UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission File Number: 000-53249
AB&T FINANCIAL CORPORATION
(Exact Name of Registrant as specified in its charter)
| NORTH CAROLINA | 26-2588442 |
| (State of Incorporation) | (I.R.S. Employer Identification No.) |
| 292 West Main Avenue, Gastonia, North Carolina | 28052 |
| (Address of Principal Office) | (Zip Code) |
Registrant's telephone number, including area code: (704) 867-5828
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
[ ] Yes [x] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
[ ] Yes [x] No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[x] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[ ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
| Large accelerated filer | o | Accelerated filer | o |
| Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter: $13,993,662.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date: 2,668,205 shares of common stock outstanding as of March 30, 2010
Documents Incorporated by Reference:
Portions of the registrant’s proxy statement for the 2010 annual meeting of shareholders are incorporated by reference in Part III of this Form 10-K.
PART I
ITEM 1. BUSINESS
General
AB&T Financial Corporation (the “Company” or the “Registrant”) was incorporated under the laws of the State of North Carolina on June 25, 2007. On May 14, 2008, the Company became the sole owner of all of the capital stock of Alliance Bank & Trust Company (the “Bank”). Alliance Bank & Trust Company is a state-chartered bank which was organized and incorporated under the laws of the State of North Carolina in September 2004. The Bank is not a member of the Federal Reserve System. The Bank commenced operations on September 8, 2004.
The Bank is headquartered in Gastonia, North Carolina and currently conducts business in two North Carolina counties through four full-service branch offices. The principal business activity of the Bank is to provide commercial banking services to domestic markets, principally in Gaston and Cleveland counties. As a state-chartered bank, the Bank is subject to regulation by the North Carolina Office of the Commissioner of Banks and the Federal Deposit Insurance Corporation. The Company is also regulated, supervised and examined by the Federal Reserve. The consolidated financial statements include the accounts of the parent company and its wholly owned subsidiary after elimination of all significant intercompany balances and transactions.
The Company applied and was approved for participation in the “TARP” Capital Purchase Program in late 2008. On January 23, 2009, the Company issued and sold to the United States Department of the Treasury (1) 3,500 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and (2) a warrant to purchase 80,153 shares of the Company’s common stock for an aggregate purchase price of $3.5 million in cash. The preferred stock qualifies as Tier 1 capital.
Merger
On February 16, 2009, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with 1st Financial Services Corporation, Hendersonville, NC (1st Financial) pursuant to which the Company was to merge with and into 1st Financial (the Merger). The merger agreement was terminated on October 1, 2009.
Primary Market Area
The Registrant's Primary Market Area (“PMA”) consists of Gaston and Cleveland Counties. The PMA has a population of over 306,000 with an average median household income of over $43,000.
At June 30, 2009, total deposits in the Registrant’s PMA exceeded $3.7 billion. As of December 31, 2009, the PMA reported moderate levels of unemployment (13.9% in Gaston County and 15.1% in Cleveland County) compared to state and national averages (10.8% and 9.3%, respectively). The leading economic components of Gaston and Cleveland Counties are manufacturing, services and retail trade. The largest employers in the Registrant’s PMA include Caromont Health, Gaston County Schools, Wal-Mart Distribution Center, Wix Filtration Corp., Pharr Yarns, Sara Lee Corp., Cleveland Regional Medical Center, PPG Industries, Freightliner, Gaston County Administration and Gardner-Webb University.
Competition
Commercial banking in North Carolina is extremely competitive with state laws long permitting statewide branching. In its market area, the Registrant competes directly for deposits with other commercial banks, savings and loan associations, agencies issuing U. S. Government securities and all other organizations and institutions engaged in money market transactions. In its lending activities, the Registrant competes with all other financial institutions as well as consumer finance companies, mortgage companies and other lenders that do business in its market area. The most recent current data for the Registrant’s PMA indicates that there are 90 offices of commercial banks and savings institutions (58 in Gaston County and 32 in Cleveland County).
Employees
The Registrant and the bank currently employ 31 full-time employees and one part-time employee. None of the Registrant’s employees are covered by a collective bargaining agreement. The Registrant believes its relations with its employees to be good.
Regulation
Regulation of the Bank
The Bank is extensively regulated under both federal and state law. Generally, these laws and regulations are intended to protect depositors and borrowers, not shareholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable law or regulation may have a material effect on the business of the Registrant and the Bank.
State Law. The Bank is subject to extensive supervision and regulation by the North Carolina Commissioner of Banks (the “Commissioner”). The Commissioner oversees state laws that set specific requirements for bank capital and regulate deposits in, and loans and investments by, banks, including the amounts, types, and in some cases, rates. The Commissioner supervises and performs periodic examinations of North Carolina-chartered banks to assure compliance with state banking statutes and regulations, and the Bank is required to make regular reports to the Commissioner describing in detail the resources, assets, liabilities and financial condition of the Bank. Among other things, the Commissioner regulates mergers and consolidations of state-chartered banks, the payment of dividends, loans to officers and directors, record keeping, types and amounts of loans and investments, and the establishment of branches.
Deposit Insurance. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund, or DIF, of the FDIC. The DIF is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006. The Bank’s deposits, therefore, are subject to FDIC deposit insurance assessment. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 temporarily raised the standard minimum deposit insurance amount (the “SMDIA”) from $100,000 to $250,000 per depositor until December 31, 2009. On May 20, 2009, the Helping Families Save Their Homes Act extended the temporary increase in the SMDIA to $250,000 per depositor through December 31, 2013. On January 1, 2014, the SMDIA will return to $100,000 per depositor for all account categories except IRAs and certain other retirement accounts, which will remain at $250,000 per depositor, unless a new law is enacted before then to extend the increased deposit insurance limits.
The FDIC recently amended its risk-based deposit assessment system to implement authority granted by the Federal Deposit Insurance Reform Act of 2005, or the Reform Act. Under the revised system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned. Risk Category I contains well-capitalized banks with only a few minor weaknesses. Unlike the other categories, Risk Category I contains further risk differentiation based on the FDIC’s analysis of financial ratios, examination component ratings and other information. Assessment rates are determined by the FDIC and for the period effective January 1, 2009 through March 31, 2009 (payment dated June 30, 2009 based on March 31, 2009 data) range from 12 to 14 basis points for the healthiest institutions (Risk Category I) to 50 basis points of assessable deposits for the riskiest (Risk Category IV). Effective April 1, 2009, the FDIC has introduced three adjustments that could be made to an institution’s initial base assessment rate: (1) a potential decrease for long-term unsecured debt, including senior and subordinated debt and, for small institutions, a portion of Tier 1 capital; (2) a potential increase for secured liabilities above a threshold amount; and (3) for non-Risk Category I institutions, a potential increase for brokered deposits above a threshold amount. The new rates will range from 7 to 24 basis points for the healthiest institutions (Risk Category I) to 43 to 77.5 basis points of assessable deposits for the riskiest (Risk Category IV).
The FDIC is authorized to set the reserve ratio for the DIF annually at between 1.15% and 1.5% of estimated insured deposits, in contrast to the statutorily fixed ratio of 1.25% under the old system. The ratio, which is viewed by the FDIC as the level that the funds should achieve, was established by the agency at 1.25% for 2007. The Reform Act also provided for the possibility that the FDIC may pay dividends to insured institutions once the DIF reserve ratio equals or exceeds 1.35% of estimated insured deposits.
On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (EESA). The EESA established two major initiative programs; the Capital Purchase Program (CPP) and the Temporary Liquidity Guarantee Program (TLG). The TLG provided for two separate FDIC guarantee programs in which the Company chose to participate. For the first program, the FDIC will guarantee newly issued senior unsecured debt issued between October 14, 2008, and June 30, 2009, including promissory notes, commercial paper, inter-bank funding, and any unsecured portion of secured debt. The amount of debt covered by the guarantee may not exceed 125 percent of debt that was outstanding as of September 30, 2008 and scheduled to mature before June 30, 2009. If an insured depository institution had no eligible debt outstanding at September 30, 2008, the debt guarantee limit was established at 2% of total liabilities at September 30, 2008. For eligible debt issued on or before June 30, 2009, coverage would only be provided until June 30, 2012, even if the liability has not matured. The second program guarantees non-interest bearing transaction accounts to an unlimited amount. Additional assessment fees apply to funds guaranteed under these programs.
For eligible senior unsecured debt, an annualized fee will be collected equal to 75 basis points multiplied by the amount of debt guaranteed under this program. The Company has not issued any debt under this program. For non-interest bearing transaction deposit accounts, a 10 basis point surcharge on the institution’s current assessment rate would be applied to deposits not otherwise covered by the existing deposit insurance limit of $250,000. Fees for the 10 basis point surcharge on the non-interest bearing transaction accounts over $250,000 will be collected through the normal assessment cycle. The Company anticipates paying assessments under this program.
On May 22, 2009, the FDIC announced that it would levy a special assessment on insured institutions as part of its effort to rebuild the deposit insurance fund. The special assessment equaled five basis points on each FDIC-insured depository institution’s assets, minus its Tier 1 capital, as of June 30, 2009. The amount of the Bank’s special assessment was $73,671.
On November 12, 2009, the FDIC voted to require all FDIC insured depository institutions to prepay risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid assessments are designed to provide the FDIC with additional liquid assets for the deposit insurance fund, which have been used to protect depositors of failed institutions and have been exchanged for less liquid claims against the assets of failed institutions. The FDIC projected that if no action is taken, its liquidity needs to resolve failures could exceed its liquid assets beginning in the first quarter of 2010. The prepaid assessment for all insured institutions was collected on December 30, 2009. For the fourth quarter of 2009 and all of 2010, the prepaid assessment was based on an institution’s total base assessment rate in effect on September 30, 2009. That rate will be increased by 3 basis points for the 2011 and 2012 prepayments and a quarterly five percent deposit growth rate is also built into the calculation.
On December 30, 2009, the Bank paid a $609,952 prepaid assessment and it will be accounted for as a prepaid expense with a zero risk-weighting for risk-based regulatory capital purposes. On a quarterly basis after December 31, 2009, the Bank will expense its regular quarterly assessment and record an offsetting credit to the prepaid assessment asset until the asset is exhausted. If the prepaid assessment is not exhausted by June 30, 2013, any remaining amount will be returned to the Bank.
The FDIC has authority to further increase deposit insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what deposit insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an insured institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management of the Bank is not aware of any practice, condition or violation that might lead to termination of its FDIC deposit insurance.
Capital Requirements. The federal banking regulators have adopted certain risk-based capital guidelines to assist in the assessment of the capital adequacy of a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit, and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.
A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk- adjusted assets. The regulators measure risk-adjusted assets, which include off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. “Tier 1,” or core capital, includes common equity, qualifying noncumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions. “Tier 2,” or supplementary capital, includes among other things, limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations and less required deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. Banks and bank holding companies subject to the risk-based capital guidelines are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at least 4% and a ratio of total capital to risk-weighted assets of at least 8%. The appropriate regulatory authority may set higher capital requirements when particular circumstances warrant. As of December 31, 2009, the Bank was classified as “well-capitalized” with Tier 1 and Total Risk-Based Capital of 17.01% and 18.26%, respectively.
The federal banking agencies have adopted regulations specifying that they will include, in their evaluations of a bank’s capital adequacy, an assessment of the bank’s interest rate risk exposure. The standards for measuring the adequacy and effectiveness of a banking organization’s interest rate risk management include a measurement of oversight by senior management and the board of directors, and a determination of whether a banking organization’s procedures for comprehensive risk management are appropriate for the circumstances of the specific banking organization.
Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions, including limitations on its ability to pay dividends, the issuance by the applicable regulatory authority of a capital directive to increase capital and, in the case of depository institutions, the termination of deposit insurance by the FDIC, as well as the measures described under the “Federal Deposit Insurance Corporation Improvement Act of 1991” below, as applicable to undercapitalized institutions. In addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends to the shareholders.
Federal Deposit Insurance Corporation Improvement Act of 1991. In December 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDIC Improvement Act”), which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made significant revisions to several other federal banking statutes. The FDIC Improvement Act provides for, among other things:
| - | publicly available annual financial condition and management reports for certain financial institutions, including audits by independent accountants, |
| - | the establishment of uniform accounting standards by federal banking agencies, |
| - | the establishment of a “prompt corrective action” system of regulatory supervision and intervention, based on capitalization levels, with greater scrutiny and restrictions placed on depository institutions with lower levels of capital, |
| - | additional grounds for the appointment of a conservator or receiver, and |
| - | restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements. |
The FDIC Improvement Act also provides for increased funding of the FDIC insurance funds and the implementation of risk-based premiums.
A central feature of the FDIC Improvement Act is the requirement that the federal banking agencies take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. Pursuant to the FDIC Improvement Act, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity.
The FDIC Improvement Act provides the federal banking agencies with significantly expanded powers to take enforcement action against institutions which fail to comply with capital or other standards. Such action may include the termination of deposit insurance by the FDIC or the appointment of a receiver or conservator for the institution. The FDIC Improvement Act also limits the circumstances under which the FDIC is permitted to provide financial assistance to an insured institution before appointment of a conservator or receiver.
International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001. On October 26, 2001, the USA PATRIOT Act of 2001 was enacted. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which sets forth anti-money laundering measures affecting insured depository institutions, broker-dealers and other financial institutions. The Act requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on the operations of financial institutions.
Community Reinvestment Act. The Registrant is subject to the provisions of the Community Reinvestment Act of 1977, as amended (CRA). Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with the examination of a bank, to assess such bank’s record in meeting the credit needs of the community served by that bank, including low-and moderate-income neighborhoods. The regulatory agency’s assessment of the Registrant’s record is made available to the public. Such an assessment is required of any bank which has made application for a domestic deposit-taking branch, relocation of a main office, branch or ATM, merger or consolidation with or acquisition of assets or assumption of liabilities of a federally insured depository institution.
Under CRA regulations, banks with assets of less than $250,000,000 that are independent or affiliated with a holding company with total banking assets of less than $1 billion, are subject to streamlined small bank performance standards and much less stringent data collection and reporting requirements than larger banks. The agencies emphasize that small banks are not exempt from CRA requirements. The streamlined performance method for small banks focuses on the bank’s loan-to-deposit ratio, adjusted for seasonal variations and as appropriate, other lending-related activities, such as loan originations for sale to secondary markets or community development lending or qualified investments; the percentage of loans and, as appropriate, other lending-related activities located in the Registrant’s assessment areas; the Registrant’s record of lending to and, as appropriate, other lending-related activities for borrowers of different income levels and businesses and farms of different sizes; the geographic distribution of the Registrant’s loans given its assessment areas, capacity to lend, local economic conditions, and lending opportunities; and the Registrant’s record of taking action, if warranted, in response to written complaints about its performance in meeting the credit needs of its assessment areas.
Regulatory agencies will assign a composite rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance” to the institution using the foregoing ground rules. A bank’s performance need not fit each aspect of a particular rating profile in order for the bank to receive that rating; exceptionally strong performance with respect to some aspects may compensate for weak performance in others, and the bank’s overall performance must be consistent with safe and sound banking practices and generally with the appropriate rating profile. To earn an outstanding rating, the bank first must exceed some or all of the standards mentioned above. The agencies may assign a “needs to improve” or “substantial noncompliance” rating depending on the degree to which the bank has failed to meet the standards mentioned above.
The regulation further states that the agencies will take into consideration these CRA ratings when considering any application and that a bank’s record of performance may be the basis for denying or conditioning the approval of an application.
Miscellaneous. The dividends that may be paid by the Bank are subject to legal limitations. In accordance with North Carolina banking law, dividends may not be paid unless a bank’s capital surplus is at least 50% of its paid-in capital.
The earnings of the Bank will be affected significantly by the policies of the Federal Reserve Board, which is responsible for regulating the United States money supply in order to mitigate recessionary and inflationary pressures. Among the techniques used to implement these objectives are open market transactions in United States government securities, changes in the rate paid by banks on bank borrowings, and changes in reserve requirements against bank deposits. These techniques are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect interest rates charged on loans or paid for deposits.
The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Bank.
We cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on the Bank’s operations.
Regulation of the Registrant
Federal Regulation. The Registrant is subject to examination, regulation and periodic reporting under the Bank Holding Company Act of 1956, as administered by the Federal Reserve Board. The Federal Reserve Board has adopted capital adequacy guidelines for bank holding companies on a consolidated basis.
The Registrant is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval is required for the Registrant to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than five percent of any class of voting shares of such bank or bank holding company.
The merger or consolidation of the Bank with another bank, or the acquisition by the Registrant of assets of another bank, or the assumption of liability by the Registrant to pay any deposits in another bank, will require the prior written approval of the primary federal bank regulatory agency of the acquiring or surviving bank under the federal Bank Merger Act. The decision is based upon a consideration of statutory factors similar to those outlined above with respect to the Bank Holding Company Act. In addition, in certain such cases an application to, and the prior approval of, the Federal Reserve Board under the Bank Holding Company Act and/or the North Carolina Banking Commission may be required.
The Registrant is required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Registrant’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. Such notice and approval is not required for a bank holding company that would be treated as “well capitalized” and “well managed” under applicable regulations of the Federal Reserve Board, that has received a composite “1” or “2” rating at its most recent bank holding company inspection by the Federal Reserve Board, and that is not the subject of any unresolved supervisory issues.
The status of the Registrant as a registered bank holding company under the Bank Holding Company Act does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.
In addition, a bank holding company is prohibited generally from engaging in, or acquiring five percent or more of any class of voting securities of any company engaged in, non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking as to be a proper incident thereto are:
- making or servicing loans;
- performing certain data processing services;
- providing discount brokerage services;
- acting as fiduciary, investment or financial advisor;
- leasing personal or real property;
- making investments in corporations or projects designed primarily to promote community welfare; and
- acquiring a savings and loan association.
In evaluating a written notice of such an acquisition, the Federal Reserve Board will consider various factors, including among others the financial and managerial resources of the notifying bank holding company and the relative public benefits and adverse effects which may be expected to result from the performance of the activity by an affiliate of such company. The Federal Reserve Board may apply different standards to activities proposed to be commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern. The required notice period may be extended by the Federal Reserve Board under certain circumstances, including a notice for acquisition of a company engaged in activities not previously approved by regulation of the Federal Reserve Board. If such a proposed acquisition is not disapproved or subjected to conditions by the Federal Reserve Board within the applicable notice period, it is deemed approved by the Federal Reserve Board.
However, with the passage of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, which became effective on March 11, 2000, the types of activities in which a bank holding company may engage were significantly expanded. Subject to various limitations, the Modernization Act generally permits a bank holding company to elect to become a “financial holding company.” A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are “financial in nature.” Among the activities that are deemed “financial in nature” are, in addition to traditional lending activities, securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, certain merchant banking activities and activities that the Federal Reserve Board considers to be closely related to banking.
A bank holding company may become a financial holding company under the Modernization Act if each of its subsidiary banks is “well capitalized” under the Federal Deposit Insurance Corporation Improvement Act prompt corrective action provisions, is well managed and has at least a satisfactory rating under the Community Reinvestment Act. In addition, the bank holding company must file a declaration with the Federal Reserve Board that the bank holding company wishes to become a financial holding company.
A bank holding company that falls out of compliance with these requirements may be required to cease engaging in some of its activities. The Registrant has not yet elected to become a financial holding company.
Under the Modernization Act, the Federal Reserve Board serves as the primary “umbrella” regulator of financial holding companies, with supervisory authority over each parent company and limited authority over its subsidiaries. Expanded financial activities of financial holding companies generally will be regulated according to the type of such financial activity: banking activities by banking regulators, securities activities by securities regulators and insurance activities by insurance regulators. The Modernization Act also imposes additional restrictions and heightened disclosure requirements regarding private information collected by financial institutions.
Sarbanes-Oxley Act of 2002. On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law and became some of the most sweeping federal legislation addressing accounting, corporate governance and disclosure issues. The impact of the Sarbanes-Oxley Act is wide-ranging as it applies to all public companies and imposes significant requirements for public company governance and disclosure requirements.
In general, the Sarbanes-Oxley Act mandates important corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It establishes responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process and creates a regulatory body to oversee auditors of public companies. It backs these requirements with SEC enforcement tools, increases criminal penalties for federal mail, wire and securities fraud, and creates criminal penalties for document and record destruction in connection with federal investigations. It also increases the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and providing federal corporate whistleblower protection.
The economic and operational effects of this legislation on public companies, including us, is significant in terms of the time, resources and costs associated with complying with the law. Because the Sarbanes-Oxley Act, for the most part, applies equally to larger and smaller public companies, we are presented with additional challenges as a smaller, community-oriented financial institution seeking to compete with larger financial institutions in our market.
Recent Regulatory Initiatives. Beginning in late 2008 and continuing into 2009, the federal government took sweeping actions in response to the deepening economic recession. As mentioned above, President Bush signed the Emergency Economic Stabilization Act of 2008 or “EESA” into law on October 3, 2008. Pursuant to EESA, the Department of the Treasury created the Troubled Asset Relief Program or “TARP” for the purpose of stabilizing the U.S. financial markets. On October 14, 2008, the Treasury announced the creation of the TARP Capital Purchase Program. The Capital Purchase Program was designed to invest up to $250 billion (later increased to $350 billion) in certain eligible financial institutions in the form of nonvoting senior preferred stock initially paying quarterly dividends at a five percent annual rate. In connection with its investment in senior preferred stock, the Treasury also received ten-year warrants to purchase common shares of participating institutions.
The Company applied and was approved for participation in the Capital Purchase Program in late 2008. On January 23, 2009, the Company issued and sold to the Treasury (1) 3,500 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and (2) a warrant to purchase 80,153 shares of the Company’s common stock for an aggregate purchase price of $3.5 million in cash. The preferred stock qualifies as Tier 1 capital.
As a result of its participation in the Capital Purchase Program, the Company has become subject to a number of new regulations and restrictions. The ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration shares of its common stock is subject to restrictions. The Company is also required to have in place certain limitations on the compensation of its senior executive officers.
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 into law. This law includes additional restrictions on executive compensation applicable to the Company as a participant in the TARP Capital Purchase Program.
For additional information about this transaction and the Company’s participation in the Capital Purchase Program, please see Note 17 to the Company’s audited consolidated financial statements included with this report and the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on January 28, 2009.
Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.
The Federal Reserve Board’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies:
- a leverage capital requirement expressed as a percentage of adjusted total assets;
- a risk-based requirement expressed as a percentage of total risk-weighted assets; and
- a Tier 1 leverage requirement expressed as a percentage of adjusted total assets.
The leverage capital requirement consists of a minimum ratio of total capital to total assets of 4%, with an expressed expectation that banking organizations generally should operate above such minimum level. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital (which consists principally of shareholders’ equity). The Tier 1 leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated companies, with minimum requirements of 4% to 5% for all others. As of December 31, 2009, the Registrant was classified as “well-capitalized” with Tier 1 and Total Risk-Based Capital of 17.01% and 18.26%, respectively.
The risk-based and leverage standards presently used by the Federal Reserve Board are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels.
Source of Strength for Subsidiaries. Bank holding companies are required to serve as a source of financial strength for their depository institution subsidiaries, and, if their depository institution subsidiaries become undercapitalized, bank holding companies may be required to guarantee the subsidiaries’ compliance with capital restoration plans filed with their bank regulators, subject to certain limits.
Dividends. As a bank holding company that does not, as an entity, currently engage in separate business activities of a material nature, the Registrant’s ability to pay cash dividends depends upon the cash dividends the Registrant receives from the Bank. At present, the Registrant’s only source of income is dividends paid by the Bank and interest earned on any investment securities the Registrant holds. The Registrant must pay all of its operating expenses from funds it receives from the Bank. Therefore, shareholders may receive dividends from the Registrant only to the extent that funds are available after payment of our operating expenses and the board decides to declare a dividend. In addition, the Federal Reserve Board generally prohibits bank holding companies from paying dividends except out of operating earnings, and the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality and overall financial condition. We expect that, for the foreseeable future, any dividends paid by the Bank to us will likely be limited to amounts needed to pay any separate expenses of the Company and/or to make required payments on our debt obligations or to meet the dividend requirements on our preferred stock.
The FDIC Improvement Act requires the federal bank regulatory agencies biennially to review risk-based capital standards to ensure that they adequately address interest rate risk, concentration of credit risk and risks from non-traditional activities and, since adoption of the Riegle Community Development and Regulatory Improvement Act of 1994, to do so taking into account the size and activities of depository institutions and the avoidance of undue reporting burdens. In 1995, the agencies adopted regulations requiring as part of the assessment of an institution’s capital adequacy the consideration of (a) identified concentrations of credit risks, (b) the exposure of the institution to a decline in the value of its capital due to changes in interest rates and (c) the application of revised conversion factors and netting rules on the institution’s potential future exposure from derivative transactions.
In addition, the agencies in September 1996 adopted amendments to their respective risk-based capital standards to require banks and bank holding companies having significant exposure to market risk arising from, among other things, trading of debt instruments, (1) to measure that risk using an internal value-at-risk model conforming to the parameters established in the agencies’ standards and (2) to maintain a commensurate amount of additional capital to reflect such risk. The new rules were adopted effective January 1, 1997, with compliance mandatory from and after January 1, 1998. Subsidiary banks of a bank holding company are subject to certain quantitative and qualitative restrictions imposed by the Federal Reserve Act on any extension of credit to, or purchase of assets from, or letter of credit on behalf of, the bank holding company or its subsidiaries, and on the investment in or acceptance of stocks or securities of such holding company or its subsidiaries as collateral for loans. In addition, provisions of the Federal Reserve Act and Federal Reserve Board regulations limit the amounts of, and establish required procedures and credit standards with respect to, loans and other extensions of credit to officers, directors and principal shareholders of the Bank, the Registrant, and any subsidiary of the Registrant and related interests of such persons. Moreover, subsidiaries of bank holding companies are prohibited from engaging in certain tie-in arrangements (with the holding company or any of its subsidiaries) in connection with any extension of credit, lease or sale of property or furnishing of services.
Any loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would also apply to guarantees of capital plans under the FDIC Improvement Act.
Interstate Branching
Under the Riegle-Neal Interstate Banking and Branching Act (the “Riegle-Neal Act”), the Federal Reserve Board may approve bank holding company acquisitions of banks in other states, subject to certain aging and deposit concentration limits. As of June 1, 1997, banks in one state may merge with banks in another state, unless the other state has chosen not to implement this section of the Riegle-Neal Act. These mergers are also subject to similar aging and deposit concentration limits.
North Carolina “opted-in” to the provisions of the Riegle-Neal Act. Since July 1, 1995, an out-of-state bank that did not already maintain a branch in North Carolina was permitted to establish and maintain a de novo branch in North Carolina, or acquire a branch in North Carolina, if the laws of the home state of the out-of-state bank permit North Carolina banks to engage in the same activities in that state under substantially the same terms as permitted by North Carolina. Also, North Carolina banks may merge with out-of-state banks, and an out-of-state bank resulting from such an interstate merger transaction may maintain and operate the branches in North Carolina of a merged North Carolina bank, if the laws of the home state of the out-of-state bank involved in the interstate merger transaction permit interstate merger.
We cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on our operations.
ITEM 1A. RISK FACTORS
Smaller reporting companies such as the Registrant are not required to provide the information required by this item.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Smaller reporting companies such as the Registrant are not required to provide the information required by this item.
ITEM 2. PROPERTIES
The following table sets forth the location of the Registrant’s banking offices or properties, as well as certain information relating to these properties to date.
Office Location | Year Opened | Approximate Square Footage | Owned or 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 King Street Kings Mountain, NC 28086 | NA | NA | NA |
Proposed Branch 405 Beatty Drive Mt Holly, NC 28120 | NA | NA | NA |
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Registrant is a party, or of which any of its property is the subject other than routine litigation that is incidental to its business.
ITEM 4. [RESERVED]
Part II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Registrant’s common stock is traded on the Over The Counter Bulletin Board under the symbol “ABTO.” The Registrant’s stock is considered thinly traded with low volume trades occurring infrequently.
Known stock trading prices:
| | | High | | | Low | |
| 2009 | | | | | | |
| First quarter | | $ | 6.90 | | | $ | 3.25 | |
| Second quarter | | | 6.00 | | | | 3.26 | |
| Third quarter. | | | 5.25 | | | | 4.00 | |
| Fourth quarter | | | 4.90 | | | | 2.60 | |
| | | | | | | | | |
| 2008 | | | | | | | | |
| First quarter | | $ | 9.70 | | | $ | 6.75 | |
| Second quarter | | | 8.25 | | | | 7.00 | |
| Third quarter | | | 8.40 | | | | 5.50 | |
| Fourth quarter | | | 7.50 | | | | 4.00 | |
As of December 31, 2009, there were 635 record holders of the Registrant’s Common Stock.
As a bank holding company that does not engage in separate business activities of a material nature, the Registrant’s ability to pay cash dividends depends upon the cash dividends the Registrants receives from the Bank. As a state-chartered bank subject to North Carolina banking law, the Bank may not pay cash dividends to the Registrant unless the Bank's capital surplus is at least 50% of its paid-in capital. Further, the Bank may only pay dividends out of retained earnings. At December 31, 2009, the Bank had a retained deficit of $3,030,307.
See Item 11 of this report for disclosure regarding securities authorized for issuance under equity compensation plans.
ITEM 6. SELECTED FINANCIAL DATA
Smaller reporting companies such as the Registrant are not required to provide the information required by this item
| ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |
The following discussion describes our results of operations for 2009 as compared to 2008, and 2008 as compared to 2007, and also analyzes our financial condition as of December 31, 2009 as compared to December 31, 2008. Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.
We have included a number of tables to assist in our description of these measures. For example, the “Average Balances” table shows the average balance in 2009 and 2008 of each category of our assets and liabilities, as well as the yield we earned or the rate we paid with respect to each category. A review of this table shows that our loans typically provide higher interest yields than do other types of interest earning assets, which is why we channel a substantial percentage of our earning assets into our loan portfolio. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included an “Interest Sensitivity Analysis” table to help explain this. Finally, we have included a number of tables that provide detail about our investment securities, our loans, and our deposits and other borrowings.
Naturally, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the "Provision and Allowance for Loan Losses" section, we have included a detailed discussion of this process, as well as several tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans.
In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this noninterest income, as well as our noninterest expense, in the "Noninterest Income and Expense" section.
The following discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.
Selected Financial Data
The following selected financial data for the years ended December 31, 2009 and 2008 is derived from the consolidated financial statements and other data of AB&T Financial Corporation. The selected financial data should be read in conjunction with the Registrant’s financial statements, including the accompanying notes, included elsewhere herein.
| | | 2009 | | | 2008 | |
| Income Statement Data: | | | | | | |
Interest income | | $ | 7,101,540 | | | $ | 8,809,686 | |
Interest expense | | | 3,244,865 | | | | 4,566,709 | |
Net interest income | | | 3,856,675 | | | | 4,242,977 | |
Provision for loan losses | | | 3,478,372 | | | | 1,312,969 | |
Net interest income after provision for loan losses | | | 378,303 | | | | 2,930,008 | |
Noninterest income | | | 451,469 | | | | 337,948 | |
Noninterest expense | | | 5,457,206 | | | | 4,056,639 | |
Income (loss) before income taxes | | | (4,627,434 | ) | | | (788,683 | ) |
Income tax (benefit) expense | | | (1,740,916 | ) | | | (274,886 | ) |
Net Income (loss) | | $ | (2,886,518 | ) | | $ | (513,797 | ) |
Accretion of preferred stock | | | 22,758 | | | | - | |
Preferred dividends paid | | | 163,040 | | | | - | |
Net loss available to shareholders | | $ | (3,072,316 | ) | | $ | (513,797 | ) |
| | | | | | | | | |
| Balance Sheet Data: | | | | | | | | |
Assets | | $ | 176,730,998 | | | $ | 170,310,305 | |
Earning assets | | | 164,472,546 | | | | 162,072,092 | |
Securities (1) | | | 6,444,594 | | | | 6,009,494 | |
Loans (2) | | | 139,974,913 | | | | 139,670,266 | |
Allowance for loan losses | | | 2,408,990 | | | | 1,935,702 | |
Deposits | | | 143,669,792 | | | | 121,318,018 | |
Shareholders’ equity | | | 24,893,706 | | | | 24,194,101 | |
| | | | | | | | | |
| Per-Share Data: | | | | | | | | |
Earnings per share – basic | | $ | (1.15 | ) | | $ | (0.19 | ) |
Earnings per share – diluted | | | (1.15 | ) | | | (0.19 | ) |
Book value (period end) | | | 8.03 | | | | 9.03 | |
______________________
| (1) | Marketable securities are all available for sale and recorded at their fair market value. Nonmarketable securities totaling $1,413,180 and $1,371,280 are included for 2009 and 2008, respectively. These securities are recorded at cost. |
(2) Loans are stated at gross amounts before allowance for loan losses.
Basis of Presentation
The following discussion should be read in conjunction with the preceding “Selected Financial Data” and the Company’s Financial Statements and the Notes thereto and the other financial data included elsewhere in this Annual Report. The financial information provided in certain tables below has been rounded in order to simplify its presentation. However, the ratios and percentages provided below are calculated using the detailed financial information contained in the Financial Statements, the Notes thereto and the other financial data included elsewhere in this Annual Report.
General
AB&T Financial Corporation and Alliance Bank & Trust Company are headquartered in Gastonia, North Carolina. The principal business activity of the Bank is to provide banking services to domestic markets, principally in the Gastonia and Shelby, North Carolina metropolitan area. Our deposits are insured by the Federal Deposit Insurance Corporation.
In 2004, the Bank completed an initial public offering of its common stock in which it sold a total of 1,065,030 shares of common stock at $11.00 per share. Proceeds of the offering were used to pay organizational costs and provide the initial capital for the Bank.
In January 2007, the Bank completed a secondary offering of its common stock in which it sold a total of 1,339,100 shares of its common stock at an offering price of $9.85 per share. Gross proceeds from the offering were $13,190,135, less offering expenses of $928,111. Proceeds from the offering were used to support the growth of the Bank.
On May 22, 2007, the shareholders of the Bank approved a plan of corporate reorganization under which the Bank became a wholly owned subsidiary of AB&T Financial Corporation, which was organized for that purpose by the Bank’s board of directors. Pursuant to the reorganization, the Company issued all shares of its common stock in exchange for all of the outstanding common shares of the Bank on May 14, 2008.
The Company applied and was approved for participation in the U.S. Department of the Treasury “TARP” Capital Purchase Program in late 2008. On January 23, 2009, the Company issued and sold to the Treasury (1) 3,500 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and (2) a warrant to purchase 80,153 shares of the Company’s common stock for an aggregate purchase price of $3.5 million in cash. The shares are part of the “TARP” Capital Purchase Program, and the preferred stock qualifies as Tier 1 capital.
Results of Operations
For the year ended December 31, 2009, compared with year ended December 31, 2008
Net interest income decreased $386,302 or 9.10% in 2009 from $4,242,977 in 2008. Although average loans increased $6,200,002 or 4.61% from 2008 to 2009, the decrease in net interest income was due primarily to a decrease in net interest spread which decreased from 2.25% in 2008 to 2.18% in 2009. The components of interest income were from loans, including fees of $6,763,059, federal funds sold of $11,433, and investment income of $267,240, and interest earning deposits of $59,808.
The Company’s net interest spread and net interest margin were 2.18% and 2.47%, respectively, in 2009 compared to 2.25% and 2.76%, respectively, in 2008. Yields on earning assets decreased in 2009. Yields on average earning assets decreased from 5.72% in 2008 to 4.54% in 2009 primarily as a result of a full year of depressed interest rates during 2009. At December 31, 2009 approximately 84% of the Company’s loans were variable rate loans tied to the prime rate, which reached its current low point of 3.25% in December 2008. Yields on average interest-bearing liabilities decreased from 3.47% in 2008 to 2.37% in 2009.
The provision for loan losses was $3,478,372 in 2009 compared to $1,312,969 in 2008. The charges to the provision were primarily to maintain the allowance for loan losses at a level sufficient to cover possible future losses in the loan portfolio. Impaired loans as of December 31, 2009 increased to $6,066,187 from $5,043,946 as of December 31, 2008. Impaired loans as of December 31, 2009 were made up largely of credits secured by real estate. All credits are currently within various stages of workouts and management feels that loss provisions placed against these credits are appropriate at this time.
Noninterest income increased $113,521, or 33.59%, to $451,469 in 2009 from $337,948 in 2008. The largest component of noninterest income was from service charges on deposit accounts which increased $128,070 or 50.37%, to $382,327 for the year ended December 31, 2009, when compared to 2008 as a result of increased deposit account volume.
Noninterest expense increased $1,400,567, or 34.53%, to $5,457,206 in 2009 from $4,056,639 in 2008. The largest component of noninterest expense was salaries and employee benefits which decreased $39,973, or 1.78%, to $2,205,329 for the year ended December 31, 2009. Losses and write downs on the sale of other real estate increased $923,910 or 485.07%, to $1,114,380 in 2009 from $190,470 in 2008 due to the decrease in the value of foreclosed real estate.
The increase in other operating expenses in 2009 was largely due to an increase in legal and accounting fees which increased to $211,660 in 2009 from $126,976 in 2008. The increase in legal and accounting fees was primarily a result of the unsuccessful merger with 1st Financial Services.
Our net loss was $2,886,518 in 2009 compared to a net loss of $513,797 in 2008. The net loss in 2009 is after the recognition of an income tax benefit of $1,740,916, and the net loss in 2008 is after the recognition of an income tax benefit of $274,886. The income tax benefit was based on an effective tax rate of 37.62% and 34.85% for 2009 and 2008, respectively. The decrease in income and subsequent net loss for 2009 was driven by multiple factors based upon the economic environment in which the Bank is currently operating. However, the primary factors in the decline of income were the historically low levels of interest rates after 400 basis points of rate reductions by the Federal Reserve in 2008. This pushed net interest margins much lower than prior periods thus reducing net interest income, a primary source of the Bank’s revenue. A second factor was the increase in provision for loan losses that the Bank added during the year along with the write down of other real estate owned of $1,034,897 to reflect changes in the value of real estate. During the year ending December 31, 2009 the Bank added $3,478,372 to the provision, an increase of $2,165,403 or 165% over the prior year.
For the year ended December 31, 2008, compared with year ended December 31, 2007
Net interest income decreased $688,354 or 13.96% in 2008 from $4,931,331 in 2007. Although the average loan portfolio increased $29,630,118 or 28.28% from 2007 to 2008, the decrease in net interest income was due primarily to a decrease in net interest spread which decreased from 3.16% in 2007 to 2.25% in 2008. The components of interest income were from loans, including fees of $8,267,849, federal funds sold of $205,415, and investment income of $252,287, and interest earning deposits of $84,135.
The Company’s net interest spread and net interest margin were 2.25% and 2.76%, respectively, in 2008 compared to 3.16% and 4.07%, respectively, in 2007. Yields on most earning assets decreased in 2008. Yields on average earning assets decreased from 8.14% in 2007 to 5.72% in 2008. Yields on average interest-bearing liabilities decreased from 4.98% in 2007 to 3.47% in 2008.
The provision for loan losses was $1,312,969 in 2008 compared to $572,898 in 2007. The charges to the provision were primarily to maintain the allowance for loan losses at a level sufficient to cover possible future losses in the loan portfolio. Impaired loans as of December 31, 2008 increased to $5,043,946 from $863,880 as of December 31, 2007. Impaired loans as of December 31, 2008 were made up largely of three credits, two participated credit facilities, as well as an operating company closely tied to the residential construction industry. All three credits are currently within various stages of workouts and management feels that loss provisions placed against these credits are appropriate at this time.
Noninterest income decreased $100,473, or 40.52%, to $147,478 in 2008 from $247,951 in 2007. The largest component of noninterest income was from service charges on deposit accounts which increased $107,696 or 73.48%, to $254,257 for the year ended December 31, 2008, when compared to 2007 as a result of increased deposit account volume. There were losses on the sale of other real estate in 2008 of $190,470, compared to a gain on the sale of other real estate in 2007 of $40,242.
Noninterest expense increased $808,306, or 24.88%, to $4,056,639 in 2008 from $3,248,333 in 2007. The largest component of noninterest expense was salaries and employee benefits which increased $281,221, or 14.32%, to $2,245,302 for the year ended December 31, 2008. Other operating expenses increased $179,610, or 18.46%, to $1,150,859 for the year ended December 31, 2008. The increase in other operating expenses in 2008 was largely due to an increase in other professional fees which increased to $130,158 in 2008 from $57,211 in 2007. The increase in professional fees was primarily a result of professional fees associated with management’s assessment of internal controls under Sarbanes-Oxley Section 404.
Our net loss was $513,797 in 2008 compared to a net income of $829,263 in 2007. The net loss in 2008 is after the recognition of an income tax benefit of $274,886, and the net income in 2007 is after the recognition of an income tax expense of $528,788. The income tax expense was based on an effective tax rate of 34.85% and 38.94% for 2008 and 2007, respectively. The decrease in income and subsequent net loss for 2008 was driven by multiple factors based upon the economic environment in which the Bank is currently operating. However, two primary factors in the decline of income were the historically low levels of interest rates after 400 basis points of rate reductions by the Federal Reserve. This pushed net interest margins much lower than prior periods thus reducing net interest income, a primary source of the Bank’s revenue. A second factor was the increase in provision for loan losses that the Bank added during the year. During the year ending December 31, 2008 the Bank added $1,312,969 to the provision, an increase of $740,071 or 129% over the prior year.
Net Interest Income
General. For an established financial institution, the largest component of net income is its net interest income, which is the difference between the income earned on assets and interest paid on deposits and borrowings used to support such assets. Net interest income is determined by the yields earned on our interest-earning assets and the rates paid on our interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of our interest-earning assets and interest-bearing liabilities. This net interest income divided by average interest-earning assets represents our net interest margin.
Average Balances, Income and Expenses and Rates. The following tables set forth, for the periods indicated, certain information related to our average balance sheet and our average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities and are then annualized. Average balances have been derived from the daily balances throughout the period indicated.
| | | For the year ended December 31, 2009 | | | For the year ended December 31, 2008 | |
| | | | | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | | |
Earning Assets: | | | | | | | | | | | | | | | | | | |
Loans¹ | | $ | 140,593,385 | | | $ | 6,763,059 | | | | 4.81 | % | | $ | 134,393,383 | | | $ | 8,267,849 | | | | 6.15 | % |
Securities, taxable | | | 5,085,032 | | | | 262,961 | | | | 5.17 | % | | | 3,975,873 | | | | 212,993 | | | | 5.36 | % |
Federal funds sold | | | 3,641,423 | | | | 11,433 | | | | 0.31 | % | | | 10,263,858 | | | | 205,415 | | | | 2.00 | % |
Interest earning deposits | | | 5,670,272 | | | | 59,808 | | | | 1.05 | % | | | 4,187,816 | | | | 84,135 | | | | 2.01 | % |
Nonmarketable equity Securities | | | 1,403,078 | | | | 4,279 | | | | 0.30 | % | | | 1,186,370 | | | | 39,294 | | | | 3.31 | % |
Total earning assets | | | 156,393,190 | | | | 7,101,540 | | | | 4.54 | % | | | 154,007,300 | | | | 8,809,686 | | | | 5.72 | % |
Cash items | | | 7,172,835 | | | | | | | | | | | | 1,362,317 | | | | | | | | | |
Premises and equipment | | | 4,060,044 | | | | | | | | | | | | 3,995,652 | | | | | | | | | |
Other assets | | | 4,928,829 | | | | | | | | | | | | 2,998,907 | | | | | | | | | |
Allowance for loan losses | | | (2,319,974 | ) | | | | | | | | | | | (1,534,289 | ) | | | | | | | | |
Total assets | | $ | 170,234,924 | | | | | | | | | | | $ | 160,829,887 | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-Bearing Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing transaction accounts | | $ | 4,818,359 | | | $ | 46,145 | | | | 0.96 | % | | $ | 3,827,604 | | | $ | 66,853 | | | | 1.75 | % |
Savings and money market deposits | | | 20,921,873 | | | | 247,372 | | | | 1.18 | % | | | 29,259,451 | | | | 709,385 | | | | 2.42 | % |
Time deposits | | | 91,637,602 | | | | 2,266,897 | | | | 2.47 | % | | | 75,804,741 | | | | 3,025,246 | | | | 3.99 | % |
Federal Home Loan Bank advances | | | 18,834,411 | | | | 676,754 | | | | 3.59 | % | | | 19,796,421 | | | | 698,111 | | | | 3.53 | % |
Other borrowings | | | 957,510 | | | | 7,697 | | | | 0.80 | % | | | 2,739,648 | | | | 67,114 | | | | 2.45 | % |
Total interest-bearing liabilities | | | 137,169,755 | | | | 3,244,865 | | | | 2.37 | % | | | 131,427,862 | | | | 4,566,709 | | | | 3.47 | % |
Demand deposits | | | 5,818,891 | | | | | | | | | | | | 4,449,114 | | | | | | | | | |
Accrued interest and other liabilities | | | 242,999 | | | | | | | | | | | | 169,135 | | | | | | | | | |
Shareholders’ equity | | | 27,003,279 | | | | | | | | | | | | 24,783,776 | | | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 170,234,924 | | | | | | | | | | | $ | 160,829,887 | | | | | | | | | |
Net interest spread | | | | | | | | | | | 2.18 | % | | | | | | | | | | | 2.25 | % |
| Net interest income | | | | | | $ | 3,856,675 | | | | | | | | | | | $ | 4,242,977 | | | | | |
| Net interest margin² | | | | | | | | | | | 2.47 | % | | | | | | | | | | | 2.76 | % |
(1) In 2009, the effect of fees collected on loans totaling $162,791 increased the annualized yield on loans by 0.12% from 4.69%. The effect on the annualized yield on earning assets was an increase of 0.10% from 4.44%. The effect on net interest spread and net interest margin was an increase of 0.11% and 0.11% from 2.07% and 2.36%, respectively.
(2) Net interest income divided by average earning assets.
Net Interest Income - continued
Analysis of Changes in Net Interest Income. Net interest income can also be analyzed in terms of the impact of changing rates and changing volume. The following table reflects the extent to which changes in interest rates and changes in the volume of earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information on changes in each category attributable to (i) changes due to volume (change in volume multiplied by prior period rate), (ii) changes due to rates (changes in rates multiplied by prior period volume) and (iii) changes in rate/volume (change in rate multiplied by the change in volume) is provided as follows:
| | | 2009 compared to 2008 | |
| | | | | | Due to increase (decrease) in | | | | |
| | | | | | | | | | | | | |
| 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 | ) |
| | | 2008 compared to 2007 | |
| | | | | | Due to increase (decrease) in | | | | |
| | | | | | | | | | | | | |
| Interest income: | | | | | | | | | | | | |
Loans | | $ | 2,557,477 | | | $ | (2,597,466 | ) | | $ | (734,639 | ) | | $ | (774,628 | ) |
Securities, taxable (1) | | | 102,982 | | | | 6,858 | | | | 5,142 | | | | 114,982 | |
Federal funds sold and other | | | 46,067 | | | | (414,769 | ) | | | (27,849 | ) | | | (396,551 | ) |
Total interest income | | | 2,706,526 | | | | (3,005,377 | ) | | | (757,346 | ) | | | (1,056,197 | ) |
| | | | | | | | | | | | | | | | | |
| Interest expense: | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | | 694,075 | | | | (1,465,303 | ) | | | (212,535 | ) | | | (983,763 | ) |
Federal Home Loan Bank advances | | | 666,555 | | | | (7,858 | ) | | | (55,301 | ) | | | 603,396 | |
Short-term borrowings | | | 42,723 | | | | (16,941 | ) | | | (13,258 | ) | | | 12,524 | |
Total interest expense | | | 1,403,353 | | | | (1,490,102 | ) | | | (281,094 | ) | | | (367,843 | ) |
Net interest income | | $ | 1,303,173 | | | $ | (1,515,275 | ) | | $ | (476,252 | ) | | $ | (688,354 | ) |
(1) Securities include nonmarketable equity securities.
Interest Sensitivity. We monitor and manage the pricing and maturity of our assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on our net interest income. The principal monitoring technique employed by us is the measurement of our interest sensitivity “gap”, which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available for sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in this same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates.
Net Interest Income - continued
The following table sets forth our interest rate sensitivity at December 31, 2009.
Interest Sensitivity Analysis
(Dollars in thousands) | | | | | After Three Through Twelve Months | | | | | | | | | | |
| Assets | | | | | | | | | | | | | | | |
| Earning assets: | | | | | | | | | | | | | | | |
Loans | | $ | 68,253 | | | $ | 14,538 | | | $ | 52,991 | | | $ | 4,193 | | | $ | 139,975 | |
Securities available for sale | | | - | | | | - | | | | 105 | | | | 4,926 | | | | 5,031 | |
Nonmarketable securities | | | 1,413 | | | | - | | | | - | | | | - | | | | 1,413 | |
Interest-bearing deposits in other banks | | | 115 | | | | 1,296 | | | | - | | | | - | | | | 1,411 | |
Federal funds sold | | | 16,730 | | | | - | | | | - | | | | - | | | | 16,730 | |
Total earning assets | | $ | 86,511 | | | $ | 15,834 | | | $ | 53,096 | | | $ | 9,119 | | | $ | 164,560 | |
Liabilities | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | |
Interest - bearing deposits: | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | $ | 4,760 | | | $ | - | | | $ | - | | | $ | - | | | $ | 4,760 | |
Savings and money market deposits | | | 24,279 | | | | - | | | | - | | | | - | | | | 24,279 | |
Time deposits | | | 26,876 | | | | 73,322 | | | $ | 8,806 | | | | - | | | | 109,004 | |
Federal Home Loan Bank advances | | | - | | | | - | | | $ | 8,000 | | | | - | | | | 8,000 | |
Other borrowings | | | - | | | | - | | | | - | | | | - | | | | - | |
Total interest-bearing liabilities | | $ | 55,915 | | | $ | 73,322 | | | $ | 16,806 | | | $ | - | | | $ | 146,043 | |
Period gap | | $ | 30,596 | | | $ | (57,488 | ) | | $ | 36,290 | | | $ | 9,119 | | | $ | 18,517 | |
Cumulative gap | | $ | 30,596 | | | $ | (26,892 | ) | | $ | 9,399 | | | $ | 18,517 | | | | | |
Ratio of cumulative gap to total earning assets | | | 18.59 | % | | | 16.34 | % | | | 5.71 | % | | | 11.25 | % | | | | |
The above table reflects the balances of interest-earning assets and interest-bearing liabilities at the earlier of their repricing or maturity dates. Overnight federal funds are reflected at the earliest pricing interval due to the immediately available nature of the instruments. Debt securities are reflected at each instrument’s ultimate maturity date. Interest–bearing deposits in other banks are reflected at their contractual maturity date. Scheduled payment amounts of fixed rate amortizing loans are reflected at each scheduled payment date. Scheduled payment amounts of variable rate amortizing loans are reflected at each scheduled payment date until the loan may be repriced contractually; the unamortized balance is reflected at that point. Interest-bearing liabilities with no contractual maturity, such as savings deposits and interest-bearing transaction accounts, are reflected in the earliest repricing period due to contractual arrangements which give us the opportunity to vary the rates paid on those deposits within a thirty-day or shorter period. Fixed rate time deposits, principally certificates of deposit, are reflected at their contractual maturity date. Other borrowings, which consist of federal funds purchased and securities sold under agreements to repurchase, are reflected at their contractual maturity date. Federal Home Loan Bank advances are reflected at their contractual maturity dates.
We generally would benefit from increasing market rates of interest when we have an asset-sensitive gap position and generally would benefit from decreasing market rates of interest when we are liability-sensitive. We are cumulatively asset sensitive. However, our gap analysis is not a precise indicator of our interest sensitivity position. The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. Net interest income may be impacted by other significant factors in a given interest rate environment, including changes in the volume and mix of earning assets and interest-bearing liabilities.
Provision and Allowance for Loan Losses
General. We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem credits. On a quarterly basis, our Board of Directors reviews and approves the appropriate level of our allowance for loan losses based upon management’s recommendations, the results of the internal monitoring and reporting system, and an analysis of economic conditions in our market.
Additions to the allowance for loan losses, which are expensed as the provision for loan losses on our income statement, are made periodically to maintain the allowance at an appropriate level based on management’s analysis of the risk inherent in the loan portfolio. Loan losses and recoveries are charged or credited directly to the allowance. The amount of the provision is a function of the level of loans outstanding, the level of nonperforming loans, the amount of loan losses actually charged against the reserve during a given period, and current and anticipated economic conditions.
Our allowance for loan losses is based upon judgments and assumptions about risk elements in the portfolio, future economic conditions, and other factors affecting borrowers. The process includes identification and analysis of loss potential in various portfolio segments utilizing a credit risk grading process and specific reviews and evaluations of significant problem credits. In addition, management monitors the overall portfolio quality through observable trends in delinquencies, charge-offs, and general and economic conditions in the service area. The adequacy of the allowance for loan losses and the effectiveness of our monitoring and analysis system are also reviewed periodically by both the Federal and State banking regulators.
The December 31, 2009 allowance for loan losses, and, therefore indirectly the provision for loan losses for the year ended December 31, 2009, was determined based on the following specific factors though not intended to be an all inclusive list:
| · | The impact of the ongoing depressed overall economic environment, including those within our geographic market, |
| · | The cumulative impact of the extended duration of this economic deterioration on our borrowers, in particular those with real estate related loans, |
| · | The declining asset quality trends in our loan portfolio, |
| · | The increasing trend in the historical loan loss rates within our loan portfolio, |
| · | The results of our internal and independent loan reviews during the third and fourth quarters of 2009 resulting in loan downgrades, |
| · | Our individual impaired loan analysis which identified continued downward trends in appraised values and market assumptions used to value real estate dependent loans. |
Based on present information and an ongoing evaluation, we consider the allowance for loan losses to be adequate to meet presently known and inherent risks in the loan portfolio. Our judgment about the adequacy of the allowance is based upon a number of assumptions about future events which we believe to be reasonable but which may or may not be accurate. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses in 2009 or that additional increases in the allowance for loan losses will not be required. We do not allocate the allowance for loan losses to specific categories of loans but evaluate the adequacy on an overall portfolio basis utilizing a risk grading system.
The following table sets forth certain information with respect to our allowance for loan losses and the composition of charge-offs and recoveries for the years ended December 31, 2009 and 2008.
Allowance for Loan Losses
| | | 2009 | | | 2008 | |
| Total loans outstanding at end of period | | $ | 139,974,913 | | | $ | 139,670,266 | |
| Average loans outstanding | | $ | 140,593,385 | | | $ | 134,393,383 | |
| Balance of allowance for loan losses at beginning of period | | $ | 1,935,702 | | | $ | 1,370,235 | |
| Recoveries | | | 135,830 | | | | 116,000 | |
| Charge-offs | | | (3,140,914 | ) | | | (863,502 | ) |
| Provision for loan losses | | | 3,478,372 | | | | 1,312,969 | |
| Balance of allowance for loan losses at end of year | | $ | 2,408,990 | | | $ | 1,935,702 | |
| Allowance for loan losses to period end loans | | | 1.72 | % | | | 1.39 | % |
In addition to loans charged-off in the ordinary course of business, included within loans charged-off for the year ended December 31, 2009 were $1.5 million relating to loans individually evaluated for impairment. The determination was made to take partial charge-offs on certain collateral dependent loans during 2009 based on the status of the underlying collateral or our expectation that these loans would be foreclosed on, and we would take possession of the collateral. The loan charge-offs primarily related to construction, acquisition, and development real estate projects that are not complete and will require additional investment to be completed. Additionally, the loan charge-offs were recorded to write down the loans to the fair value of the collateral less cost to sell.
Nonperforming Assets
Nonperforming Assets. As of December 31, 2009 and 2008, loans in nonaccrual status totaled approximately $6,001,000 and $2,693,000, respectively. Loans past due ninety days or more and still accruing interest as of December 31, 2009 and 2008, were approximately $63,000 and $9,000, respectively. Assets held as other real estate totaled $2,050,272 and $2,296,290 in 2009 and 2008, respectively.
Our policy with respect to nonperforming assets is as follows. Accrual of interest will be discontinued on a loan when we believe, after considering economic and business conditions and collection efforts that the borrower’s financial condition is such that the collection of interest is doubtful. A delinquent loan will generally be placed in nonaccrual status when it becomes 90 days or more past due. When a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid will be reversed and deducted from current earnings as a reduction of reported interest income. No additional interest will be accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. When a problem loan is finally resolved, there may ultimately be an actual writedown or charge-off of the principal balance of the loan which would necessitate additional charges to earnings.
Potential Problem Loans. At December 31, 2009, through our internal review mechanisms, we had identified $8,742,720 of criticized loans and $9,112,635 of classified loans. The results of this internal review process are considered in determining our assessment of the adequacy of the allowance for loan losses.
Our criticized loans increased from $1,722,862 December 31, 2008 to $8,742,720 at December 31, 2009. Total classified loans increased from $5,569,588 at December 31, 2008 to $9,112,635 at December 31, 2009. The increase in classified loans as of period end is made up of loans primarily secured by real estate assets. The Bank also has a credit facility to an operating entity closely tied to the residential building industry which has been negatively impacted by the deterioration in the construction industry. The Bank is currently working to resolve these impaired loans and minimize further negative impacts to the Bank.
Noninterest Income and Expense
Noninterest Income. The largest component of noninterest income was service charges on deposit accounts. The following table sets forth the principal components of noninterest income for the years ended December 31, 2009 and 2008.
| | | 2009 | | | 2008 | |
Service charges on deposit accounts | | $ | 382,327 | | | $ | 254,257 | |
| Other income | | | 69,142 | | | | 83,691 | |
Total noninterest income | | $ | 451,469 | | | $ | 337,948 | |
Noninterest Expense. Salaries and employee benefits comprised the largest component of noninterest expense and totaled $2,205,329 for the year ended December 31, 2009 as compared to $2,245,302 for the year ended December 31, 2008. Loss on sale of other real estate increased from 2008 by approximately $924,000 to $1,114,380, primarily as a result of amounts charged off as a result of writing other real estate down to the lower of cost or net realizable value as of December 31, 2009. Other operating expenses totaled $1,472,188 for the year ended December 31, 2009, compared to $1,150,859 for the year ended December 31, 2008. The increase in other operating expenses was due primarily to the increase in professional fees and expenses associated with other real estate owned. In addition the Company incurred expenses of approximately $200,000 relating to the unconsummated merger with 1st Financial.
Noninterest Income and Expense - continued
The following table sets forth the primary components of noninterest expense for the years ended December 31, 2009 and 2008.
| | | 2009 | | | 2008 | |
| Salaries and employee benefits | | $ | 2,205,329 | | | $ | 2,245,302 | |
| Net occupancy expense | | | 196,708 | | | | 195,599 | |
| FDIC insurance | | | 275,002 | | | | 83,763 | |
| Other insurance | | | 38,099 | | | | 19,276 | |
| Advertising and marketing expense | | | 23,212 | | | | 13,485 | |
| Office supplies, stationary and printing | | | 100,429 | | | | 84,550 | |
| Data processing | | | 134,147 | | | | 110,313 | |
| Professional fees | | | 458,485 | | | | 331,365 | |
| Furniture and equipment expense | | | 193,599 | | | | 190,646 | |
| Telephone | | | 47,708 | | | | 53,322 | |
| Postage | | | 63,621 | | | | 41,110 | |
| Other real estate expense | | | 104,246 | | | | 24,609 | |
| Loss on sale of other real estate | | | 1,114,380 | | | | 190,470 | |
| Other | | | 505,241 | | | | 472,829 | |
Total noninterest expense | | $ | 5,457,206 | | | $ | 4,056,639 | |
Balance Sheet Review
General. At December 31, 2009, we had total assets of $176,730,998, consisting principally of $137,565,923 in net loans, $6,444,594 in investments, $16,729,661 in federal funds sold, $3,952,877 in net premises, furniture and equipment, and $4,701,944 in cash and due from banks compared to December 31, 2008 when the Bank had total assets of $170,310,305, an increase of 3.77%. Total assets in 2008 consisted principally of $137,734,564 in net loans, $6,009,494 in investments, $9,008,817 in federal funds sold, $4,157,724 in net premises, furniture and equipment and $8,159,812 in cash and due from banks.
At December 31, 2009, the Bank had liabilities totaling $151,837,292, consisting principally of $143,669,792 in deposits, and $8,000,000 in advances from the Federal Home Loan Bank. This was an increase of 3.92% over the total liabilities at December 31, 2008 which totaled $146,116,204 and consisted principally of $121,318,018 in deposits, $1,068,339 in federal funds purchased and securities sold under agreements to repurchase, and $23,570,000 in advances from Federal Home Loan Bank.
At December 31, 2009 shareholders’ equity equaled $24,893,706, an increase of 2.89% over the 2008 year ending equity balance of $24,194,101. This increase is primarily due to the inclusion of TARP funds acquired during 2009 in the form of preferred stock, less current year losses.
Loans. Loans are the largest category of earning assets and typically provide higher yields than the other types of earning assets. Associated with the higher loan yields are the inherent credit and liquidity risks which we attempt to control and counterbalance. Loans averaged $140,593,385 in 2009 as compared to $134,393,383 in 2008. At December 31, 2009 total loans were $139,974,913 or .22% higher than the December 31, 2008 balance of $139,670,266.
The following table sets forth the composition of the loan portfolio by category at December 31, 2009 and 2008 and highlights our general emphasis on real-estate lending.
Balance Sheet Review - continued
Composition of Loan Portfolio
(Dollars in thousands) 2009 2008
| | | Amount | | | Percent of Total | | | Amount | | | Percent of Total | |
| Commercial and industrial | | $ | 15,220 | | | | 10.87 | % | | $ | 18,320 | | | | 13.12 | % |
| Real Estate | | | | | | | | | | | | | | | | |
Mortgage | | | 94,439 | | | | 67.47 | % | | | 91,708 | | | | 65.66 | % |
Construction | | | 29,444 | | | | 21.04 | % | | | 28,594 | | | | 20.47 | % |
| Consumer | | | 872 | | | | 0.62 | % | | | 1,048 | | | | 0.75 | % |
Total Loans | | $ | 139,975 | | | | 100.00 | % | | $ | 139,670 | | | | 100.00 | % |
| Allowance for Loan Losses | | | (2,409 | ) | | | | | | | (1,936 | ) | | | | |
Net Loans | | $ | 137,566 | | | | | | | $ | 137,734 | | | | | |
The largest component of loans in our loan portfolio is real estate mortgage loans. At December 31, 2009 real estate mortgage loans totaled $94,439,000 and represented 67.47% of the total loan portfolio. At December 31, 2008, real estate mortgage loans totaled $91,708,000 and represented 65.66% of the total loan portfolio.
In the context of this discussion, a “real estate mortgage loan” is defined as any loan, other than a loan for construction purposes, secured by real estate, regardless of the purpose of the loan. It is common practice for financial institutions in the Bank’s market area to obtain a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component.
Residential 1 to 4 family real estate loans totaled $46,869,000 at December 31, 2009 and $48,815,000 at December 31, 2008. Residential 1 to 4 family real estate loans consist of first and second mortgages on single or multi-family residential dwellings. Nonresidential real estate loans, which include commercial loans and other loans secured by multi-family properties and farmland, totaled $77,014,000 at December 31, 2009 and $71,487,000 at December 31, 2008. The demand for residential and commercial real estate loans in the market remains strong due to the low interest rate environment.
Our loan portfolio also includes consumer loans. At December 31, 2009 and 2008, consumer loans totaled $872,000 and $1,048,000 and represented 0.62% and 0.75% of the total loan portfolio, respectively.
Our loan portfolio reflects the diversity of our market. Our home office is located in Gastonia, North Carolina and we have branches in Shelby and Kings Mountain, North Carolina. We expect the area to remain stable with slower but continued growth in the near future. The diversity of the economy creates opportunities for all types of lending. We do not engage in foreign lending.
The repayment of loans in the loan portfolio as they mature is also a source of liquidity for us. The following table sets forth our loans maturing within specified intervals at December 31, 2009.
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
December 31, 2009 (Dollars in thousands) | | One Year or Less | | | Over One Year Through Five Years | | | Over Five Years | | | Total | |
| | | | | | | | | | | | | |
| Commercial and industrial | | $ | 10,250 | | | | 4,900 | | | | 70 | | | | 15,220 | |
| Real estate | | | 72,310 | | | | 47,839 | | | | 3,733 | | | | 123,883 | |
| Consumer and other | | | 269 | | | | 604 | | | | - | | | | 872 | |
| | | $ | 82,829 | | | $ | 53,342 | | | $ | 3,803 | | | $ | 139,975 | |
| Loans maturing after one year with: | | | | | | | | | | | | | | | | |
| Fixed interest rates | | | | | | | | | | | | | | $ | 54,069 | |
| Floating interest rates | | | | | | | | | | | | | | | 3,076 | |
| | | | | | | | | | | | | | | $ | 57,145 | |
Balance Sheet Review - continued
The information presented in the above table is based on the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval as well as modification of terms upon their maturity. Consequently, we believe this treatment presents fairly the maturity and repricing structure of the loan portfolio shown in the above table.
Investment Securities. The investment securities portfolio is also a component of our total earning assets and includes securities available for sale and nonmarketable equity securities. Total securities available for sale averaged $5,085,032 in 2009 as compared to $3,975,873 in 2008. Total nonmarketable equity securities averaged $1,403,078 in 2009 as compared to $1,186,370 in 2008. At December 31, 2009, the total securities portfolio was $6,444,594 as compared to $6,009,494 at December 31, 2008.
The following table sets forth the scheduled maturities and average yields of securities available for sale at December 31, 2009. The table excludes nonmarketable equity securities.
Investment Securities Maturity Distribution and Yields
(Dollars in thousands) | | After One but Within Five Years | | | After Five but Within Ten Years | | | Over Ten Years | |
| | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | |
| US Government agencies | | $ | - | | | | - | | | $ | 1,039 | | | | 4.05 | % | | $ | - | | | | - | |
| Mortgage-backed securities | | | 105 | | | | 5.08 | % | | $ | 1,230 | | | | 5.31 | % | | $ | 2,657 | | | | 5.38 | % |
Other attributes of the securities portfolio, including yields and maturities, are discussed above in “--Net Interest Income--- Interest Sensitivity.”
Short-Term Investments. Short-term investments, which consist primarily of federal funds sold, averaged $3,641,423 in 2009 and $10,263,858 in 2008. At December 31, 2009 and 2008, short-term investments totaled $16,729,661 and $9,008,817, respectively. These funds are an important source of our liquidity. Federal funds are generally invested in an earning capacity on an overnight basis.
Deposits. Average total deposits totaled $123,196,725 during 2009 as compared to $113,340,910 during 2008. At December 31, 2009, total deposits were $143,669,792 as compared to $121,318,018 at December 31, 2008. Average interest-bearing liabilities totaled $137,169,755 in 2009 as compared to $131,427,862 in 2008.
The following table sets forth our deposits by category as of December 31, 2009 and 2008.
Deposits
| | | 2009 | | | 2008 | |
| | | | | | | | | | | | | |
| Noninterest-bearing demand deposits | | $ | 5,626,494 | | | | 3.92 | % | | $ | 5,235,742 | | | | 4.31 | % |
| NOW interest bearing deposits | | | 4,759,708 | | | | 3.31 | | | | 4,593,973 | | | | 3.79 | |
| Savings and money market accounts | | | 24,279,357 | | | | 16.90 | | | | 22,233,022 | | | | 18.33 | |
| Time deposits less than $100,000 | | | 102,069,318 | | | | 71.04 | | | | 69,949,192 | | | | 57.66 | |
| Time deposits $100,000 and over | | | 6,934,915 | | | | 4.83 | | | | 19,306,089 | | | | 15.91 | |
Total Deposits | | $ | 143,669,792 | | | | 100 | % | | $ | 121,318,018 | | | | 100 | % |
Core deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $136,734,877 at December 31, 2009.
Deposits, and particularly core deposits, have been a primary source of funding and have enabled us to successfully meet both our short-term and long-term liquidity needs. We anticipate that such deposits will continue to be our primary source of funding in the future. Our loan-to-deposit ratio was 97.43% and 115.13% at December 31, 2009 and 2008, respectively. The maturity distribution of our time deposits over $100,000 at December 31, 2009, is set forth in the following table:
Balance Sheet Review - continued
Maturities of Certificates of Deposit of $100,000 or More
(Dollars in thousands) | | | | | After Three Through Six Months | | | After Six Through Twelve Months | | | | | | | |
Certificates of deposit of $100 or more | | $ | 1,604 | | | $ | 302 | | | $ | 3,486 | | | $ | 1,543 | | | $ | 6,935 | |
Time deposits over $100,000 in the aggregate amount of $1,604,000 had scheduled maturities within three months, and approximately $5,392,000, or 78%, had maturities within twelve months. Large certificate of deposit customers tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits.
Federal Home Loan Bank Advances. Total advances from the Federal Home Loan Bank were $8,000,000 at December 31, 2009, compared to $23,570,000 at December 31, 2008. The average of Federal Home Loan Bank advances outstanding was $18,834,411 during 2009, compared to $19,796,421 during 2008. Advances from the Federal Home Loan Bank serve as a secondary funding source. Advances from the Federal Home Loan Bank mature at different periods as discussed in the notes to the financial statements and are secured by the Bank’s investment in Federal Home Loan Bank stock and real estate loan portfolio.
Other Borrowings. Other borrowings, which consist of federal funds purchased and securities sold under agreements to repurchase, averaged $957,510 in 2009 as compared to $2,739,648 in 2008 and totaled $0 at December 31, 2009 and $1,068,339 at December 31, 2008. The maximum amount at any month end in 2009 was $14,783,069 and had a weighted average interest rate during the year of .24%. The maximum amount at any month end in 2008 was $8,567,865 and had a weighted average interest rate during the year of 3.30%. The repurchase agreements are collateralized by investment securities.
Capital
We are subject to various regulatory capital requirements administered by the state and federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 capital and 8% for total risk-based capital.
We are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio. Only the strongest institutions are allowed to maintain capital at the minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the minimum.
Capital - continued
We exceeded the regulatory capital requirements at December 31, 2009 and 2008 as set forth in the following table.
Analysis of Capital and Capital Ratios
| December 31, | | 2009 | | | 2008 | |
| (Dollars in thousands) | | | | | | |
| Tier 1 capital | | $ | 23,688 | | | $ | 24,425 | |
| Tier 2 capital | | | 1,750 | | | | 1,587 | |
Total qualifying capital | | $ | 25,438 | | | $ | 26,012 | |
Risk-adjusted total assets (including off-balance sheet exposures) | | $ | 171,360 | | | $ | 135,409 | |
Tier 1 risk-based capital ratio | | | 17.01 | % | | | 18.04 | % |
| Total risk-based capital ratio | | | 18.26 | % | | | 19.21 | % |
| Tier 1 leverage ratio | | | 13.82 | % | | | 14.01 | % |
Off-Balance Sheet Risk
Through our operations, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At December 31, 2009, we had issued commitments to extend credit of $10,358,000 through various types of commercial lending arrangements. All of these commitments to extend credit had variable rates. The Company also had standby letters of credit which totaled $180,000.
The following table sets forth the length of time until maturity for unused commitments to extend credit at December 31, 2009.
(Dollars in thousands) | | | | | After One Through Three Months | | | After Three Through Twelve Months | | | | | | | | | | |
Unused commitments to extend credit | | $ | 836 | | | $ | 164 | | | $ | 3,554 | | | $ | 4,554 | | | $ | 5,804 | | | $ | 10,358 | |
We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.
Critical Accounting Policies
We have adopted various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 2009 as filed with our annual report on Form 10-K. Certain accounting policies involve significant judgments and assumptions which have a material impact on the carrying value of certain assets and liabilities. These accounting policies are considered to be critical accounting policies. The judgments and assumptions used are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions, actual results could differ from these judgments and estimates which could have a material impact on the carrying values of assets and liabilities and results of operations.
We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of the consolidated financial statements. Refer to the portion of this discussion that addresses the allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.
Liquidity Management and Capital Resources
Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity represents our ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Without proper liquidity management, we would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities we serve.
Liquidity management is made more complex because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to nearly the same degree of control. We also have the ability to obtain funds from various financial institutions should the need arise. The amount available under such agreements was $18,500,000 at December 31, 2009. These lines may be withdrawn at their discretion. In addition, we have the ability to borrow from the Federal Home Loan Bank. Our available credit with the Federal Home Loan Bank was $16,576,000 at December 31, 2009.
Impact of Inflation
Unlike most industrial companies, the assets and liabilities of financial institutions such as the Bank are primarily monetary in nature. Therefore, interest rates have a more significant effect on the Bank’s performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, management seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.
Forward-Looking Information
Statements contained in this report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein could vary as a result of market and other factors. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Registrant with the Securities and Exchange Commission from time to time. Such forward-looking statements may be identified by the use of such words as “believe”, “expect”, “anticipate”, “should”, “might”, “planned”, “estimated”, and “potential”. Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Registrant that are subject to various factors which could cause actual results to differ materially form these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Bank’s operations, pricing, products and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Smaller reporting companies such as the Registrant are not required to provide the information required by this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
AB&T FINANCIAL CORPORATION AND
ALLIANCE BANK & TRUST COMPANY
Consolidated Financial Statements
Years ended December 31, 2009 and 2008
Table of Contents
| | Page No. |
| Report of Independent Registered Public Accounting Firm | 28 |
| Consolidated Balance Sheets | 29 |
| Consolidated Statements of Operations | 30 |
| Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income | 31 |
| Consolidated Statements of Cash Flows | 32 |
| Notes to Consolidated Financial Statements | 33-49 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
AB&T Financial Corporation
Gastonia, North Carolina
We have audited the accompanying consolidated balance sheets of AB&T Financial Corporation and subsidiary, Alliance Bank & Trust Company, (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders’ equity and comprehensive loss, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AB&T Financial Corporation and subsidiary, as of December 31, 2009 and 2008 and the related statements of operations, changes in shareholders’ equity and comprehensive loss, and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to examine management's assessment about the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 included in the accompanying Form 10-K, item 9 and, accordingly, we do not express an opinion thereon.
/s/ Elliott Davis, PLLC
Elliott Davis, PLLC
Charlotte, North Carolina
March 29, 2010
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
| | | December 31, | |
| Assets: | | 2009 | | | 2008 | |
| Cash and cash equivalents: | | | | | | |
| Cash and due from banks | | $ | 4,701,944 | | | $ | 8,159,812 | |
| Federal funds sold | | | 16,729,661 | | | | 9,008,817 | |
Total cash and cash equivalents | | | 21,431,605 | | | | 17,168,629 | |
| Time deposits with other banks | | | 1,296,527 | | | | 1,260,199 | |
| Investments: | | | | | | | | |
| Securities available for sale | | | 5,031,414 | | | | 4,638,214 | |
| Nonmarketable equity securities | | | 1,413,180 | | | | 1,371,280 | |
Total investments | | | 6,444,594 | | | | 6,009,494 | |
| Loans receivable | | | 139,974,913 | | | | 139,670,266 | |
| Less allowance for loan losses | | | (2,408,990 | ) | | | (1,935,702 | ) |
Loans, net | | | 137,565,923 | | | | 137,734,564 | |
| Premises, furniture and equipment, net | | | 3,952,877 | | | | 4,157,724 | |
| Accrued interest receivable | | | 566,318 | | | | 518,504 | |
| Other real estate owned | | | 2,050,272 | | | | 2,296,290 | |
| Other assets | | | 3,422,882 | | | | 1,164,901 | |
Total assets | | $ | 176,730,998 | | | $ | 170,310,305 | |
| Liabilities: | | | | | | | | |
| Deposits: | | | | | | | | |
| Noninterest-bearing transaction accounts | | $ | 5,626,494 | | | $ | 5,235,742 | |
| Interest-bearing transaction accounts | | | 4,759,708 | | | | 4,593,973 | |
| Savings and money market | | | 24,279,357 | | | | 22,233,022 | |
| Time deposits $100,000 and over | | | 6,934,915 | | | | 19,306,089 | |
| Other time deposits | | | 102,069,318 | | | | 69,949,192 | |
Total deposits | | | 143,669,792 | | | | 121,318,018 | |
| Federal funds purchased and securities sold under agreements to repurchase | | | - | | | | 1,068,339 | |
| Advances from the Federal Home Loan Bank | | | 8,000,000 | | | | 23,570,000 | |
| Accrued interest payable | | | 55,169 | | | | 109,043 | |
| Other liabilities | | | 112,331 | | | | 50,804 | |
Total liabilities | | | 151,837,292 | | | | 146,116,204 | |
| Commitments and contingencies (Notes 10, 12 and 19) | | | | | | | | |
Shareholders’ equity: | | | | | | | | |
| Preferred stock, no par value, 1,000,000 shares authorized, | | | | | | | | |
| issued and outstanding – 3,500 at December 31, 2009, and 0 | | | | | | | | |
| at December 31, 2008 | | | 3,385,908 | | | | - | |
| Common stock, $1.00 par value, 11,000,000 shares authorized; | | | | | | | | |
| and 2,678,205 shares issued and outstanding | | | | | | | | |
| at December 31, 2009 and 2008 | | | 2,678,205 | | | | 2,678,205 | |
| Treasury stock, at cost (10,000 shares at December 31, 2009 and | | | | | | | | |
| no shares in 2008) | | | (55,600 | ) | | | - | |
| Warrants | | | 136,850 | | | | - | |
| Capital surplus | | | 21,734,686 | | | | 21,607,455 | |
| Retained earnings (deficit) | | | (3,066,700 | ) | | | (157,424 | ) |
| Accumulated other comprehensive income | | | 80,357 | | | | 65,865 | |
Total shareholders’ equity | | | 24,893,706 | | | | 24,194,101 | |
Total liabilities and shareholders’ equity | | $ | 176,730,998 | | | $ | 170,310,305 | |
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, 2009 and 2008
| | | 2009 | | | 2008 | |
| Interest income: | | | | | | |
Loans, including fees | | $ | 6,763,059 | | | $ | 8,267,849 | |
Securities available-for-sale, taxable and nonmarketable equity securities | | | 267,240 | | | | 252,287 | |
Federal funds sold | | | 11,433 | | | | 205,415 | |
Money Market deposit | | | 23,480 | | | | 73,938 | |
Time deposits with other banks | | | 36,328 | | | | 10,197 | |
Total interest income | | | 7,101,540 | | | | 8,809,686 | |
| Interest expense: | | | | | | | | |
Time deposits $100,000 and over | | | 1,795,139 | | | | 2,563,890 | |
Other deposits | | | 765,275 | | | | 1,237,594 | |
Federal Home Loan Bank advances | | | 676,754 | | | | 698,111 | |
Other borrowings | | | 7,697 | | | | 67,114 | |
Total interest expense | | | 3,244,865 | | | | 4,566,709 | |
| Net interest income | | | 3,856,675 | | | | 4,242,977 | |
| Provision for loan losses | | | 3,478,372 | | | | 1,312,969 | |
| Net interest income after provision for loan losses | | | 378,303 | | | | 2,930,008 | |
| Noninterest income: | | | | | | | | |
Service charges on deposit accounts | | | 382,327 | | | | 254,257 | |
Other | | | 69,142 | | | | 83,691 | |
Total noninterest income | | | 451,469 | | | | 337,948 | |
| Noninterest expenses: | | | | | | | | |
Salaries and employee benefits | | | 2,205,329 | | | | 2,245,302 | |
Net occupancy | | | 196,708 | | | | 195,599 | |
Furniture and equipment | | | 193,599 | | | | 190,646 | |
FDIC Insurance premiums | | | 275,002 | | | | 83,763 | |
Losses on sale and write down of Other Real Estate | | | 1,114,380 | | | | 190,470 | |
Other operating | | | 1,472,188 | | | | 1,150,859 | |
Total noninterest expense | | | 5,457,206 | | | | 4,056,639 | |
| Loss before income taxes | | | (4,627,434 | ) | | | (788,683 | ) |
| Income tax benefit | | | (1,740,916 | ) | | | (274,886 | ) |
| Net loss | | $ | (2,886,518 | ) | | $ | (513,797 | ) |
| Accretion of preferred stock to redemption value | | | 22,758 | | | | - | |
| Preferred stock dividends | | | 163,040 | | | | - | |
| Net loss available to common shareholders | | $ | (3,072,316 | ) | | $ | (513,797 | ) |
Losses per common share Basic | | $ | (1.15 | ) | | $ | (0.19 | ) |
| Diluted | | $ | (1.15 | ) | | $ | (0.19 | ) |
Average common shares outstanding Basic | | | 2,678,205 | | | | 2,678,205 | |
| Diluted | | | 2,678,205 | | | | 2,678,205 | |
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 Loss
For the years ended December 31, 2009 and 2008
(dollars in thousands except for share data)
| | | | | | | | | | | | | | | | | | | | | | | | Retained Earnings (Deficit) | | | Accum-ulated Other Compre- hensive Income (Loss) | | | | |
Balance, December 31, 2007 | | | 2,678,205 | | | $ | 2,678 | | | | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 21,425 | | | $ | 356 | | | $ | 14 | | | $ | 24,474 | |
Net loss from operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (514 | ) | | | | | | | (514 | ) |
Other comprehensive income net of tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 52 | | | | 52 | |
Total Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (462 | ) |
Stock-based employee compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | 182 | | | | | | | | | | | | 182 | |
Balance December 31, 2008 | | | 2,678,205 | | | | 2,678 | | | | - | | | | - | | | | - | | | | - | | | | 21,607 | | | | (158 | ) | | | 66 | | | | 24,194 | |
Net loss from operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (2,886 | ) | | | | | | | (2,886 | ) |
Other comprehensive income net of tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 14 | | | | 14 | |
Total Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (2,872 | ) |
Issuance of Preferred Stock | | | | | | | | | | | 3,500 | | | | 3,363 | | | | | | | | | | | | | | | | | | | | | | | | 3,363 | |
Issuance of Common Stock Warrants | | | | | | | | | | | | | | | | | | | | | | | 137 | | | | | | | | | | | | | | | | 137 | |
Accretion of preferred stock to redemption value | | | | | | | | | | | | | | | 23 | | | | | | | | | | | | | | | | (23 | ) | | | | | | | - | |
Dividends, preferred | | | | | | | | | | | | | | | | | | | | | | | | | | | (142 | ) | | | | | | | | | | | (142 | ) |
Purchase of Treasury Stock (10,000 shares) | | | | | | | | | | | | | | | | | | | (56 | ) | | | | | | | | | | | | | | | | | | | (56 | ) |
Stock-based employee compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | 269 | | | | | | | | | | | | 269 | |
Balance December 31, 2009 | | | 2,678,205 | | | $ | 2,678 | | | | 3,500 | | | $ | 3,386 | | | $ | (56 | ) | | $ | 137 | | | $ | 21,734 | | | $ | (3,067 | ) | | $ | 80 | | | $ | 24,893 | |
The accompanying notes are an integral part of the consolidated financial statements
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended December 31, 2009 and 2008
| | | 2009 | | | 2008 | |
| Cash flows from operating activities: | | | | | | |
| Net loss | | $ | (2,886,518 | ) | | $ | (513,797 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | |
Provision for loan losses | | | 3,478,372 | | | | 1,312,969 | |
Depreciation and amortization expense | | | 202,934 | | | | 192,715 | |
Discount accretion and premium amortization | | | (9,627 | ) | | | (2,068 | ) |
Loss on sale of other real estate | | | 79,545 | | | | 190,470 | |
Loss on write down of other real estate | | | 1,034,917 | | | | - | |
Deferred income tax benefit | | | (1,486,296 | ) | | | (35,831 | ) |
Decrease (increase) in accrued interest receivable | | | (47,814 | ) | | | 195,858 | |
Increase (decrease) in accrued interest payable | | | (53,874 | ) | | | 28,268 | |
Increase in other assets | | | (780,979 | ) | | | (628,484 | ) |
Increase (decrease) in other liabilities | | | 61,527 | | | | (214,310 | ) |
Stock-based compensation expense | | | 269,175 | | | | 182,095 | |
Net cash provided by operating activities | | | (138,638 | ) | | | 707,885 | |
Cash flows from investing activities: | | | | | | | | |
Purchases of securities available for sale | | | (1,045,600 | ) | | | (1,007,931 | ) |
Calls and maturities of securities available for sale | | | 685,764 | | | | 432,101 | |
Purchases of nonmarketable equity securities | | | (41,900 | ) | | | (809,100 | ) |
Proceeds from sale of nonmarketable equity securities | | | - | | | | 270,000 | |
Purchases of time deposits with other banks | | | (36,328 | ) | | | 1,250,000 | |
Net increase in loans receivable | | | (4,576,458 | ) | | | (23,076,358 | ) |
Purchases of premises, furniture and equipment | | | (26,324 | ) | | | (635,148 | ) |
Proceeds from sale of furniture and equipment | | | 28,238 | | | | - | |
Capitalized other real estate expenses | | | (133,184 | ) | | | - | |
Proceeds from sale of other real estate | | | 531,515 | | | | 516,101 | |
Net cash used by investing activities | | | (4,614,277 | ) | | | (25,560,335 | ) |
Cash flows from financing activities: | | | | | | | | |
Net increase in deposits | | | 22,351,774 | | | | 17,532,535 | |
Decrease in federal funds purchased | | | (1,068,339 | ) | | | (4,542,072 | ) |
Increase (decrease) in Federal Home Loan Bank advances | | | (15,570,000 | ) | | | 10,570,000 | |
Proceeds from issuance of preferred stock, net | | | 3,363,150 | | | | - | |
Preferred dividends paid | | | (141,944 | ) | | | - | |
Purchase of Treasury stock | | | (55,600 | ) | | | - | |
Proceeds from issuance of stock warrants | | | 136,850 | | | | - | |
Net cash provided by financing activities | | | 9,015,891 | | | | 23,560,463 | |
| Net increase (decrease) in cash and cash equivalents | | | 4,262,976 | | | | (1,291,987 | ) |
Cash and cash equivalents, beginning of year | | | 17,168,629 | | | | 18,460,616 | |
| Cash and cash equivalents, end of year | | $ | 21,431,605 | | | $ | 17,168,629 | |
Supplemental disclosure of cash flow information:
Transfer of loans to real estate acquired in settlement of loans | | $ | 1,266,727 | | | $ | 2,182,016 | |
Interest paid | | $ | 3,298,739 | | | $ | 4,538,441 | |
Taxes paid | | $ | - | | | $ | 166,350 | |
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 Bank is headquartered in Gastonia, North Carolina and currently conducts business in two North Carolina counties through four full service branch offices. The principal business activity of the Bank is to provide commercial banking services to domestic markets, principally in Gaston and Cleveland counties. As a state-chartered bank, the Bank is subject to regulation by the North Carolina Office of the Commissioner of Banks and the Federal Deposit Insurance Corporation. The Company is also regulated, supervised and examined by the Federal Reserve. The consolidated financial statements include the accounts of the parent company and its wholly-owned subsidiary after elimination of all significant intercompany balances and transactions.
Management’s Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans, including valuation allowances for impaired loans, and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. Management must also make estimates in determining the estimated useful lives and methods for depreciating premises and equipment.
While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for losses on loans. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for losses on loans may change materially in the near term.
Concentrations of Credit Risk - Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amounts due from banks.
The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily in Gaston and Cleveland counties in North Carolina. The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers. Additionally, management is not aware of any concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions.
In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans
with initial interest-only periods, etc), and loans with high loan-to-value ratios. Management has determined that there is no concentration of credit risk associated with its lending policies or practices. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans). These loans are underwritten and monitored to manage the associated risks. Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
The Company’s investment portfolio consists principally of obligations of the United States, and its agencies or its corporations. In the opinion of management, there is no concentration of credit risk in its investment portfolio. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.
Time Deposits with Other Banks - Time deposits with other banks include the bank’s investments in certificates of deposit with a maturity date greater than 90 days. Because the maturity date is greater than 90 days, these time deposits are not included in cash and cash equivalents.
Securities Available-for-Sale - Securities available-for-sale are carried at amortized cost and adjusted to estimated market value by recognizing the aggregate unrealized gains or losses in a valuation account. Aggregate market valuation adjustments are recorded in shareholders' equity net of deferred income taxes. Reductions in market value considered by management to be other than temporary are reported as a realized loss and a reduction in the cost basis of the security. The adjusted cost basis of investments available-for-sale is determined by specific identification and is used in computing the gain or loss upon sale.
Nonmarketable Equity Securities - Nonmarketable equity securities include the cost of the Company's investment in the stock of Federal Home Loan Bank and Community Bankers Bank. These stocks have no quoted market value and no ready market for them exists. Investment in the Federal Home Loan Bank is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to collateralize such borrowings. At December 31, 2009 and 2008, the Company's investment in Federal Home Loan Bank stock was $1,368,000 and $1,326,100, respectively. At December 31, 2009 and 2008, investment in Community Bankers Bank was $45,180.
Loans Receivable - Loans are stated at their unpaid principal balance. Interest income is computed using the simple interest method and is recorded in the period earned.
When serious doubt exists as to the collectibility of a loan or when a loan becomes contractually 90 days past due as to principal or interest, interest income is generally discontinued unless the estimated net realizable value of collateral exceeds the principal balance and accrued interest. When interest accruals are discontinued, income earned but not collected is reversed.
The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s problem loan watch list are considered potentially impaired loans. These loans are evaluated in determining whether all outstanding principal and interest are expected to be collected at their contractual terms. Loans are not considered impaired if a minimal payment delay occurs and all amounts due, including accrued interest at the contractual interest rate for the period of delay, are expected to be collected consistent with the contract. At December 31, 2009 and 2008, loans in impaired status totaled $6,066,187 and $5,043,946, respectively.
Allowance for Loan Losses - An allowance for loan losses is maintained at a level deemed appropriate by management to provide adequately for known and inherent losses in the loan portfolio. The allowance is based upon past loan loss experience, current economic conditions that may affect the borrowers' ability to pay, and the underlying collateral value of the loans. Loans which are deemed to be uncollectible are charged off and deducted from the allowance. The provision for loan losses and recoveries of loans previously charged off are added to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of the loan. The general component covers nonclassified loans and is based upon historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration of all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective rate, the loan��s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer or residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.
Premises, Furniture and Equipment - Premises, furniture and equipment are stated at cost, less accumulated depreciation. The provision for depreciation is computed by the straight-line method, based on the estimated useful lives for buildings of 40 years and furniture and equipment of 5 to 10 years. Leasehold improvements are amortized over the life of the leases. The cost of assets sold or otherwise disposed of and the related allowance for depreciation are eliminated from the accounts and the resulting gains or losses are reflected in the income statement when incurred. Maintenance and repairs are charged to current expense. The costs of major renewals and improvements are capitalized.
Other Real Estate Owned - Other real estate owned includes real estate acquired through foreclosure. Other real estate owned is initially recorded at the lower of cost (principal balance of the former loan plus costs of improvements) or estimated fair value. Any write-downs at the dates of foreclosure are charged to the allowance for loan losses. Expenses to maintain such assets and subsequent valuation writedowns, are included in other expenses. Gains and losses on disposal are included in noninterest income or expense.
Securities Sold Under Agreements to Repurchase - The Bank enters into sales of securities under agreements to repurchase. Fixed-coupon repurchase agreements are treated as financing, with the obligation to repurchase securities sold being reflected as a liability and the securities underlying the agreements remaining as assets.
Income Taxes - Income taxes are the sum of amounts currently payable to taxing authorities and the net changes in income taxes payable or refundable in future years. Income taxes deferred to future years are determined utilizing a liability approach. This method gives consideration to the future tax consequences associated with differences between financial accounting and tax bases of certain assets and liabilities which are principally the allowance for loan losses, depreciable premises and equipment, and the Company’s net operating loss carryforward.
Advertising Expense - Advertising and public relations costs are expensed as incurred. External costs incurred in producing media advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are expended in the period in which the direct mailings are sent. Advertising and public relations costs of approximately $63,000 and $73,000 were included in the Company's results of operations for 2009 and 2008, respectively.
Stock-Based Compensation - Compensation expense is recognized as salaries and benefits in the consolidated statement of operations. In calculating the compensation expense for stock options for 2008, the fair value of options granted is estimated as of the date granted using the Black-Scholes option pricing model with the following weighted-average assumptions: dividend yield of 0 percent; expected volatility of 18.50 percent; risk-free interest rate of 4.43 percent; and expected life of 10 years. There were no options granted in 2009.
Earnings (Losses) Per Share - Basic earnings (losses) per share represents income available to shareholders divided by the weighted-average number of common shares outstanding during the period. Dilutive earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and warrants and are determined using the treasury stock method.
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Comprehensive Income (Loss) - Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists of unrealized gains and losses on investment securities available for sale, net of taxes. Comprehensive income (loss) is presented in the statements of stockholders’ equity and comprehensive income (loss).
Statement of Cash Flows - For purposes of reporting cash flows in the financial statements, the Company considers certain highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents include amounts due from banks and federal funds sold. Generally, federal funds are sold for one-day periods.
Off-Balance Sheet Financial Instruments - In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. These financial instruments are recorded in the financial statements when they become payable by the customer. In preparing these financial statements, the Company has evaluated events and transactions through our filing date for potential recognition or disclosure in the Consolidated Financial Statements.
Recent Accounting Pronouncements - The following is a summary of recent authoritative pronouncements that may affect accounting, reporting, and disclosure of financial information by the Company:
In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance which restructured generally accepted accounting principles (“GAAP”) and simplified access to all authoritative literature by providing a single source of authoritave nongovernmental GAAP. The guidance is presented in a topically organized structure referred to as the FASB Accounting Standareds Codification (“ASC”). The new structure is effective for interim or annual periods ending after September 15, 2009. All existing accounting standards have been superseded and all other accounting literature not included is considered nonauthoritative.
The FASB issued new accounting guidance on accounting for transfers of financial assets in June 2009. The guidance limits the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking into consideration the transferor’s continuing involvement. The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The concept of a qualifying special-purpose entity is no longer applicable. The standard is effective for the first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company does not expect the guidance to have any impact on the Company’s financial statements. The ASC was amended in December, 2009, to include this guidance.
Guidance was issued in June 2009 requiring a company to analyze whether its interest in a variable interest entity (“VIE”) gives it a controlling financial interest that should be included in consolidated financial statements. A company must assess whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to direct the activities of the VIE that significantly impact its economic performance, making it the primary beneficiary. Ongoing reassessments of whether a company is the primary beneficiary are also required by the standard. This guidance amends the criteria to qualify as a primary beneficiary as well as how to determine the existence of a VIE. The standard also eliminates certain exceptions that were previously available. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Comparative disclosures will be required for periods after the effective date. The Company does not expect the guidance to have any impact on the Company’s financial position. An update was issued in December, 2009, to include this guidance in the ASC.
In October, 2009, updated guidance was issued to provide for accounting and reporting for own-share lending arrangements issued in contemplation of a convertible debt issuance. At the date of issuance, a share-lending arrangement entered into on an entity’s own shares should be measured at fair value in accordance with prior guidance and recognized as an issuance cost, with an offset to additional paid-in capital. Loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs. The amendment also requires several disclosures including a description and the terms of the arrangement and the reason for entering into the arrangement. The effective dates of the amendment are dependent upon the date the share-lending arrangement was entered into and include retrospective application for arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009. The Company has no plans to issue convertible debt and, therefore, does not expect the update to have an impact on its financial statements.
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
In January, 2010, guidance was issued to alleviate diversity in the accounting for distributions to shareholders that allow the shareholder to elect to receive their entire distribution in cash or shares but with a limit on the aggregate amount of cash to be paid. The amendment states that the stock portion of a distribution to shareholders that allows them to elect to receive cash or shares with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance. The amendment is effective for interim and annual periods ending on or after December 15, 2009 and had no impact on the Company’s financial statements.
Also in January, 2010, an amendment was issued to clarify the scope of subsidiaries for consolidation purposes. The amendment provides that the decrease in ownership guidance should apply to (1) a subsidiary or group of assets that is a business or nonprofit activity, (2) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture, and (3) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. The guidance does not apply to a decrease in ownership in transactions related to sales of in substance real estate or conveyances of oil and gas mineral rights. The update is effective for the interim or annual reporting periods ending on or after December 15, 2009 and had no impact on the Company’s financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Risks and Uncertainties - In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different basis than its interest-earning assets. Credit risk is the risk of default on the Company's loan portfolio that results from borrower's inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.
The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions from the regulators' judgments based on information available to them at the time of their examination.
Reclassifications - - Certain captions and amounts in the 2008 financial statements were reclassified to conform with the 2009 presentation.
Subsequent Events – In preparing these financial statements, the Company has evaluated events and transactions through our filing date for potential recognition or disclosure in the Consolidated Financial statements.
NOTE 2 - CASH AND DUE FROM BANKS
The Company is required to maintain cash balances with its correspondent banks to cover all cash letter transactions. At December 31, 2009 and 2008, the requirement was met by the cash balance in the vault.
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available-for-sale were:
| | | | | | | | | | |
| | | | | | | | | | | | | |
| December 31, 2009 | | | | | | | | | | | | |
U.S. Government Agencies | | $ | 1,042,373 | | | $ | - | | | $ | 2,782 | | | $ | 1,039,591 | |
Mortgage-backed securities | | | 3,857,417 | | | | 155,987 | | | | 21,581 | | | | 3,991,823 | |
Total | | $ | 4,899,790 | | | $ | 155,987 | | | $ | 24,363 | | | $ | 5,031,414 | |
December 31, 2008 | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 4,530,327 | | | $ | 107,932 | | | $ | 45 | | | $ | 4,638,214 | |
Total | | $ | 4,530,327 | | | $ | 107,932 | | | $ | 45 | | | $ | 4,638,214 | |
The following is a summary of maturities of securities available-for-sale as of December 31, 2009. The amortized cost and estimated fair values are based on the contractual maturity dates. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.
| | | Securities Available-for-Sale | |
| | | | | | | |
| Due in one year or less | | $ | - | | | $ | - | |
| Due after one year but within five years | | | 100,980 | | | | 104,604 | |
| Due after five years but within ten years | | | 2,293,749 | | | | 2,269,386 | |
| Due after ten years | | | 2,505,061 | | | | 2,657,424 | |
| | | $ | 4,899,790 | | | $ | 5,031,414 | |
The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2009 and 2008:
| | | | | | | | | | |
December 31, 2009 | | Fair value | | | Unrealized Losses | | | Fair value | | | Unrealized Losses | | | Fair value | | | Unrealized Losses | |
Mortgage-backed securities | | $ | 1,229,796 | | | $ | 21,581 | | | | - | | | | - | | | $ | 1,229,796 | | | $ | 21,581 | |
| U.S. Government agencies | | | 1,039,591 | | | | 2,782 | | | | - | | | | - | | | | 1,039,591 | | | | 2,782 | |
Total | | $ | 2,269,387 | | | $ | 24,363 | | | $ | - | | | $ | - | | | $ | 2,269,387 | | | $ | 24,363 | |
December 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | - | | | $ | - | | | $ | 1,360,449 | | | $ | 45 | | | $ | 1,360,449 | | | $ | 45 | |
Total | | $ | - | | | $ | - | | | $ | 1,360,449 | | | $ | 45 | | | $ | 1,360,449 | | | $ | 45 | |
Securities classified as available-for-sale are recorded at fair market value. All of the unrealized losses, or two individual securities, consisted of securities in a continuous loss position for twelve months or less at December 31, 2009. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.
At December 31, 2009 and 2008, investment securities with a book value of $341,937 and $1,768,936 and a market value of $356,584 and $1,825,982, respectively, were pledged as collateral for the securities sold under agreements to repurchase. At December 31, 2008, investment securities with a book value of $3,677,513 and a market value of $3,718,310 were pledged as collateral for Federal Home Loan Bank advances. At December 31, 2009, there were no investment securities pledged as collateral for Federal Home Loan Bank advances.
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 4 - LOANS RECEIVABLE
Major classifications of loans receivable at December 31, 2009 and 2008 are summarized as follows:
| | | | | | | |
| Real estate – construction | | $ | 29,444,000 | | | $ | 28,594,000 | |
| Real estate – mortgage | | | 94,439,000 | | | | 91,708,000 | |
| Commercial and industrial | | | 15,220,000 | | | | 18,320,000 | |
| Consumer and other | | | 871,913 | | | | 1,048,266 | |
Total gross loans | | $ | 139,974,913 | | | $ | 139,670,266 | |
As of December 31, 2009 and 2008, loans individually evaluated and considered impaired were as follows:
| | | December 31, | |
| | | | | | | |
Total loans considered impaired at period end | | $ | 6,066,187 | | | $ | 5,043,946 | |
Loans considered impaired for which there is a related allowance for loan loss: | | | | | | | | |
Outstanding loan balance | | | 4,972,626 | | | | 5,043,946 | |
Related allowance established | | | 863,742 | | | | 553,575 | |
Loans considered impaired for which no related allowance for loan loss was established | | | 1,093,561 | | | | - | |
Average annual investment in impaired loans | | | 9,365,634 | | | | 5,252,522 | |
Interest income recognized on impaired loans during the period of impairment Cash basis | | $ | 183,264 | | | $ | 9,223 | |
As of December 31, 2009 and 2008, loans in nonaccrual status were approximately $6,001,000 and $2,693,000, respectively. Loans ninety days or more past due and still accruing interest as of December 31, 2009 and 2008, were approximately $63,000 and $9,000, respectively.
Transactions in the allowance for loan losses for the years ended December 31, 2009 and 2008 are summarized as follows:
| | | 2009 | | | 2008 | |
| Balance, beginning of year | | $ | 1,935,702 | | | $ | 1,370,235 | |
| Provision charged to operations | | | 3,478,372 | | | | 1,312,969 | |
| Recoveries | | | 135,830 | | | | 116,000 | |
| Charge-offs | | | (3,140,914 | ) | | | (863,502 | ) |
Balance, end of year | | $ | 2,408,990 | | | $ | 1,935,702 | |
NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT
Premises, furniture and equipment consisted of the following at December 31, 2009 and 2008:
| | | 2009 | | | 2008 | |
| Buildings | | $ | 2,834,862 | | | $ | 2,825,445 | |
| Land | | | 1,014,787 | | | | 1,014,787 | |
| Leasehold and land improvements | | | 104,450 | | | | 104,450 | |
| Furniture and equipment | | | 620,117 | | | | 606,710 | |
| Software | | | 63,373 | | | | 59,873 | |
| Transportation equipment | | | - | | | | 37,656 | |
Total | | | 4,637,589 | | | | 4,648,921 | |
Less, accumulated depreciation | | | (684,712 | ) | | | (491,197 | ) |
Premises, furniture and equipment, net | | $ | 3,952,877 | | | $ | 4,157,724 | |
Depreciation expense for the years ended December 31, 2009 and 2008 was $202,934 and $192,715, respectively.
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 6 - DEPOSITS
At December 31, 2009, the scheduled maturities of certificates of deposit and individual retirement accounts were as follows:
| Maturing In: | | Amount | |
2010 | | $ | 100,147,232 | |
| 2011 | | | 7,865,235 | |
| 2012 | | | 412,043 | |
| 2013 | | | 508,940 | |
| 2014 | | | 70,783 | |
Total | | $ | 109,004,233 | |
NOTE 7 - FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company had federal funds purchased and securities sold under agreements to repurchase which generally mature within one day. At December 31, 2009 there were no securities sold under agreements to repurchase. At December 31, 2009, the amortized cost of securities pledged to collateralize the repurchase when there is a balance, was $341,937 and the estimated fair value was $356,584. The securities underlying the agreements are held by a third-party custodian. At December 31, 2009, there were no federal funds purchased.
NOTE 8 - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consisted of the following at December 31, 2009 and 2008:
Description | | Interest Rate | | | 2009 | | | 2008 | |
| Fixed rate advances maturing: | | | | | | | | | |
September 20, 2012 | | | 3.86 | % | | $ | 8,000,000 | | | $ | 8,000,000 | |
December 17, 2009 | | | 3.71 | % | | | - | | | | 5,000,000 | |
June 29, 2009 | | | 3.15 | % | | | - | | | | 3,000,000 | |
July 28, 2009 | | | 3.04 | % | | | - | | | | 4,570,000 | |
August 28, 2009 | | | 3.02 | % | | | - | | | | 3,000,000 | |
| | | | | | | $ | 8,000,000 | | | $ | 23,570,000 | |
Scheduled principal reductions of Federal Home Loan Bank advances are as follows:
As collateral, the Company has pledged first mortgage loans on one to four family residential loans totaling $29,889,276, multifamily loans totaling $6,066,323 and commercial real estate loans totaling $53,672,181 at December 31, 2009 (see Note 4). The Company’s Federal Home Loan Bank stock, in the amount of $1,368,000, is pledged to secure the borrowings. Certain advances are subject to prepayment penalties.
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
Income tax expense (benefit) for the years ended December 31, 2009 and 2008 is summarized as follows:
| | | 2009 | | | 2008 | |
| Current portion | | | | | | |
Federal | | $ | (254,620 | ) | | $ | (130,182 | ) |
State | | | - | | | | - | |
Total current | | | (254,620 | ) | | | (130,182 | ) |
Deferred income tax expense (benefit) | | | (1,486,296 | ) | | | (144,704 | ) |
Income tax expense (benefit) | | $ | (1,740,916 | ) | | $ | (274,886 | ) |
The gross amounts of deferred tax assets and deferred tax liabilities are as follows at December 31, 2009 and 2008:
| | | 2009 | | | 2008 | |
| Deferred tax assets: | | | | | | |
Allowance for loan losses | | $ | 802,489 | | | $ | 464,955 | |
Organization and start-up costs | | | 85,287 | | | | 34,113 | |
Nonaccrual interest on loans | | | 99,069 | | | | 48,401 | |
Net operating loss carryforward | | | 645,103 | | | | - | |
Stock compensation | | | 160,429 | | | | 101,271 | |
Other Real Estate Owned allowance | | | 289,724 | | | | - | |
Other | | | 5,599 | | | | 3,961 | |
Total deferred tax assets | | | 2,087,700 | | | | 652,701 | |
Deferred tax liabilities: | | | | | | | | |
Accumulated depreciation | | | 73,836 | | | | 98,401 | |
Unrealized gain on securities | | | 50,741 | | | | 42,022 | |
Other | | | 25,641 | | | | 52,373 | |
Total deferred tax liabilities | | | 150,218 | | | | 192,796 | |
Net deferred tax asset | | $ | 1,937,482 | | | $ | 459,905 | |
Deferred tax assets represent the future tax benefit of deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. As of December 31, 2009, management believes it will fully realize 100% of the Company’s deferred tax asset.
A reconciliation between the income tax expense (benefit) and the amount computed by applying the federal statutory rate of 34% to income before income taxes follows:
| | | For the years ended December 31, | |
| | | 2009 | | | 2008 | |
| Tax expense (benefit) at statutory rate | | $ | (1,573,328 | ) | | $ | (254,205 | ) |
| State income tax, net of federal income tax benefit | | | (204,381 | ) | | | - | |
| Stock compensation expense | | | 39,344 | | | | 21,904 | |
| Other, net | | | (2,551 | ) | | | (28,638 | ) |
| | | $ | (1,740,916 | ) | | $ | (274,886 | ) |
The Company had analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions at December 31, 2009.
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 10 - LEASES
The Company leases a Kings Mountain branch location. The operating lease had an original term of two years and three months, expiring on March 31, 2010. Under the terms of the lease, the monthly rental payment is $2,650 or $31,800 per year.
The total lease expense included in the statement of operations for the years ended December 31, 2009 and December 31, 2008 was $37,308 and $43,072, respectively.
NOTE 11 - RELATED PARTY TRANSACTIONS
Certain parties (principally certain directors and executive officers of the Company, their immediate families and business interests) were loan customers of and had other transactions in the normal course of business with the Bank. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. As of December 31, 2009 and 2008, the Company had related party loans totaling approximately $7,485,902 and $6,446,723, respectively.
Deposits by directors, officers and their related interests, as of December 31, 2009 and 2008 approximated $2,586,000 and $3,523,000, respectively.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company is subject to claims and lawsuits which arise primarily in the ordinary course of business. Management is not aware of any legal proceedings which would have a material adverse effect on the financial position or operating results of the Company.
NOTE 13 - STOCK COMPENSATION PLAN
In 2005, the shareholders approved the Incentive Stock Option Plan (Incentive Plan) and the Nonstatutory Stock Option Plan (Nonstatutory Plan). The Incentive Plan provides for the granting of up to 267,755 stock options to purchase shares of the Company's common stock to officers and employees of the Company. The Company may grant awards for a term of up to ten years from the effective date of the Plan. Options may be exercised up to ten years after the date of grant. The per-share exercise price will be determined by the Option Committee of the Board of Directors, except that the exercise price of an incentive stock option may not be less than fair market value of the common stock on the grant date. At December 31, 2009, 183,922 options had been granted under the Incentive Plan.
The Nonstatutory Plan provides for the granting of up to 267,755 stock options to purchase shares of the Company's common stock to Directors of the Company. The Company may grant awards for a term of up to ten years from the effective date of the Plan. Options may be exercised up to ten years after the date of grant. The per-share exercise price will be determined by the Board of Directors, except that the exercise price of a nonstatutory stock option may not be less than fair market value of the common stock on the grant date. At December 31, 2009, 243,911 options had been granted under the Nonstatutory Plan.
A summary of the status of our stock option plans as of December 31, 2009 and 2008, and changes during the periods then ended are presented below.
| | | December 31, 2009 | | | December 31, 2008 | |
| | | Shares | | | Weighted- Average Exercise Price | | | Shares | | | Weighted- Average Exercise Price | |
Outstanding at beginning of year | | | 427,833 | | | $ | 7.65 | | | | 193,769 | | | $ | 8.80 | |
| Granted | | | - | | | | - | | | | 274,072 | | | | 7.00 | |
| Exercised | | | - | | | | - | | | | - | | | | - | |
| Forfeited | | | - | | | | - | | | | (40,008 | ) | | | 8.80 | |
| Outstanding at end of year | | | 427,833 | | | $ | 7.65 | | | | 427,833 | | | $ | 7.65 | |
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 13 - STOCK COMPENSATION PLAN - continued
The following table summarizes information about stock options outstanding under the Company’s plan at December 31, 2009:
| | Outstanding | Exercisable |
| Number of options | 427,833 | 147,131 |
| Weighted average remaining life | 7.9 years | 7.3 years |
| Weighted average exercise price | $ 7.65 | $ 8.84 |
The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of 2009 and the exercise price, multiplied by the number of in-the-money options) for options outstanding and exercisable at December 31, 2009 amounted to $0. This amount represents what would have been received by the option holder had all option holders exercised their options on December 31, 2009. The intrinsic value changes based on changes in the fair market value of the Company’s stock.
The Company measures the fair value of each option award on the date of grant using the Black-Scholes option pricing model with the following assumptions: the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant; the dividend yield is based on the Company's dividend yield at the time of the grant (subject to adjustment if the dividend yield on the grant date is not expected to approximate the dividend yield over the expected life of the options); the volatility factor is based on the historical volatility of the Company's stock (subject to adjustment if historical volatility is reasonably expected to differ from the past); the weighted-average expected life is based on the historical behavior of employees related to exercises, forfeitures and cancellations. These assumptions are summarized in Note 1 to these financial statements.
NOTE 14 - EARNINGS (LOSSES) PER SHARE
Basic earnings (losses) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive common share equivalents using the treasury stock method. Due to there being a net loss for 2008 and 2009, the dilutive common share equivalents outstanding were antidilutive; therefore, basic loss per share and diluted earnings per share were the same.
| | | 2009 | | | 2008 | |
| Basic earnings (losses) per share computation: | | | | | | |
Net earnings (loss) available to common shareholders | | $ | (3,072,316 | ) | | $ | (513,797 | ) |
| Average common shares outstanding – basic | | | 2,678,205 | | | | 2,678,205 | |
| Basic net earnings (losses) per share | | $ | (1.15 | ) | | $ | (0.19 | ) |
| | | | | | | | | |
| Diluted earnings (losses) per share computation: | | | 2009 | | | | 2008 | |
Net earnings (loss) available to common shareholders | | $ | (3,072,316 | ) | | $ | (513,797 | ) |
| Average common shares outstanding – basic | | | 2,678,205 | | | | 2,678,205 | |
Incremental shares from assumed conversions: Stock options and warrants | | | - | | | | - | |
| Average common shares outstanding – diluted | | | 2,678,205 | | | | 2,678,205 | |
| Diluted earnings (loss) per share | | $ | (1.15 | ) | | $ | (0.19 | ) |
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 15 - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct adverse material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.
The Company and the Bank are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. Only the strongest institutions are allowed to maintain capital at the minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the minimum.
As of December 31, 2009, management believes it is categorized as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events that management believes have changed the Company’s or the Bank’s categories.
The following table summarizes the capital amounts and ratios of the Company and the Bank and the regulatory minimum requirements at December 31, 2009 and 2008.
| | | Actual | | | For Capital Adequacy Purposes | | | To Be Well-Capitalized Under Prompt Corrective Action Provisions | |
| (Dollars in thousands) | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
| December 31, 2009 | | | | | | | | | | | | | | | | | | |
| The Company | | | | | | | | | | | | | | | | | | |
| Total capital (to risk-weighted assets) | | $ | 25,438 | | | | 18.26 | % | | $ | 11,143 | | | | 8.00 | % | | $ | 13,928 | | | | 10.00 | % |
| Tier I capital (to risk-weighted assets) | | | 23,688 | | | | 17.01 | % | | | 5,571 | | | | 4.00 | % | | | 8,357 | | | | 6.00 | % |
| Tier I capital (to average assets) | | | 23,688 | | | | 13.82 | % | | | 6,854 | | | | 4.00 | % | | | 8,568 | | | | 5.00 | % |
| The Bank | | | | | | | | | | | | | | | | | | | | | | | | |
| Total capital (to risk-weighted assets) | | $ | 25,438 | | | | 18.26 | % | | $ | 11,143 | | | | 8.00 | % | | $ | 13,928 | | | | 10.00 | % |
| Tier I capital (to risk-weighted assets) | | | 23,688 | | | | 17.01 | % | | | 5,571 | | | | 4.00 | % | | | 8,357 | | | | 6.00 | % |
| Tier I capital (to average assets) | | | 23,688 | | | | 13.82 | % | | | 6,854 | | | | 4.00 | % | | | 8,568 | | | | 5.00 | % |
December 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | |
| The Company | | | | | | | | | | | | | | | | | | | | | | | | |
| Total capital (to risk-weighted assets) | | $ | 26,012 | | | | 19.31 | % | | $ | 10,833 | | | | 8.00 | % | | $ | 13,540 | | | | 10.00 | % |
| Tier I capital (to risk-weighted assets) | | | 24,425 | | | | 18.14 | % | | | 5,416 | | | | 4.00 | % | | | 8,124 | | | | 6.00 | % |
| Tier I capital (to average assets) | | | 24,425 | | | | 14.19 | % | | | 6,974 | | | | 4.00 | % | | | 8,716 | | | | 5.00 | % |
| The Bank | | | | | | | | | | | | | | | | | | | | | | | | |
| Total capital (to risk-weighted assets) | | $ | 26,012 | | | | 19.21 | % | | $ | 10,833 | | | | 8.00 | % | | $ | 13,540 | | | | 10.00 | % |
| Tier I capital (to risk-weighted assets) | | | 24,425 | | | | 18.04 | % | | | 5,416 | | | | 4.00 | % | | | 8,124 | | | | 6.00 | % |
| Tier I capital (to average assets) | | | 24,425 | | | | 14.01 | % | | | 6,974 | | | | 4.00 | % | | | 8,716 | | | | 5.00 | % |
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 16 - UNUSED LINES OF CREDIT
At December 31, 2009, the Company had lines of credit to purchase federal funds up to $18,500,000 from unrelated financial institutions. At December 31, 2009, the Company had no outstanding borrowings on these lines. Under the terms of the arrangements, the Company may borrow at mutually agreed-upon rates for periods varying from one to thirty days. The Company also has a line of credit to borrow funds from the Federal Home Loan Bank up to 15% of the Bank's total assets, which totaled $26,510,000 as of December 31, 2009. As of December 31, 2009, the Bank had $8,000,000 in advances on this line.
NOTE 17 - PREFERRED STOCK
On January 23, 2009, the Company entered into a Letter Agreement, with the United States Department of the Treasury (the “Treasury”), pursuant to which the Company issued and sold to the Treasury (1) 3,500 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the Preferred Stock”) and (2) a warrant to purchase 80,153 shares of the Company’s common stock, $1.00 par value per share, for an aggregate purchase price of $3,500,000 in cash. The Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Company may redeem the Preferred Stock subject to consultation with the appropriate federal banking agency. The Preferred Stock is generally nonvoting. The warrant has a 10-year term and is immediately exercisable upon its issuance, with an initial per share exercise price of $6.55. The warrant has anti-dilution protections, registration rights, and certain other protections for the holder. Pursuant to the Purchase Agreement, the Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant.
The Series A Preferred Stock has a preference over the Company’s common stock upon liquidation. Dividends on the preferred stock, if declared, are payable quarterly in arrears. The Company’s ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, its common stock is subject to certain restrictions in the event that the company fails to pay or set aside full dividends on the preferred stock for the latest completed dividend period.
NOTE 18 - RESTRICTIONS ON DIVIDENDS, LOANS, OR ADVANCES
The Company’s dividend payments will be made from dividends received from the Bank. The Bank, as a North Carolina banking corporation, may pay dividends only out of undivided profits as determined pursuant to North Carolina General Statutes. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the Bank.
NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual notional amount of the instrument. Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments to extend credit as it does for on-balance sheet instruments. Letters of credit are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as other lending facilities.
Collateral held for commitments to extend credit and letters of credit varies but may include accounts receivable, inventory, property, plant, equipment and income-producing commercial properties.
The following table summarizes the Company’s off-balance sheet financial instruments whose contract amounts represent credit risk at December 31, 2009 and 2008:
| | | 2009 | | | 2008 | |
| Commitments to extend credit | | $ | 10,358,000 | | | $ | 12,131,000 | |
| Financial standby letters of credit | | | 180,000 | | | | 180,000 | |
| | | $ | 10,538,000 | | | $ | 12,311,000 | |
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective January 1, 2008, the Company adopted ASC Topic 820, Fair Value Measurements and Disclosures, which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. ASC Topic 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available for sale investment securities) or on a nonrecurring basis (for example, impaired loans).
ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
| Level 1 | Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries, other securities that are highly liquid and are actively traded in over-the-counter markets and money market funds. |
| Level 2 | Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bond, corporate debt securities, and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans. |
| Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts. |
Assets measured at fair value on a recurring basis are as follows as of December 31, 2009:
| | | Quoted market price in active markets (Level 1) | | | Significant other observable inputs (Level 2) | | | Significant unobservable inputs (Level 3) | |
| | | | | | | | | | |
| Available-for-sale investments | | $ | - | | | $ | 5,031,414 | | | $ | - | |
| | | | | | | | | | | | | |
| Total | | $ | - | | | $ | 5,031,414 | | | $ | - | |
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS - continued
Assets measured at fair value on a recurring basis are as follows as of December 31, 2008:
| | | Quoted market price in active markets (Level 1) | | | Significant other observable inputs (Level 2) | | | Significant unobservable inputs (Level 3) | |
| | | | | | | | | | |
| Available-for-sale investments | | $ | - | | | $ | 4,638,214 | | | $ | - | |
| | | | | | | | | | | | | |
| Total | | $ | - | | | $ | 4,638,214 | | | $ | - | |
The Company had no liabilities carried at fair value or measured at fair value on a recurring basis at December 31, 2009 or 2008.
Assets measured at fair value on a non-recurring basis are as follows as of December 31, 2009:
| | | Quoted market price in active markets (Level 1) | | | Significant other observable inputs (Level 2) | | | Significant unobservable inputs (Level 3) | |
| | | | | | | | | | |
| Impaired loans | | $ | - | | | $ | 6,066,187 | | | $ | - | |
| Real estate acquired through foreclosure | | | | | | | 2,050,272 | | | | | |
| | | | | | | | | | | | | |
| Total | | $ | - | | | $ | 8,116,459 | | | $ | - | |
Assets measured at fair value on a non-recurring basis are as follows as of December 31, 2008:
| | | Quoted market price in active markets (Level 1) | | | Significant other observable inputs (Level 2) | | | Significant unobservable inputs (Level 3) | |
| | | | | | | | | | |
| Impaired loans | | $ | - | | | $ | 5,043,946 | | | $ | - | |
| Real estate acquired through foreclosure | | | | | | | 2,296,290 | | | | | |
| | | | | | | | | | | | | |
| Total | | $ | - | | | $ | 7,340,236 | | | $ | - | |
The Company had no liabilities carried at fair value or measured at fair value on a non-recurring basis at December 31, 2009 or 2008.
The Company is predominantly an asset based lender with real estate serving as collateral on a substantial majority of loans. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 2 inputs.
The Company has no assets or liabilities whose fair values are measured using Level 3 inputs.
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS - continued
The following table summarizes fair value estimates as of December 31, 2009 and 2008 for financial instruments, as defined by ASC Topic 825, excluding short-term financial assets and liabilities, for which carrying amounts approximate fair value, and financial instruments recorded at fair value on a recurring basis at December 31, 2009.
In accordance with ASC Topic 825, the Company has not included assets and liabilities that are not financial instruments in its disclosure, such as the value of the long-term relationships with the Company’s deposit, net premises and equipment, net core deposit intangibles, deferred taxes and other assets and liabilities. Additionally, the amounts in the table have not been updated since the date indicated; therefore the valuations may have changes since that point in time. For these reasons, the total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.
The following disclosures represent financial instruments in which the ending balance at December 31, 2009 and 2008 are not carried at fair value in its entirety on the Company’s Consolidated Balance Sheet.
Short-term Financial Instruments - The carrying value of short-term financial instruments, including cash and cash equivalents, time deposits placed, federal funds sold and purchased, repurchase agreements, and other short-term investments and borrowings, approximates the fair value of these instruments. These financial instruments generally expose the Corporation to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market.
Loans - Fair values were generally determined by discounting both principal and interest cash flows expected to be collected using an observable discount rate for similar instruments with adjustments that the Company believes a market participant would consider in determining fair value. The Company estimates the cash flows expected to be collected using internal credit risk, interest rate and prepayment risk models that incorporate the Company’s best estimate of current key assumptions, such as default rates, loss severity and prepayment speeds for the life of the loan.
Deposits - The fair value for certain deposits with stated maturities was calculated by discounting contractual cash flows using current market rates for instruments with similar maturities. The carrying value of foreign time deposits approximates fair value. For deposits with no stated maturities, the carrying amount was considered to approximate fair value and does not take into account the significant value of the cost advantage and stability of the Company’s long-term relationships with depositors.
Long-Term Debt - The Company uses quoted market prices for its long-term debt when available. When quoted market prices are not available, fair value is estimated based on current market interest rates and credit spreads for debt with similar maturities.
The carrying and fair values of certain financial instruments at December 31, 2009 and 2008 were as follows:
| | | December 31, 2009 | | | December 31, 2008 | |
| | | Carrying Amount | | | Estimated Fair Value | | | Carrying Amount | | | Estimated Fair Value | |
| Financial Assets: | | | | | | | | | | | | |
| Loans receivable, net | | $ | 137,566,000 | | | $ | 137,205,000 | | | $ | 137,735,000 | | | $ | 137,740,000 | |
Financial Liabilities: | | | | | | | | | | | | | | | | |
| Total deposits | | $ | 143,670,000 | | | $ | 139,206,000 | | | $ | 121,318,000 | | | $ | 121,451,000 | |
| FHLB advances | | $ | 8,000,000 | | | $ | 8,004,000 | | | $ | 23,570,000 | | | $ | 23,570,000 | |
AB&T FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 21 - AB&T FINANCIAL CORPORATION (PARENT COMPANY ONLY)
Presented below are the condensed financial statements for AB&T Financial Corporation (Parent Company only):
Condensed Balance Sheet
| | | December 31, | |
| | | 2009 | | | 2008 | |
Assets: Investment in banking subsidiary | | $ | 24,893,706 | | | $ | 24,194,101 | |
Liabilities and stockholders’ equity: | | | | | | | | |
Liabilities | | | - | | | | - | |
Stockholders’ equity | | $ | 24,893,706 | | | $ | 24,194,101 | |
Total liabilities and stockholders’ equity | | $ | 24,893,706 | | | $ | 24,194,101 | |
Condensed Statement of Operations
For the years ended December 31, 2009 and 2008
| | | 2009 | | | 2008 | |
| Income | | $ | - | | | $ | - | |
| Expenses | | | 269,175 | | | | 182,095 | |
Loss before income equity in undistributed losses of banking subsidiary | | | (269,175 | ) | | | (182,095 | ) |
Equity in undistributed losses of banking subsidiary | | | (2,617,343 | ) | | | (331,702 | ) |
Net loss | | $ | (2,886,518 | ) | | $ | (513,797 | ) |
Condensed Statement of Cash Flows
For the years ended December 31, 2009 and 2008
| | | 2009 | | | 2008 | |
| Cash flows from operating activities: | | | | | | |
Net loss | | $ | (2,886,518 | ) | | $ | (513,797 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | |
Stock based compensation expense | | | 269,175 | | | | 182,095 | |
Equity in undistributed losses of banking subsidiary | | | 2,617,343 | | | | 331,702 | |
Net cash used by operating activities | | | - | | | | - | |
Cash flows from investing activities: | | | | | | | | |
Dividends received from banking subsidiary | | | 141,944 | | | | - | |
Investment in banking subsidiary | | | (3,500,000 | ) | | | - | |
Net cash used by investing activities | | | (3,358,056 | ) | | | - | |
Cash flows from financing activities: | | | | | | | | |
Dividends, paid | | | (141,944 | ) | | | - | |
Proceeds from issuance of preferred stock, net | | | 3,363,150 | | | | - | |
Proceeds from issuance of stock warrants | | | 136,850 | | | | - | |
Net cash provided by financing activities | | | 3,358,056 | | | | - | |
| Increase (decrease) in cash | | | - | | | | - | |
| Cash and cash equivalents, beginning of year | | | - | | | | - | |
| Cash and cash equivalents, end of year | | $ | - | | | $ | - | |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
| (a) | As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)) pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective. |
| (b) | Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). A system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. |
| | All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may be inadequate due to changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. |
| | Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2009 based on the criteria established in a report entitled “Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission” and the interpretive guidance issued by the Commission in Release No. 34-55929. Based on this evaluation, the Company’s internal control over financial reporting was effective as of December 31, 2009. |
| | The Company is continuously seeking to improve the efficiency and effectiveness of its operations and of its internal controls. This results in modifications to its processes throughout the Company. However, there has been no change in its internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting. |
| | This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report. |
| ITEM 9B. | OTHER INFORMATION |
None.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Incorporated by reference from the discussion under the headings “Proposal 1: Election of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Meetings and Committees of the Board of Directors” of the Registrant’s proxy statement for the 2010 annual meeting of shareholders, to be filed with the Securities and Exchange Commission.
The Registrant has a code of ethics that is applicable, among others, to its principal executive officer and principal financial officer. The Registrant’s code of ethics will be provided to any person upon written request made to Daniel C. Ayscue, president and chief executive officer, AB&T Financial Corporation, 292 W. Main Avenue, Gastonia, NC 28052.
| ITEM 11. | EXECUTIVE COMPENSATION |
Incorporated by reference from the discussion under the headings “Executive Compensation” and “Director Compensation” of the Registrant’s proxy statement for the 2010 annual meeting of shareholders, to be filed with the Securities and Exchange Commission.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Incorporated by reference from the discussion under the heading “Beneficial Ownership of Voting Securities” of the Registrant’s proxy statement for the 2010 annual meeting of shareholders, to be filed with the Securities and Exchange Commission.
Stock Option Plans
Set forth below is certain information regarding the Registrant’s various stock option plans.
| Equity Compensation Plan Information |
Plan Category | | No. of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | No. of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | | (a) | | (b) | | (c) |
| | | | | | | |
| Equity compensation plans approved by security holders | | 427,833 | | $7.65 | | 107,677 |
| | | | | | | |
| Equity compensation plans not approved by security holders | | n/a | | n/a | | n/a |
| | | | | | | |
| Total | | 427,833 | | $7.65 | | 107,677 |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference from the discussion under the headings “Director Independence,” “Director Relationships,” and “Indebtedness of and Transactions with Management” of the Registrant’s proxy statement for the 2010 annual meeting of shareholders, to be filed with the Securities and Exchange Commission.
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference from the discussion under the headings “Proposal 3: Ratification of Independent Public Accountants” and “Report of the Audit Committee” of the Registrant’s proxy statement for the 2010 annual meeting of shareholders, to be filed with the Securities and Exchange Commission.
Part IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) List of Documents Filed as Part of this Report
(1) Financial Statements. The following consolidated financial statements are filed as part of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Operations for the Years Ended
December 31, 2009 and 2008
Consolidated Statements of Changes in Shareholders’ Equity and
Comprehensive Loss for the Years Ended December 31, 2009 and 2008
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2009 and 2008
Notes to Consolidated Financial Statements
| | (2) Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto. |
| | (3)Exhibits. The following is a list of exhibits filed as part of this report: |
No. Description
| | 3.1 | Articles of Incorporation of Registrant (incorporated by reference from Exhibit 3.01 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on May 20, 2008) |
| | 3.2 | Bylaws of Registrant (incorporated by reference from Exhibit 3.02 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on May 20, 2008) |
| | 3.3 | Articles of Amendment dated January 22, 2009, regarding Series A Preferred Stock (incorporated by reference from Exhibit 3.1 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on January 28, 2009) |
| | 4.1 | Specimen of Registrant’s common stock certificate (incorporated by reference from Exhibit 5.1 to Registrant’s Registration Statement on Form S-8, Registration No. 333-157471, as filed with the Securities and Exchange Commission on February 23, 2009) |
| | 4.2 | Specimen of Registrant’s series A preferred stock certificate (incorporated by reference from Exhibit 4.2 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on January 28, 2009) |
| | 4.3 | Warrant to Purchase Common Stock of AB&T Financial Corporation, dated January 23, 2009 (incorporated by reference from Exhibit 4.1 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on January 28, 2009) |
| | 10.1 | 2005 Incentive Stock Option Plan (incorporated by reference from Exhibit 10.05 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on May 20, 2008)* |
| | 10.2 | 2005 Nonstatutory Stock Option Plan (incorporated by reference from Exhibit 10.06 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on May 20, 2008)* |
| | 10.3 | Employment Agreement of Daniel C. Ayscue (incorporated by reference from Exhibit 10.02 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on May 20, 2008)* |
| | 10.4 | Employment Agreement of Eric Dixon (incorporated by reference from Exhibit 10.03 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on May 20, 2008)* |
| | 10.5 | Employment Agreement of Matthew J. Triplett (incorporated by reference from Exhibit 10.04 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on May 20, 2008)* |
| | 10.6 | Letter Agreement including the Securities Purchase Agreement- Standard Terms, between AB&T Financial Corporation and the United States Department of the Treasury, dated January 23, 2009 (incorporated by reference from Exhibit 10.1 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on January 28, 2009) |
| | 10.7 | Form of Executive Compensation Modification Agreement (incorporated by reference from Exhibit 10.2 to Registrant’s Form 8-K as filed with the Securities and Exchange Commission on January 28, 2009)* |
| | 21.1 | Subsidiaries (filed herewith) |
| | 23.1 | Consent of Elliott Davis, PLLC (filed herewith) |
| | 31.1 | Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) (filed herewith) |
| | 31.2 | Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) (filed herewith) |
| | 32.1 | Certification of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
| | 99.1 | Certification of Principal Executive Officer pursuant to section 111(b)(4) of the Emergency Economic Stabilization Act of 2008, as amended (filed herewith) |
| | 99.2 | Certification of Principal Financial Officer pursuant to section 111(b)(4) of the Emergency Economic Stabilization Act of 2008, as amended (filed herewith) |
_________________________
* Compensatory Plan or Management Contract
| | (b) Exhibits. The exhibits required by Item 601 of Regulation S-K are either filed as part of the report or incorporated by reference herein. |
| | (c) Financial Statements and Schedules Excluded from Annual Report. There are no other financial statements and financial statement schedules which were excluded from the Annual Report to Stockholders pursuant to Rule 14a-3(b) which are required to be included herein. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
AB&T FINANCIAL CORPORATION
Registrant
By: /s /Daniel C. Ayscue______________
Daniel C. Ayscue
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 30, 2010
Pursuant to the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Kenneth Appling, Director | March 30, 2010 |
Roger Mobley, Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | March 30, 2010 |
Joseph H. Morgan, Director | March 30, 2010 |
Wayne F. Shovelin., Director | March 30, 2010 |
David W. White, Director | March 30, 2010 |
EXHIBIT INDEX
No. Description
| | 3.1 | Articles of Incorporation of Registrant* |
| | 3.3 | Articles of Amendment* |
| | 4.1 | Specimen of Registrant’s common stock certificate* |
| | 4.2 | Specimen of Registrant’s series A preferred stock certificate* |
| | 4.3 | Warrant to Purchase Common Stock* |
| | 10.1 | 2005 Incentive Stock Option Plan* |
| | 10.2 | 2005 Nonstatutory Stock Option Plan* |
| | 10.3 | Employment Agreement of Daniel C. Ayscue* |
| | 10.4 | Employment Agreement of Eric Dixon* |
| | 10.5 | Employment Agreement of Matthew J. Triplett* |
| | 10.6 | Letter Agreement with the United States Department of the Treasury* |
| | 10.7 | Form of Executive Compensation Modification Agreement* |
| | 23.1 | Consent of Elliott Davis, PLLC |
31.1 Certification of the Principal Executive Officer pursuant to Rule 13a-14(a)
31.2 Certification of the Principal Financial Officer pursuant to Rule 13a-14(a)
| | 32.1 | Certification of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | 99.1 | Certification of Principal Executive Officer pursuant to section 111(b)(4) of the Emergency Economic Stabilization Act of 2008, as amended |
| | 99.2 | Certification of Principal Financial Officer pursuant to section 111(b)(4) of the Emergency Economic Stabilization Act of 2008, as amended |
_________________________
* Incorporated by reference
Exhibit 21.1
Subsidiaries
| | Alliance Bank & Trust Company, a North Carolina banking corporation |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors
AB&T Financial Corporation
/s/ Elliott Davis, PLLC
Elliott Davis, PLLC
Charlotte, North Carolina
March 29, 2010
Exhibit 31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)
I, Daniel C. Ayscue, certify that:
| | 1. | I have reviewed this annual report on Form 10-K of AB&T Financial Corporation; |
| | 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| | 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| | 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| | a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| | b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| | c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| | d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| | 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): |
| | a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
| | b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: March 30, 2010 /s/ Daniel C. Ayscue
Daniel C. Ayscue
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)
I, Roger A. Mobley, certify that:
| | 1. | I have reviewed this annual report on Form 10-K of AB&T Financial Corporation; | |
| | 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| | 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| | 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| | a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| | b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| | c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| | d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| | 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): |
| | a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
| | b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: March 30, 2010 /s/ Roger A. Mobley
Roger A. Mobley
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The undersigned hereby certify that, to his knowledge, (i) the Form 10-K filed by AB&T Financial Corporation (the “Issuer”) for the year ended December 31, 2009, fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 and (ii) the information contained in that report fairly presents, in all material respects, the financial condition and results of operations of the Issuer on the dates and for the periods presented therein.
Date: March 30, 2010
| /s/Daniel C. Ayscue |
| Daniel C. Ayscue |
| President and Chief Executive Officer |
| (Principal Executive Officer) |
| |
| /s/Roger A. Mobley |
| Roger A. Mobley |
| Executive Vice President and |
| Chief Financial Officer |
| (Principal Financial Officer) |
Exhibit 99.1
Certification of Principal Executive Officer
Pursuant to
Section 111(b)(4)
of the
Emergency Economic Stabilization Act of 2008, as Amended
I, Daniel C. Ayscue, certify, based on my knowledge, that:
| (i) | The compensation committee of AB&T Financial Corporation has discussed, reviewed, and evaluated with senior risk officers at least every six months during the period beginning on September 14, 2009, and ending on December 31, 2009 (the “Applicable Period”), the senior executive officer (“SEO”) compensation plans and employee compensation plans and the risks these plans pose to AB&T Financial Corporation; |
| (ii) | The compensation committee of AB&T Financial Corporation has identified and limited during the Applicable Period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of AB&T Financial Corporation, and during that same Applicable Period has identified any features of the employee compensation plans that pose risks to AB&T Financial Corporation and has limited those features to ensure that AB&T Financial Corporation is not unnecessarily exposed to risks; |
| (iii) | The compensation committee has reviewed, at least every six months during the Applicable Period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of AB&T Financial Corporation to enhance the compensation of an employee and has limited any such features; |
| (iv) | The compensation committee of AB&T Financial Corporation will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above; |
| (v) | The compensation committee of AB&T Financial Corporation will provide a narrative description of how it limited during any part of the most recently completed fiscal year that included a TARP period the features in |
| | (A) | SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of AB&T Financial Corporation; |
| | (B) | Employee compensation plans that unnecessarily expose AB&T Financial Corporation to risks; and |
| | (C) | Employee compensation plans that could encourage the manipulation of reported earnings of AB&T Financial Corporation to enhance the compensation of an employee; |
| (vi) | AB&T Financial Corporation has required that bonus payments, as defined in the regulations and guidance established under section 111 of EESA (“bonus payments”), of the SEOs and twenty next most highly compensated employees be subject to a recovery or ‘‘clawback’’ provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria; |
| (vii) | AB&T Financial Corporation has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to an SEO or any of the next five most highly compensated employees during the period beginning on June 15, 2009 and ending on December 31, 2009; |
| (viii) | AB&T Financial Corporation has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during the period beginning on June 15, 2009 and ending on December 31, 2009. |
| (ix) | The board of directors of AB&T Financial Corporation has established an excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, by September 14, 2009; this policy has been provided to Treasury and its primary regulatory agency; AB&T Financial Corporation and its employees have complied with this policy during the applicable period; and any expenses that, pursuant to this policy, required approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved; |
| (x) | AB&T Financial Corporation will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during the period beginning June 15, 2009 and ending on December 31, 2009; |
| (xi) | AB&T Financial Corporation will disclose the amount, nature, and justification for the offering during the period beginning June 15, 2009 and ending with December 31, 2009 of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii); |
| (xii) | AB&T Financial Corporation will disclose whether AB&T Financial Corporation, the board of directors of AB&T Financial Corporation, or the compensation committee of AB&T Financial Corporation has engaged during the period beginning June 15, 2009 and ending December 31, 2009, a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period; |
| (xiii) | AB&T Financial Corporation has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during the period beginning June 15, 2009 and ending December 31, 2009; |
| (xiv) | AB&T Financial Corporation has substantially complied with all other requirements related to employee compensation that are provided in the agreement between AB&T Financial Corporation and Treasury, including any amendments; |
| (xv) | AB&T Financial Corporation has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year and the most recently completed fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified; and |
| (xvi) | I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both. |
March 30, 2010 /s/ Daniel C. Ayscue
Daniel C. Ayscue
President and Chief Executive Officer
Exhibit 99.2
Certification of Principal Financial Officer
Pursuant to
Section 111(b)(4)
of the
Emergency Economic Stabilization Act of 2008, as Amended
I, Roger A. Mobley, certify, based on my knowledge, that:
| (i) | The compensation committee of AB&T Financial Corporation has discussed, reviewed, and evaluated with senior risk officers at least every six months during the period beginning on September 14, 2009, and ending on December 31, 2009 (the “Applicable Period”), the senior executive officer (“SEO”) compensation plans and employee compensation plans and the risks these plans pose to AB&T Financial Corporation; |
| (ii) | The compensation committee of AB&T Financial Corporation has identified and limited during the Applicable Period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of AB&T Financial Corporation, and during that same Applicable Period has identified any features of the employee compensation plans that pose risks to AB&T Financial Corporation and has limited those features to ensure that AB&T Financial Corporation is not unnecessarily exposed to risks; |
| (iii) | The compensation committee has reviewed, at least every six months during the Applicable Period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of AB&T Financial Corporation to enhance the compensation of an employee and has limited any such features; |
| (iv) | The compensation committee of AB&T Financial Corporation will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above; |
| (v) | The compensation committee of AB&T Financial Corporation will provide a narrative description of how it limited during any part of the most recently completed fiscal year that included a TARP period the features in |
| | (A) | SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of AB&T Financial Corporation; |
| | (B) | Employee compensation plans that unnecessarily expose AB&T Financial Corporation to risks; and |
| | (C) | Employee compensation plans that could encourage the manipulation of reported earnings of AB&T Financial Corporation to enhance the compensation of an employee; |
| (vi) | AB&T Financial Corporation has required that bonus payments, as defined in the regulations and guidance established under section 111 of EESA (“bonus payments”), of the SEOs and twenty next most highly compensated employees be subject to a recovery or ‘‘clawback’’ provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria; |
| (vii) | AB&T Financial Corporation has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to an SEO or any of the next five most highly compensated employees during the period beginning on June 15, 2009 and ending on December 31, 2009; |
| (viii) | AB&T Financial Corporation has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during the period beginning on June 15, 2009 and ending on December 31, 2009. |
| (ix) | The board of directors of AB&T Financial Corporation has established an excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, by September 14, 2009; this policy has been provided to Treasury and its primary regulatory agency; AB&T Financial Corporation and its employees have complied with this policy during the applicable period; and any expenses that, pursuant to this policy, required approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved; |
| (x) | AB&T Financial Corporation will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during the period beginning June 15, 2009 and ending on December 31, 2009; |
| (xi) | AB&T Financial Corporation will disclose the amount, nature, and justification for the offering during the period beginning June 15, 2009 and ending with December 31, 2009 of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii); |
| (xii) | AB&T Financial Corporation will disclose whether AB&T Financial Corporation, the board of directors of AB&T Financial Corporation, or the compensation committee of AB&T Financial Corporation has engaged during the period beginning June 15, 2009 and ending December 31, 2009, a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period; |
| (xiii) | AB&T Financial Corporation has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during the period beginning June 15, 2009 and ending December 31, 2009; |
| (xiv) | AB&T Financial Corporation has substantially complied with all other requirements related to employee compensation that are provided in the agreement between AB&T Financial Corporation and Treasury, including any amendments; |
| (xv) | AB&T Financial Corporation has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year and the most recently completed fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified; and |
| (xvi) | I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both. |
March 30, 2010
/s/ Roger A. Mobley
Roger A. Mobley
Executive Vice President
and Chief Financial Officer
