the earlier of their repricing or maturity dates. Overnight federal funds are reflected at the earliest pricing interval due to the immediately available nature of the instruments. Debt securities are reflected at each instrument’s ultimate maturity date. Interest–bearing deposits in other banks are reflected at their contractual maturity date. Scheduled payment amounts of fixed rate amortizing loans are reflected at each scheduled payment date. Scheduled payment amounts of variable rate amortizing loans are reflected at each scheduled payment date until the loan may be repriced contractually; the unamortized balance is reflected at that point. Interest-bearing liabilities with no contractual maturity, such as savings deposits and interest-bearing transaction accounts, are reflected in the earliest repricing period due to contractual arrangements which give us the opportunity to vary the rates paid on those deposits within a thirty-day or shorter period. Fixed rate time deposits, principally certificates of deposit, are reflected at their contractual maturity date. Other borrowings, which consist of federal funds purchased and securities sold under agreements to repurchase, are reflected at their contractual maturity date. Federal Home Loan Bank advances are reflected at their contractual maturity dates.

We generally would benefit from increasing market rates of interest when we have an asset-sensitive gap position and generally would benefit from decreasing market rates of interest when we are liability-sensitive. We are cumulatively asset sensitive. However, our gap analysis is not a precise indicator of our interest sensitivity position. The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. Net interest income may be impacted by other significant factors in a given interest rate environment, including changes in the volume and mix of earning assets and interest-bearing liabilities.

Provision and Allowance for Loan Losses

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

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

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

The December 31, 2011 allowance for loan losses, and, therefore indirectly the provision for loan losses for the year ended December 31,2011, was determined based on the following specific factors though not intended to be an all inclusive list:

•

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

•

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

•

The slowing of declining asset quality trends in our loan portfolio,

•

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

•

The results of our internal and independent loan reviews during the third and fourth quarters of 2011 resulting in loan downgrades,

•

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

•

The level of charge offs already held in the portfolio.

For the years ended December 31, 2011 and 2010, the provision for loan losses was $2,229,856 and $3,346,727, respectively. On December 31, 2011, there were $12,214,610 in loans in nonaccrual status. On December 31, 2010, there were $10,257,374 in loans in nonaccrual status. Based on present information and an ongoing evaluation, it is management’s assessment that the allowance for loan losses as of December 31, 2011, was appropriate in light of the risk inherent within the loan portfolio. Our judgment about the adequacy of the allowance is based upon a number of assumptions about future events which we believe to be reasonable but which may or may not be accurate. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses in 2011 or that additional increases in the allowance for loan losses will not be required.

The following table sets forth certain information with respect to our allowance for loan losses and the composition of charge-offs and recoveries for the years ended December 31, 2011 and 2010.

Allowance for Loan Losses

Loan Loss and Recovery


	For the Year
	2011			2010			2009			2008			2007
Balance at beginning of year	$	5,225,914		$	2,408,990		$	1,935,702		$	1,370,235		$	1,190,460
Provision for loan losses (1)		2,229,856			3,346,727			3,478,372			1,312,969			572,898
Charge-offs
Real Estate:
Construction		531,100			154,430			126,906			190,765			—
Commercial		1,271,479			0			461,134			—			—
Residential		1,525,948			366,100			254,100			132,768			239,770

Total real estate		3,328,527			520,530			842,140			323,533			239,770
Commercial & Industrial		1,283,737			61,120			2,176,132			443,250			145,763
Consumer & Other		170,900			130,082			122,643			95,581			7,590

Total charge-offs		4,783,164			711,732			3,140,915			862,364			393,123
Recoveries
Real Estate:
Construction		26,747			—			71,094			—			—
Commercial		0			—			—			—			—
Residential		459,125			122,590			—			65,833			—

Total real estate		485,872			122,590			71,094			65,833			—
Commercial & Industrial		23,704			3,572			—			18,000			—
Consumer & Other		90,463			55,767			64,737			31,029			—

Total recoveries		600,039			181,929			135,831			114,862			—

Net charge-offs		4,183,125			529,803			3,005,084			747,502			393,123

Balance at end of year	$	3,272,645		$	5,225,914		$	2,408,990		$	1,935,702		$	1,370,235


Average loans, excluding loans held for sale	$	164,373,734		$	137,825,896		$	140,593,385		$	134,393,383		$	104,763,265


Period end loans, excluding loans held for sale	$	163,039,560		$	148,289,512		$	139,974,913		$	139,670,266		$	119,523,426


Net charge-offs to average loans, excluding loans held for sale		2.54	%		.38	%		2.14	%		.56	%		.38	%


Allowance for loan losses to period end loans, excluding loans held for sale		2.00	%		3.52	%		1.72	%		1.39	%		1.15	%

(1)

Net of reversal of specific reserves of $1,046,479 on loans sold in conjunction with the HELOC Portfolio acquisition.

Allocation of the Allowance for Loan Losses


	2011					2010					2009
	Amount		Percent of Total Loans (1)			Amount		Percent of Total Loans (1)			Amount		Percent of Total Loans (1)
Real Estate:

Construction	$	428,043		13.09	%	$	1,133,180		21.68	%	$	457,357		18.99	%

Commercial		999,259		30.53	%		1,532,386		29.32	%		251,634		10.45	%

Residential		1,104,617		33.75	%		1,690,850		32.36	%		444,670		18.46	%


Total real estate loans		2,531,919		77.37	%		4,356,416		83.36	%		1,153,661		47.89	%

Commercial and Industrial		552,459		16.88	%		636,627		12.18	%		311,216		12.92	%

Consumer		6,266		.19	%		6,676		.13	%		16,557		.69	%

Unallocated		182,001		5.56	%		226,195		4.33	%		927,556		38.50	%


Total	$	3,272,645		100.00	%	$	5,225,914		100.00	%	$	2,408,990		100.00	%

(1)

Percent of loans in each category to total loans

Transactions in the allowance for loan losses for the year ended December 31, 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 charged to operations		(200,784	)		738,352			480,590			1,175,865			80,027			(44,194	)		2,229,856
Recoveries		26,747			—			459,125			23,704			90,463			—			600,039
Charge-offs		(531,100	)		(1,271,479	)		(1,525,948	)		(1,283,737	)		(170,900	)		—			(4,783,164	)

Balance, end of year	$	428,043		$	999,259		$	1,104,617		$	552,459		$	6,266		$	182,001		$	3,272,645

Nonperforming Assets

Nonperforming Assets. As of December 31, 2011 and 2010, loans in nonaccrual status totaled approximately $12,215,000 and $10,257,000, respectively. There were no loans past due ninety days or more and still accruing interest as of December 31, 2011 and as of December 31, 2010, there were approximately $1,870,000. Assets held as other real estate totaled $5,605,042 and $6,402,263 in 2011 and 2010, respectively.

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

Nonperfoming Assets

(dollars in thousands)


	December 31
	2011			2010			2009			2008			2007
Nonaccrual loans	$	12,215		$	10,257		$	6,001		$	2,693		$	864

Loan past due 90 or more days and still accruing interest		—			1,870			63			9			598

Total nonperforming loans		12,215			12,127			6,064			2,702			1,462
Foreclosed real estate		5,605			6,402			2,050			2,296			821
Repossessed assets		—			—			—			—			—

Total nonperforming assets	$	17,820		$	18,529		$	8,114		$	4,998		$	2,283


Allowance for loan losses	$	3,273		$	5,226		$	2,409		$	1,936		$	1,370

Nonperforming loans to period end loans, excluding loans held for sale		7.49	%		8.18	%		4.33	%		1.93	%		1.22	%

Allowance for loan losses to period end loans, excluding loans held for sale		2.01	%		3.52	%		1.72	%		1.39	%		1.15	%

Nonperforming assets as a percentage of:
Loans and foreclosed assets		10.57	%		11.98	%		5.71	%		3.52	%		1.90	%
Total assets		7.95	%		10.04	%		4.59	%		2.93	%		1.55	%

Ratio of allowance for loan losses to nonperforming loans		26.8	%		43.1	%		39.7	%		71.6	%		93.7	%

Troubled Debt Restructurings (TDRs). On a loan by loan basis, management determines whether an account that experiences financial difficulties should be modified as to its interest rate or repayment terms to maximize the Company’s collection of its balance. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the contract is modified are excluded from restructured loans once repayment performance, in accordance with the modified agreements, has been demonstrated over several payment cycles. Loans that have interest rates reduced below comparable market rates remain classified as restructured loans; however, interest income is accrued at the reduced rate as long as the customer complies with the revised terms and conditions. Restructured loans totaled approximately $9,893,000 at December 31, 2011, compared to $10,256,000 at December 31, 2010, of which approximately $6,807,000 and $8,679,000 were accruing interest at the respective period ends. Restructured loans not accruing interest are included in nonaccrual loans. The increase in restructured loans resulted from increased demand for modifications or renewals of loans in 2011, during a period of continued economic downturn, in which many borrowers have experienced financial challenges.

Potential Problem Loans. 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 December 31, 2011, through our internal review mechanisms, we had identified $17,582,368 of criticized loans and $20,549,614 of classified loans. The results of this internal review process are considered in determining our assessment of the adequacy of the allowance for loan losses.

Our criticized loans increased from $8,671,253 at December 31, 2010 to $17,582,368 at December 31, 2011. Total classified loans decreased from $21,517,717 at December 31, 2010 to $20,549,614 at December 31, 2011. The increase in criticized loans as of period end is made up of loans primarily secured by real estate assets. The Bank also has a credit facility to an operating entity closely tied to the residential building industry which has been negatively impacted by the deterioration in the construction industry. The Bank is currently working to resolve these criticized loans and minimize further negative impacts to the Bank.

Noninterest Income and Expense

Noninterest Income. The largest component of noninterest income was service charges on deposit accounts. The following table sets forth the principal components of noninterest income for the years ended December 31, 2011 and 2010.


	2011		2010
Service charges on deposit accounts	$	411,724	$	374,047
Gain on the sale of securities		52,196		410,187
Other income		115,520		69,105

Total noninterest income	$	579,440	$	853,339

Noninterest Expense. Salaries and employee benefits comprised the largest component of noninterest expense and totaled $2,671,261 for the year ended December 31, 2011 as compared to $2,431,812 for the year ended December 31, 2010. Loss on sale and write down of other real estate decreased from 2010 by approximately $85,920 to $489,080. Other operating expenses totaled $2,286,750 for the year ended December 31, 2011, compared to $1,722,815 for the year ended December 31, 2010. The increase in other operating expenses was due primarily to the increase in professional fees and expenses associated with other real estate owned.

Noninterest Income and Expense - continued

The following table sets forth the primary components of noninterest expense for the years ended December 31, 2011 and 2010.


	2011		2010
Salaries and employee benefits	$	2,671,261	$	2,431,812
HELOC pool expense		1,002,119		—
Net occupancy expense		195,708		197,111
FDIC insurance		348,585		459,095
Other insurance		59,222		28,640
Advertising and marketing expense		69,176		86,519
Office supplies, stationary and printing		78,803		92,657
Data processing		160,130		146,204
Professional fees		460,024		302,234
Furniture and equipment expense		165,479		176,258
Telephone		54,382		48,311
Postage		86,941		48,210
Other real estate expense		604,670		375,897
Loss on sale of loans		79,395		281,293
Loss on sale of other real estate		489,080		575,000
Other		713,402		594,143

Total noninterest expense	$	7,238,377	$	5,843,384

Balance Sheet Review

General. At December 31, 2011, we had total assets of $224,129,909, consisting principally of $159,766,915 in net loans, $37,771,076 in investments, $5,944,001 in federal funds sold, $3,741,759 in net premises, furniture and equipment, and $4,890,563 in cash and due from banks compared to December 31, 2010 when the Bank had total assets of $184,488,829, an increase of 21.49%. Total assets in 2010 consisted principally of $143,063,598 in net loans, $19,023,896 in investments, $4,150,670 in federal funds sold, $3,861,622 in net premises, furniture and equipment and $3,924,571 in cash and due from banks.

At December 31, 2011, the Bank had liabilities totaling $205,812,529, consisting principally of $186,450,932 in deposits, and $19,000,000 in advances from the Federal Home Loan Bank. This was an increase of 26.16% over the total liabilities at December 31, 2010 which totaled $163,133,927 and consisted principally of $148,983,739 in deposits, and $13,500,000 in advances from Federal Home Loan Bank.

At December 31, 2011 shareholders’ equity equaled $18,317,380 a decrease of 14.22% compared to the 2010 year ending equity balance of $21,354,902. This decrease is primarily due to the net loss for the year of $3,255,160 plus dividends on preferred stock of $43,750.

Loans. Loans are the largest category of earning assets and typically provide higher yields than the other types of earning assets. Associated with the higher loan yields are the inherent credit and liquidity risks which we attempt to control and counterbalance. Loans averaged $164,373,734 in 2011 as compared to $137,825,896 in 2010. At December 31, 2011 total loans were $163,039,560 or 9.94% higher than the December 31, 2010 balance of $148,289,512. This increase is primarily as a result of the HELOC portfolio acquisition.

The following table sets forth the composition of the loan portfolio by category at December 31, 2011 and 2010 and highlights our general emphasis on real-estate lending.

Balance Sheet Review - continued

Composition of Loan Portfolio

Portfolio Loan Summary (1)

(Dollars in Thousands)


	December 31
	2011					2010					2009					2008					2007
	Amount		% of Total Loans			Amount		% of Total Loans			Amount		% of Total Loans			Amount		% of Total Loans			Amount		% of Total Loans
Real Estate—

Construction	$	14,389		8.8	%	$	23,068		15.6	%	$	29,444		21.0	%	$	28,594		20.5	%	$	26,405		22.1	%

Commercial		61,432		37.7	%		61,413		41.4	%		47,570		34.0	%		42,893		30.7	%		36,495		30.5	%

Residential		65,843		40.4	%		43,562		29.4	%		46,869		33.5	%		48,815		35.0	%		39,254		32.8	%


Total real estate		141,664		86.9	%		128,043		86.4	%		123,883		88.5	%		120,302		86.2	%		102,154		85.5	%

Commercial and industrial		20,827		12.8	%		19,351		13.0	%		15,220		10.9	%		18,320		13.1	%		16,242		13.6	%

Consumer		548		0.3	%		896		0.6	%		872		0.6	%		1,048		0.7	%		1,127		0.9	%


Total	$	163,039		100.0	%	$	148,290		100	%	$	139,975		100.0	%	$	139,670		100.0	%	$	119,523		100.0	%

Allowance for Loan Losses	$	3,272				$	5,226				$	2,409				$	1,936				$	1,370

Net Loans	$	159,767				$	143,064				$	137,566				$	137,734				$	118,153

(1)

Excluding loans held for sale

The largest component of loans in our loan portfolio is real estate mortgage loans. At December 31, 2011 real estate mortgage loans totaled $127,275,000 and represented 78.06% of the total loan portfolio. At December 31, 2010, real estate mortgage loans totaled $104,975,000 and represented 70.79% of the total loan portfolio.

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

Residential 1 to 4 family real estate loans totaled $65,843,000 at December 31, 2011 and $43,562,000 at December 31, 2010. Residential 1 to 4 family real estate loans consist of first and second mortgages on single or multi-family residential dwellings. Nonresidential and construction real estate loans, which include commercial loans and other loans secured by multi-family properties and farmland, totaled $75,821,000 at December 31, 2011 and $84,481,000 at December 31, 2010. The demand for residential and commercial real estate loans in the market remains strong due to the low interest rate environment.

On or about March 25, 2011, Alliance Bank and Trust entered into a purchase and sale (swap) agreement whereby it exchanged approximately $4,058,458 in largely non-performing loans and cash of $24,490,950, for a pool of residential mortgage home equity loans with a par value of $27,095,572. The pool had an estimated fair value of $26,093,437. The non-performing loans were transferred without recourse. The Bank received as additional consideration a credit enhancement in the amount of $2,700,000 to be deposited at the Bank. To date, the transaction has performed as agreed, given the continued turmoil in the residential real estate market. The Bank currently maintains a credit enhancement against the stated value of the mortgage home equity portfolio in the amount of $1,406,039. The Bank reviews the credit enhancement quarterly to determine if an additional provision for loan loss should be recorded for probable losses in the portfolio.

Our loan portfolio also includes consumer loans. At December 31, 2011 and 2010, consumer loans totaled $548,000 and $896,000 and represented 0.34% and 0.60% of the total loan portfolio, respectively.

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

We use underwriting procedures and criteria we believe minimize the risk of loan delinquencies and losses, but banks routinely incur losses in their loan portfolios. However, regardless of the underwriting criteria we use, we will experience loan losses from time to time in the ordinary course of our business, and some of those losses will result from factors beyond our control. These factors include, among other things, changes in market, economic, business or personal conditions, or other events (including changes in market interest rates), that affect our borrowers’ abilities to repay their loans and the value of properties that collateralize loans. Recent difficulties in the state and national economy and housing market, declining real state values, high unemployment, and loss of consumer confidence, have resulted and may continue to result in increasing loan delinquencies and loan losses for all financial institutions.

The repayment of loans in the loan portfolio as they mature is also a source of liquidity for us. The following table sets forth our loans maturing within specified intervals at December 31, 2011. The Company does not actively market loans for sale, but considers all options related to non-performing loans and potential reduction of criticized assets.

Balance Sheet Review - continued

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates


December 31, 2011 (Dollars in thousands)	One Year or Less		Over One Year Through Five Years		Over Five Years		Total
Commercial and industrial	$	7,589,587	$	12,982,606	$	255,000	$	20,827,193
Real estate		35,677,793		71,803,713		34,182,763		141,664,269
Consumer and other		80,113		432,828		35,157		548,098

	$	43,347,493	$	85,219,147	$	34,472,920	$	163,039,560

Loans maturing after one year with:
Fixed interest rates								23,519,879
Floating interest rates								96,172,188

							$	119,692,067

The information presented in the above table is based on the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval as well as modification of terms upon their maturity. Consequently, we believe this treatment presents fairly the maturity and repricing structure of the loan portfolio shown in the above table.

Investment Securities. The investment securities portfolio is also a component of our total earning assets and includes securities available for sale and nonmarketable equity securities. Total securities available for sale averaged $23,710,893 in 2011 as compared to $12,964,681 in 2010. Total nonmarketable equity securities averaged $1,151,085 in 2011 as compared to $1,365,746 in 2010. At December 31, 2011, the total securities portfolio was $37,771,076 as compared to $19,023,896 at December 31, 2010. The increase in available for sale securities is due to the Bank’s emphasis in increasing on balance sheet liquidity during 2011.

The following table sets forth the scheduled maturities and average yields of securities available for sale at December 31, 2011. The table excludes nonmarketable equity securities.

Investment Securities Maturity Distribution and Yields


	After One but Within Five Years					After Five but Within Ten Years					Over Ten Years
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield
U.S. Agency securities	$	4,331		1.410	%	$	3,360		2.646	%	$	6,769		2.345	%
Mortgage-backed securities	$	8,047		1.887	%	$	9,289		1.705	%	$	4,736		2.668	%

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

Short-Term Investments. Short-term investments, which consist primarily of federal funds sold, averaged $9,191,069 in 2011 and $10,179,719 in 2010. At December 31, 2011 and 2010, short-term investments totaled $5,944,001 and $4,150,670, respectively. These funds are an important source of our liquidity. Federal funds are generally invested in an earning capacity on an overnight basis.

Deposits. Average total deposits totaled $180,300,589 during 2011 as compared to $140,242,668 during 2010. At December 31, 2011, total deposits were $186,450,932 as compared to $148,983,739 at December 31, 2010. Average interest-bearing liabilities totaled $180,498,979 in 2011 as compared to $142,711,779 in 2010.

Balance Sheet Review - continued

The following table sets forth our deposits by category as of December 31, 2011 and 2010.

Deposits


	2011					2010
	Amount		Percent of Deposits			Amount		Percent of Deposits
Noninterest-bearing demand deposits	$	11,015,012		5.91	%	$	7,225,888		4.85	%
NOW interest bearing deposits		8,612,889		4.62			6,773,623		4.55
Savings and money market accounts		72,594,258		38.94			41,551,912		27.89
Time deposits less than $100,000		71,493,309		38.34			85,690,137		57.51
Time deposits $100,000 and over		22,735,464		12.19			7,742,179		5.20

Total Deposits	$	186,450,932		100	%	$	148,983,739		100	%

Core deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $163,715,468 at December 31, 2011.

Deposits, and particularly core deposits, have been a primary source of funding and have enabled us to successfully meet both our short-term and long-term liquidity needs. We anticipate that such deposits will continue to be our primary source of funding in the future. Our loan-to-deposit ratio was 87.44% and 99.53% at December 31, 2011 and 2010, respectively. The maturity distribution of our time deposits over $100,000 at December 31, 2011, is set forth in the following table:

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

(Dollars in thousands)

Within
Three
Months

After Three
Through Six
Months

After Six
Through
Twelve
Months

After
Twelve
Months

Total

Certificates of deposit of $100 or more

882

595

6,914

14,344

22,735

Certificates of deposits over $100,000 in the aggregate amount of $882,000, had scheduled maturities within three months, and approximately $8,045,000, or 35.39%, had maturities within twelve months. Large certificate of deposit customers tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits. The total certificates of deposit greater than $100 thousand in the above table does not include approximately $1,173,000 in certificates greater than $100 thousand held in individual retirement accounts.

Federal Home Loan Bank Advances. Total advances from the Federal Home Loan Bank were $19,000,000 at December 31, 2011, compared to $13,500,000 at December 31, 2010. The average of Federal Home Loan Bank advances outstanding was $11,413,699 during 2011, compared to $9,249,315 during 2010. Advances from the Federal Home Loan Bank serve as a secondary funding source. Advances from the Federal Home Loan Bank mature at different periods as discussed in the notes to the financial statements and are secured by the Bank’s investment in Federal Home Loan Bank stock and real estate loan portfolio.

Other Borrowings. Other borrowings, which consist of federal funds purchased and securities sold under agreements to repurchase, averaged $103,971 in 2011 as compared to $242,181 in 2010 and totaled $0 at December 31, 2011 and December 31, 2010. The maximum amount at any month end in 2011 was $248,988 and had a weighted average interest rate during the year of .75%. The maximum amount at any month end in 2010 was $5,070,000 and had a weighted average interest rate during the year of 1.00%. The repurchase agreements are collateralized by investment securities.

Capital

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

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

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

In addition, the Bank is subject to heightened capital requirements under the Consent Order issued by the FDIC and the Commissioner. The Consent Order (discuss in detail in Item 1) requires the Bank to maintain a leverage ratio (the ratio of Tier 1 capital to total assets) of at least 8% and a total risk-based capital ratio (the ratio of qualifying total capital to risk-weighted assets) of at least 11%. As a result of the Company being below 8% at December 31, 2011 Management and the board mush develop a plan to increase capital levels.

Information regarding our capital and capital ratios at December 31, 2011 and 2010 as set forth in the following table.

Analysis of Capital and Capital Ratios


December 31, (Dollars in thousands)	2011			2010
Tier 1 capital	$	17,039		$	19,823
Tier 2 capital		1,968			1,865

Total qualifying capital	$	19,007		$	21,688

Risk-adjusted total assets (including off-balance sheet exposures)	$	155,426		$	146,226

Tier 1 risk-based capital ratio		7.68	%		13.56	%
Total risk-based capital ratio		12.23	%		14.83	%
Tier 1 leverage ratio		10.96	%		11.26	%

Off-Balance Sheet Risk

Through our operations, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At December 31, 2011, we had issued commitments to extend credit of $12,007,653 through various types of commercial lending arrangements. All of these commitments to extend credit had variable rates. The Company also had standby letters of credit which totaled $14,000.

The following table sets forth the length of time until maturity for unused commitments to extend credit at December 31, 2011.


	Within One Month		After One Through Three Months		After Three Through Twelve Months		Greater Than One Year		Total
Unused commitments to extend credit	$	851,356	$	1,434,465	$	2,424,517	$	7,297,315	$	12,007,653

We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.

Critical Accounting Policies

We have adopted various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 2011 as filed with this annual report on Form 10-K. Certain accounting policies involve significant judgments and assumptions which have a material impact on the carrying value of certain assets and liabilities. These accounting policies are considered to be critical accounting policies. The judgments and assumptions used are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions, actual results could differ from these judgments and estimates which could have a material impact on the carrying values of assets and liabilities and results of operations.

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

Liquidity Management and Capital Resources

Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity represents our ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Without proper liquidity management, we would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities we serve.

Liquidity management is made more complex because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to nearly the same degree of control. We also have the ability to obtain funds from various financial institutions should the need arise. The amount available under such agreements was $22,500,000 at December 31, 2011. In addition, we have the ability to borrow from the Federal Home Loan Bank. Our available credit with the Federal Home Loan Bank was $14,800,000 at December 31, 2011.

Impact of Inflation

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

Forward-Looking Information

Statements contained in this report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein could vary as a result of market and other factors. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Registrant with the Securities and Exchange Commission from time to time. Such forward-looking statements may be identified by the use of such words as “believe”, “expect”, “anticipate”, “should”,

“might”, “planned”, “estimated”, and “potential”. Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Registrant that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Bank’s operations, pricing, products and services.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

AB&T FINANCIAL CORPORATION AND

ALLIANCE BANK & TRUST COMPANY

Consolidated Financial Statements

Years ended December 31, 2011 and 2010

Table of Contents


	Page No.
Report of Independent Registered Public Accounting Firm		33
Consolidated Balance Sheets		34
Consolidated Statements of Operations		35
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income(Loss)		36
Consolidated Statements of Cash Flows		37
Notes to Consolidated Financial Statements		38-62

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

AB&T Financial Corporation

Gastonia, North Carolina

We have audited the accompanying consolidated balance sheets of AB&T Financial Corporation and subsidiary, (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in shareholders’ equity and comprehensive income (loss), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AB&T Financial Corporation and subsidiary, as of December 31, 2011 and 2010 and the related statements of operations, changes in shareholders’ equity and comprehensive income (loss), and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/Elliott Davis, PLLC

Elliott Davis, PLLC

Charlotte, North Carolina

April 6, 2012

AB&T FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets


	December 31,
	2011			2010
Assets:
Cash and cash equivalents:
Cash and due from banks	$	4,890,563		$	3, 924,571
Federal funds sold		5,944,001			4,150,670

Total cash and cash equivalents		10,834,564			8,075,241

Time deposits with other banks		3,300,572			789,721
Investments:
Securities available for sale		36,583,896			17,756,616
Nonmarketable equity securities		1,187,180			1,267,280

Total investments		37,771,076			19,023,896

Loans receivable		163,039,560			148,289,512
Less allowance for loan losses		(3,272,645	)		(5,225,914	)

Loans, net		159,766,915			143,063,598
Premises, furniture and equipment, net		3,741,759			3,861,622
Accrued interest receivable		686,389			676,898
Other real estate owned		5,605,042			6,402,263
Other assets		2,423,592			2,595,590

Total assets	$	224,129,909		$	184,488,829

Liabilities:
Deposits:
Noninterest-bearing transaction accounts	$	11,015,012		$	7,225,888
Interest-bearing transaction accounts		8,612,889			6,773,623
Savings and money market		72,594,258			41,551,912
Time deposits $100,000 and over		22,735,464			7,742,179
Other time deposits		71,493,309			85,690,137

Total deposits		186,450,932			148,983,739

Federal funds purchased and securities sold under agreements to repurchase		—			360,143
Advances from the Federal Home Loan Bank		19,000,000			13,500,000
Accrued interest payable		77,580			66,787
Other liabilities		284,017			223,258

Total liabilities		205,812,529			163,133,927

Commitments and contingencies (Notes 12 and 21)
Shareholders’ equity:
Preferred stock, no par value, 1,000,000 shares authorized, issued and outstanding – 3,500 at December 31, 2011 and 2010.		3,434,532			3,410,220
Common stock, $1.00 par value, 11,000,000 shares authorized; and 2,678,205 shares issued and outstanding at December 31, 2011 and 2010		2,678,205			2,678,205
Treasury stock, at cost (10,000 shares at December 31, 2011 and 2010)		(55,600	)		(55,600	)
Warrants		136,850			136,850
Capital surplus		21,912,257			21,787,729
Retained deficit		(9,820,211	)		(6,540,739	)
Accumulated other comprehensive income (loss)		31,347			(61,763	)

Total shareholders’ equity		18,317,380			21,354,902

Total liabilities and shareholders’ equity	$	224,129,909		$	184,488,829

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

AB&T FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations

For the years ended December 31, 2011 and 2010


	2011			2010
Interest income:
Loans, including fees	$	7,734,845		$	6,592,205
Securities available-for-sale, taxable and nonmarketable equity securities		466,278			391,491
Federal funds sold		20,547			22,545
Money Market deposit		—			514
Time deposits with other banks		17,141			14,221

Total interest income		8,238,811			7,020,976

Interest expense:
Time deposits $100,000 and over		149,933			192,714
Other deposits		1,682,302			1,567,795
Federal Home Loan Bank advances		253,906			304,332
Other borrowings		1,245			2,420

Total interest expense		2,087,386			2,067,261

Net interest income		6,151,425			4,953,715
Provision for loan losses		2,229,856			3,346,727

Net interest income after provision for loan losses		3,921,569			1,606,988

Noninterest income:
Service charges on deposit accounts		411,724			374,047
Gain on sale of available for sale securities		52,196			410,187
Other		115,520			69,105

Total noninterest income		579,440			853,339

Noninterest expenses:
Salaries and employee benefits		2,671,261			2,431,812
Net occupancy		195,708			197,111
Furniture and equipment		165,479			176,258
FDIC Insurance premiums		348,585			459,095
Loss on sale of loans		79,395			281,293
Losses on sale and write down of other real estate		489,080			575,000
HELOC pool purchase discount		1,002,119			—
Other operating		2,286,750			1,722,815

Total noninterest expense		7,238,377			5,843,384

Loss before income taxes		(2,737,368	)		(3,383,057	)
Income tax expense		517,792			66,063

Net loss	$	(3,255,160	)	$	(3,449,120	)

Accretion of preferred stock to redemption value		24,312			24,312
Preferred stock dividends		175,000			175,000

Net loss available to common shareholders	$	(3,454,472	)	$	(3,648,432	)

Losses per common share
Basic	$	(1.30	)	$	(1.37	)

Diluted	$	(1.30	)	$	(1.37	)

Average shares outstanding
Basic		2,668,205			2,668,205

Diluted		2,668,205			2,668,205

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

AB&T FINANCIAL CORPORATION AND SUBSIDIARY

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

For the years ended December 31, 2011 and 2010

(dollars in thousands except for share data)


	Common Stock Shares		Common Stock Amount		Preferred Stock Shares		Preferred Stock Amount		Treasury Stock			Warrants		Capital Surplus			Retained Deficit			Accum- ulated Other Compre- hensive Income (Loss)			Total
Balance, December 31, 2009		2,678,205	$	2,678		3,500	$	3,386	$	(56	)	$	137	$	21,734		$	(3,067	)	$	80		$	24,892
Net loss from operations																		(3,449	)					(3,449	)
Other comprehensive loss net of tax																					(142	)		(142	)

Total Comprehensive loss																								(3,591	)
Accretion of preferred stock to redemption value								24										(24	)					—
Dividends, preferred															(175	)								(175	)
Stock-based employee compensation															228									228

Balance December 31, 2010		2,678,205		2,678		3,500		3,410		(56	)		137		21,787			(6,540	)		(62	)		21,354

Net loss from operations																		(3,255	)					(3,255	)
Other comprehensive income net of tax																					93			93

Total Comprehensive loss																								(3,162	)
Accretion of preferred stock to redemption value								25										(25	)					—
Dividends, preferred															(43	)								(43	)
Stock-based employee compensation															168									168

Balance December 31, 2011		2,678,205	$	2,678		3,500	$	3,435	$	(56	)	$	137	$	21,912		$	(9,820	)	$	31		$	18,317

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

AB&T FINANCIAL CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows

For the years ended December 31, 2011 and 2010


	2011			2010
Cash flows from operating activities:
Net loss	$	(3,255,160	)	$	(3,449,120	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses		2,229,856			3,346,727
Depreciation expense		182,248			169,309
Discount accretion and premium amortization		275,235			106,465
Loss on sale of other real estate		252,214			7,108
Loss on write down of other real estate		233,711			566,140
Loss on sale of loans		79,395			281,293
Discount on purchased loans		1,002,119			—
Gain on sale of securities available for sale		(52,196	)		(410,187	)
Deferred income tax expense		500,173			(31,772	)
Increase in accrued interest receivable		(9,491	)		(110,580	)
Increase in accrued interest payable		10,793			11,618
(Decrease) increase in other assets		(387,973	)		949,736
Increase in other liabilities		60,759			110,927
Stock-based compensation expense		168,278			227,436

Net cash provided by operating activities		1,289,961			1,775,100

Cash flows from investing activities:
Purchases of securities available for sale		(28,637,262	)		(25,291,202	)
Paydowns of securities available for sale		3,425,782			3,092,599
Purchases of nonmarketable equity securities		(177,700	)		—
Proceeds from sale of nonmarketable equity securities		257,800			145,900
Proceeds from sale of securities available for sale		6,314,069			9,544,331
(Purchases) maturities of time deposits with other banks, net		(2,510,851	)		506,806
Net increase in loans receivable		(821,309	)		(16,323,908	)
Purchase of HELOC Portfolio		(24,490,950	)		—
Purchases of premises, furniture and equipment		(62,385	)		(78,054	)
Capitalized other real estate expenses		(372,816	)		(236,908	)
Proceeds from sale of loans		4,283,458			1,593,994
Proceeds from sale of other real estate		1,698,226			915,888

Net cash used by investing activities		(41,093,938	)		(26,130,554	)

Cash flows from financing activities:
Net increase in deposits		37,467,193			5,313,947
(Decrease) increase in federal funds purchased		(360,143	)		360,143
Increase in Federal Home Loan Bank advances		5,500,000			5,500,000
Preferred dividends paid		(43,750	)		(175,000	)

Net cash provided by financing activities		42,563,300			10,999,090

Net increase (decrease) in cash and cash equivalents		2,759,323			(13,356,364	)
Cash and cash equivalents, beginning of year		8,075,241			21,431,605

Cash and cash equivalents, end of year	$	10,834,564		$	8,075,241

Supplemental disclosure of cash flow information:
Transfer of loans to real estate acquired in settlement of loans	$	1,014,114		$	5,604,219

Interest paid	$	2,076,593		$	2,055,643

Taxes paid	$	—		$	—

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

AB&T FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for losses on loans. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for losses on loans may change materially in the near term.

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

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

The purchase of the HELOC portfolio in 2011, created a concentration in 1-4 family second liens. As such, management is required by the Consent Order (See Note 2) to develop a plan to reduce this concentration.

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g., principal deferral periods, loans

AB&T FINANCIAL CORPORATION AND SUBSIDIARY

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

with initial interest-only periods, etc.), and loans with high loan-to-value ratios. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e., balloon payment loans). These loans are underwritten and monitored to manage the associated risks. Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.

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

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

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

Nonmarketable Equity Securities - Nonmarketable equity securities include the cost of the Company’s investment in the stock of Federal Home Loan Bank and Community Bankers Bank. These stocks have no quoted market value and no ready market for them exists. Investment in the Federal Home Loan Bank is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to collateralize such borrowings. At December 31, 2011 and 2010, the Company’s investment in Federal Home Loan Bank stock was $1,142,000 and $1,222,100, respectively. At December 31, 2011 and 2010, investment in Community Bankers Bank was $45,180.

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

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

The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s problem loan watch list are considered potentially impaired loans. These loans are evaluated in determining whether all outstanding principal and interest are expected to be collected at their contractual terms. Loans are not considered impaired if a minimal payment delay occurs and all amounts due, including accrued interest at the contractual interest rate for the period of delay, are expected to be collected consistent with the contract. At December 31, 2011 and 2010, loans in impaired status totaled $24,312,809 and $14,338,761, respectively.

Allowance for Loan Losses - An allowance for loan losses is maintained at a level deemed appropriate by management to provide adequately for known and inherent losses in the loan portfolio. The allowance is based upon past loan loss experience, current economic conditions that may affect the borrowers’ ability to pay, and the underlying collateral value of the loans. Loans which are deemed to be uncollectible are charged off and deducted from the allowance. The provision for loan losses and recoveries of loans previously charged off are added to the allowance.

AB&T FINANCIAL CORPORATION AND SUBSIDIARY

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

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

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

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration of all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer or residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

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

Other Real Estate Owned - Other real estate owned includes real estate acquired through foreclosure. Other real estate owned is initially recorded at fair value and then carried at the lower of cost (principal balance of the former loan plus costs of improvements) or estimated fair value less estimated selling costs. Any write-downs at the dates of foreclosure are charged to the allowance for loan losses. Expenses to maintain such assets and subsequent valuation writedowns are included in other expenses. Gains and losses on disposal are included in noninterest income or expense. The following tables detail the other real estate owed by a property type as of December 31, 2011 and 2010.


	December 31,
	2011		2010
By property type:
Construction	$	3,153,583	$	3,172,743
1-4 residential		1,433,469		2,361,197
Nonfarm, nonresidential		1,017,990		868,323

Balance at end of period	$	5,605,042	$	6,402,263


	For the Year
	2011		2010
Rollforward:
Balance at beginning of year	$	6,402,263	$	2,050,272
Additions from loans		1,134,756		5,834,019
Sales		1,698,266		915,888
Write-downs		233,711		566,140

Balance at end of period	$	5,605,042	$	6,402,263

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

AB&T FINANCIAL CORPORATION AND SUBSIDIARY

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

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

In the event the future tax consequences of differences between the financial reporting base and the tax bases of the Company’s assets and liabilities results in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.

Advertising Expense - Advertising and public relations costs are expensed as incurred. External costs incurred in producing media advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are expended in the period in which the direct mailings are sent. Advertising and public relations costs of approximately $69,176 and $86,519 were included in the Company’s results of operations for 2011 and 2010, respectively.

Stock-Based Compensation - Compensation expense is recognized as salaries and benefits in the consolidated statement of operations. In calculating the compensation expense for stock options, the fair value of options granted is estimated as of the date granted using the Black-Scholes option pricing model. There were no options granted in 2011 or 2010.

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

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

The approximate components of other comprehensive income and related tax effects are as follows for the years ended December 31, 2011 and 2010:


	2011			2010
Unrealized gains on securities available for sale	$	205,000		$	178,000
Reclassification adjustment for gains realized in net income		(52,000	)		(410,000	)

Net unrealized gains on securities		153,000			(232,000	)
Tax effect		(60,000	)		90,000

Net of tax amount	$	93,000		$	(142,000	)

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

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

AB&T FINANCIAL CORPORATION AND SUBSIDIARY

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

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

In 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 its interim and annual financial statements. See Note 5.

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 the FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR. 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 6.

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 were 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 and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments will be applicable to the Company on January 1, 2012 and will be applied retrospectively. In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements.

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.

AB&T FINANCIAL CORPORATION AND SUBSIDIARY

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

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

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

Reclassifications - Certain amounts in the 2010 consolidated financial statements were reclassified to conform to the 2011 presentation. These reclassifications had no effect on shareholders’ equity or results of operations as previously presented.

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

NOTE 2 - CONSENT ORDER

Effective February 1, 2012, the Bank stipulated to the issuance of a Consent Order (the “Order”) issued by the Federal Deposit Insurance Corporation (FDIC) and the North Carolina Commissioner of Banks (the “Commissioner”). Although the Company neither admitted nor denied any unsafe or unsound banking practices or violations of law or regulation, it agreed to the Order, which under the terms of the Order, the Bank is required, among other things, to do the following: increase Board participation in the affairs of the Bank and establish a program to oversee compliance with the Order; ensure that the Bank has and retains qualified management and develop a written management plan based upon the findings of an independent third party management assessment; achieve and maintain (i) a total risk based capital ratio of at least 11%, and (ii) a Tier 1 leverage ratio of at least 8%; charge off all assets classified as “Loss” and 50% of those assets classified as “Doubtful;” develop a comprehensive policy for determining the adequacy of the Bank’s ALLL; formulate a plan to reduce the risk exposure for each asset or relationship in excess of $250,000 classified as “Substandard” or “Doubtful;” refrain from extending credit to any borrower whose extension of credit has been, in whole or in part, charged-off or classified as “Loss” or “Doubtful” and is uncollected; refrain from extending credit to any borrower who has a loan or other extension of credit from the Bank that has been classified as “Substandard;” perform a risk segmentation analysis on and develop a written plan to systematically reduce and monitor the Bank’s concentration of credit in revolving 1–4 family residential property loans; review and revise its loan review and grading system; review and revise the Bank’s strategic plan and comprehensive budget; review and revise its liquidity, contingent funding and asset liability management plan; develop and implement a written policy for interest rate management; and eliminate and/or correct all violations of rules and regulations noted by the Bank’s regulators.

The Order further prohibits the Bank from declaring or paying dividends or bonuses without prior regulatory approval. The Bank may not accept, renew, or roll over any brokered deposits unless it is in compliance with FDIC regulations governing brokered deposits. Furthermore, while the Consent Order is in effect, the Bank must notify its regulators at least sixty days prior to undertaking asset growth that exceeds 10% or more per year.

The Company intends to take all actions necessary to enable the Bank to comply with the requirements of the Consent Order. There can be no assurance that the Bank will be able to comply fully with the provisions of the Consent Order, and the determination of our compliance will be made by the FDIC and the Commissioner. Failure to meet the requirements of the Consent Order could result in additional regulatory action.

Quarterly written progress reports to the FDIC and Commissioner are required by the Order.

Due to the Bank’s recent receipt of the Consent Order, the Bank is not in compliance with its terms as of the filing date of these financial statements. However management and the Board are aggressively working to fulfill the terms of the agreement.

NOTE 3 - CASH AND DUE FROM BANKS

The Company is required to maintain cash balances with its correspondent banks to cover all cash letter transactions. At December 31, 2011 and 2010, the requirement was met by the cash balance in the vault.

NOTE 4 - INVESTMENT SECURITIES

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


			Gross Unrealized
	Amortized Cost		Gains		Losses		Estimated Fair Value
December 31, 2011
U.S. Agency securities	$	14,459,782	$	15,842	$	27,925	$	14,447,699
Mortgage-backed securities		22,072,375		98,033		34,211		22,136,197

Total	$	36,532,157	$	113,875	$	62,136	$	36,583,896
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

AB&T FINANCIAL CORPORATION AND SUBSIDIARY

NOTE 4 - INVESTMENT SECURITIES - continued

The following is a summary of maturities of securities available-for-sale as of December 31, 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 Costs		Estimated Fair Value
Due in one year or less	$	20,704	$	21,324
Due after one year but within five years		12,377,980		12,415,012
Due after five years but within ten years		12,682,129		12,680,294
Due after ten years		11,451,344		11,467,266

	$	36,532,157	$	36,583,896

The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2011 and 2010:


	Less than twelve months				Twelve months or more				Total
	Fair value		Unrealized Losses		Fair value		Unrealized Losses		Fair value		Unrealized Losses
December 31, 2011
U.S. agency securities	$	6,364,844	$	27,925	$	240,914	$	—	$	6,605,758	$	27,925
Mortgage-backed securities		5,204,043		31,970		—		2,241		5,204,043		34,211

Total	$	11,568,887	$	59,895	$	240,914	$	2,241	$	11,809,801	$	62,136

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

Securities classified as available-for-sale are recorded at fair market value. There were no securities in a continuous loss position for twelve months or more as of December 31, 2010. Of the securities in an unrealized loss position as of December 31, 2011, the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.

At December 31, 2011 and 2010, investment securities with a book value of $169,616 and $278,544 and a market value of $170,705 and $283,288, respectively, were pledged as collateral for the securities sold under agreements to repurchase. For the year ended December 31, 2011 proceeds from available for sale securities totaled $6,314,069 resulting in gross gains of $52,196. For the year ended December 31, 2010 proceeds from available for sale securities totaled $9,544,331 resulting in gross gains of $410,187.

AB&T FINANCIAL CORPORATION AND SUBSIDIARY

NOTE 5 – LOANS RECEIVABLE

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


	2011		2010
Real estate – construction	$	14,388,838	$	23,068,291
Real estate – commercial		61,432,346		61,412,742
Real estate – residential		65,843,085		43,561,911
Commercial and industrial		20,827,193		19,350,893
Consumer and other		548,098		895,675


Total gross loans	$	163,039,560	$	148,289,512

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


	December 31,
	2011		2010

Total loans considered impaired at period end	$	24,312,809	$	14,338,761

Loans considered impaired for which there is a related allowance for loan loss:
Outstanding loan balance		11,549,090		11,489,266
Related allowance established		1,524,967		2,783,404

Loans considered impaired for which no related allowance for loan loss was established		12,763,719		2,849,495

Average annual investment in impaired loans		29,156,825		14,370,750

Interest income recognized on impaired loans during the period of impairment cash basis	$	757,680	$	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 December 31, 2011:


	Real Estate						Commercial &		Consumer
	Construction		Commercial		Residential		Industrial		& Other		Unallocated		Total
Allowance for loan and lease losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	237,212	$	623,884	$	566,818	$	97,053	$	—	$	—	$	1,524,967
Collectively evaluated for impairment		190,831		375,375		537,799		455,406		6,266		182,001		1,747,678

Total	$	428,043	$	999,259	$	1,104,617	$	552,459	$	6,266	$	182,001	$	3,272,645

Loans:
Loans individually evaluated for impairment	$	5,151,906	$	12,559,956	$	5,865,347	$	716,852	$	18,748	$	—	$	24,312,809
Loans collectively evaluated for impairment		9,236,932		48,872,390		36,449,125		20,110,341		529,350		—		115,198,138
Loans acquired with deteriorated credit quality		—		—		23,528,613		—		—		—		23,528,613

Total	$	14,388,838	$	61,432,346	$	65,843,085	$	20,827,193	$	548,098	$	—	$	163,039,560

AB&T FINANCIAL CORPORATION AND SUBSIDIARY

NOTE 5 - 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 &
	Construction		Commercial		Residential		Industrial		Consumer		Unallocated		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
Collectively evaluated for impairment		309,205		894,663		812,125		193,646		6,676		226,195		2,442,510

Total	$	1,133,180	$	1,532,386	$	1,690,850	$	636,627	$	6,676	$	226,195	$	5,225,914

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

Total	$	23,068,291	$	61,412,742	$	43,561,911	$	19,350,893	$	895,675	$	—	$	148,289,512

The following table presents loans individually evaluated for impairment as of December 31, 2011:


	Unpaid Principal Balance		Recorded Investment		Allowance Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	132,854	$	132,854	$	—	$	164,197	$	7,155
Consumer & other		18,748		18,748		—		21,603		1,379
Real estate:
Construction		2,470,326		2,470,327		—		2,752,629		118,664
Mortgage – residential		4,481,501		3,314,583		—		4,461,693		105,621
Mortgage – commercial		7,971,288		6,827,208		—		9,427,284		323,105
With an allowance recorded:
Commercial, and industrial		583,998		583,998		97,053		600,966		9,032
Real estate:
Construction		2,681,579		2,681,579		237,212		2,689,031		44,557
Mortgage – residential		2,550,764		2,550,764		566,818		2,646,315		10,757
Mortgage – commercial		5,732,748		5,732,748		623,884		6,393,107		137,410

Total	$	26,623,806	$	24,312,809		1,524,967		29,156,825	$	757,680

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


	Unpaid Principal Balance		Recorded Investment		Allowance Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:

Commercial and industrial	$	49,555	$	49,555	$	—	$	49,765	$	—
Real estate:
Construction		2,494,797		2,494,797		—		2,494,797		—
Mortgage – residential		—		—		—		—
Mortgage – commercial		304,395		304,395		—		305,143
With an allowance recorded:
Commercial, and industrial		1,368,753		1,368,753		442,981		1,371,776		12,446
Real estate:
Construction		2,553,722		2,553,722		823,975		2,554,097		16,327
Mortgage – residential		5,086,632		4,331,447		878,725		4,356,514		147,806
Mortgage – commercial		3,236,092		3,236,092		637,723		3,238,658		42,450

Total	$	15,093,946	$	14,338,761	$	2,783,404	$	14,370,750	$	219,029

Transactions in the allowance for loan losses for the year ended December 31, 2011 are summarized as follows:


	Real Estate									Commercial			Consumer
	Construction			Commercial			Residential			and Industrial			& 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 charged to operations(1)		(200,784	)		738,352			480,590			1,175,865			80,027			(44,194	)		2,229,856
Recoveries		26,747			—			459,125			23,704			90,463			—			600,039
Charge-offs		(531,100	)		(1,271,479	)		(1,525,948	)		(1,283,737	)		(170,900	)		—			(4,783,164	)

Balance, end of year	$	428,043		$	999,259		$	1,104,617		$	552,459		$	6,266		$	182,001		$	3,272,645

(1)	Amount is net of the reversal of $1,046,479 specific reserves which were recorded on loans sold in conjunction with the HELOC portfolio acquisition. Of the total amount $777,246 related to real estate construction loans and $269,233 related to residential real estate loans.

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


	Real Estate								Commercial			Consumer
	Construction			Commercial		Residential			and Industrial			& Other			Unallocated			Total

Balance, beginning of year	$	457,357		$	251,634	$	444,670		$	311,216		$	16,557		$	927,556		$	2,408,990
Provision charged to operations		830,253			1,280,752		1,489,690			382,959			64,434			(701,361	)		3,346,727
Recoveries		—			—		122,590			3,572			55,767			—			181,929
Charge-offs		(154,430	)		—		(366,100	)		(61,120	)		(130,082	)		—			(711,732	)

Balance, end of year	$	1,133,180		$	1,532,386	$	1,690,850		$	636,627		$	6,676		$	226,195		$	5,225,914

AB&T FINANCIAL CORPORATION AND SUBSIDIARY

NOTE 5 - LOANS RECEIVABLE - continued


	December 31, 2011				December 31, 2010
	Nonaccrual		Accruing loans delinquent for 90 days or more		Nonaccrual		Accruing loans delinquent for 90 days or more

Commercial and industrial	$	218,676	$	—	$	1,207,596	$	433,325
Real estate:
Construction		3,485,061		—		1,285,564		24,575
Mortgage – residential		4,164,644		—		4,223,726		1,056,621
Mortgage – commercial		4,339,334		—		3,540,488		349,867
Consumer & other		6,895		—		—		4,963

Total	$	12,214,610	$	—	$	10,257,374	$	1,869,351

The following table presents the aging of the recorded investment in past due loans and leases as of December 31, 2011:

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

AB&T Financial CORP 10-K