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ASBB > SEC Filings for ASBB > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for ASB BANCORP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ASB BANCORP INC


9-May-2013

Quarterly Report


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

A Caution About Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements, which can be identified by the use of words such as "believes," "expects," "anticipates," "estimates" or similar expressions. Forward-looking statements include, but are not limited to:

statements of our goals, intentions and expectations;

statements regarding our business plans, prospects, growth and operating strategies;

statements regarding the quality of our loan and investment portfolios; and

estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

general economic conditions, either nationally or in our primary market area, that are worse than expected;

a continued decline in real estate values;

changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

increased competitive pressures among financial services companies;

changes in consumer spending, borrowing and savings habits;

legislative, regulatory or supervisory changes that adversely affect our business;

adverse changes in the securities markets;

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board; and

the risks outlined in the "Risk Factors" section of our Annual Report on Form 10-K.

Any of the forward-looking statements that we make in this quarterly report and in other public statements we make may later prove incorrect because of inaccurate assumptions, the factors illustrated above or other factors that we cannot foresee. Consequently, no forward-looking statement can be guaranteed.

Except as required by applicable law or regulation, ASB Bancorp, Inc. does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Critical Accounting Policies

During the three-month period ended March 31, 2013, there were no significant changes in critical accounting policies or the application of critical accounting policies as disclosed in the our audited consolidated financial statements and related footnotes for the year ended December 31, 2012 included in the Company's Annual Report on Form 10-K.


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We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. The following represent our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to earnings. Management's estimates of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impaired loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance monthly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect our earnings. See notes 1 and 4 of the notes to the consolidated financial statements included in this quarterly report.

Fair Value of Investments. Securities are characterized as available for sale or held to maturity based on management's ability and intent regarding such investment at acquisition. On an ongoing basis, management estimates the fair value of its investment securities based on information and assumptions it deems reliable and reasonable, which may be quoted market prices or if quoted market prices are not available, fair values extrapolated from the quoted prices of similar instruments. Based on this information, an assessment must be made as to whether any decline in the fair value of an investment security should be considered as an other than temporary impairment and recorded in noninterest income as a loss on investments. The determination of such impairment is subject to a variety of factors, including management's judgment and experience. See notes 2 and 7 of the notes to the consolidated financial statements included in this quarterly report.

Deferred Tax Assets. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. A reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. See note 1 of the notes to the consolidated financial statements included in this quarterly report.


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Pension Plan. The Company has a noncontributory defined benefit pension plan. This plan is accounted for under the provisions of ASC Topic 715:
Compensation-Retirement Benefits, which requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The funded status of a benefit plan is measured as the difference between plan assets at fair value and the benefit obligation. For a pension plan, the benefit obligation is the projected benefit obligation. ASC Topic 715 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. Management must make certain estimates and assumptions when determining the projected benefit obligation. These estimates and assumptions include the expected return on plan assets, the rate of compensation increases over time, and the appropriate discount rate to be used in determining the present value of the obligation. The Bank amended its pension plan to curtail or eliminate benefits under the plans for services to be performed in future periods. The amendment resulted in a one-time credit for prior service costs recognized at the time of curtailment and a recurring reduction in periodic costs recognized for obligations under the pension plan. See notes 1 and 5 of the notes to the consolidated financial statements included in this quarterly report.

Valuation of Stock-Based Compensation. The Company accounts for its stock options and restricted stock in accordance with ASC Topic 718: Compensation - Stock Compensation. ASC Topic 718 requires companies to expense the fair value of stock-based compensation. Management uses the Black-Scholes option valuation model and the Intrinsic Value model to estimate the fair value of stock options and restricted stock, respectively. These models require the input of highly subjective assumptions, including expected stock price volatility and option life stipulated for restricted stock awards. These subjective input assumptions materially affect the fair value estimate.

Introduction

This Management's Discussion and Analysis is provided to help readers understand how we evaluate our financial condition and results of operations. The following discussions are intended to provide a general overview of our financial condition at March 31, 2013 and our operating performance for the three-month period ended March 31, 2013. Readers seeking more in-depth information should read the more detailed discussions below as well as the consolidated financial statements and related notes included under Item 1 of this quarterly report.

All amounts presented are consolidated data unless otherwise specified. Uncertainty and future events could cause changes in accounting estimates that have material effects on the financial position and results of operations in future periods.


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Comparison of Financial Condition at March 31, 2013 and December 31, 2012

The following table provides the changes in our significant asset and liability
categories at March 31, 2013 compared to December 31, 2012.



                                         March 31,         December 31,
(dollars in thousands)                      2013               2012            $ change        % change

Interest-earning assets
Interest-earning deposits with banks
and overnight and short-term
investments                              $   42,921       $       37,029       $   5,892            15.9 %
Investment securities                       261,880              243,385          18,495             7.6 %
Investments held at cost                      3,131                3,429            (298 )          -8.7 %
Loans held for sale                          11,603                9,759           1,844            18.9 %
Loans receivable, net of deferred
fees                                        395,540              387,721           7,819             2.0 %

Total interest-earning assets               715,075              681,323          33,752             5.0 %


Non-interest-earning assets
Cash and due from banks                       7,400               10,361          (2,961 )         -28.6 %
Allowance for loan losses                    (8,553 )             (8,513 )           (40 )          -0.5 %
Premises and equipment, net of
accumulated depreciation                     13,184               13,306            (122 )          -0.9 %
Foreclosed real estate, net of
reserves                                     18,128               19,411          (1,283 )          -6.6 %
Deferred income tax assets, net of
deferred income tax liabilities               5,443                5,450              (7 )          -0.1 %
Securities sold but not settled                  -                21,260         (21,260 )        -100.0 %
Other assets                                  6,845                6,756              89             1.3 %

Total non-interest-earning assets            42,447               68,031         (25,584 )         -37.6 %


Total assets                             $  757,522       $      749,354       $   8,168             1.1 %


Interest-bearing liabilities
Interest-bearing deposits                $  521,206       $      513,004       $   8,202             1.6 %
Overnight and short-term borrowings             618                  411             207            50.4 %
Federal Home Loan Bank advances              50,000               50,000              -              0.0 %

Total interest-bearing liabilities          571,824              563,415           8,409             1.5 %


Non-interest-bearing liabilities
Non-interest-bearing deposits                68,420               65,295           3,125             4.8 %
Accounts payable and other
liabilities                                   9,845                9,115             730             8.0 %

Total non-interest-bearing
liabilities                                  78,265               74,410           3,855             5.2 %


Total liabilities                           650,089              637,825          12,264             1.9 %


Total equity                                107,433              111,529          (4,096 )          -3.7 %


Total liabilities and equity             $  757,522       $      749,354       $   8,168             1.1 %


Cash and cash equivalents                $   50,321       $       47,390       $   2,931             6.2 %
Total core deposits (excludes
certificate accounts)                       398,338              389,095           9,243             2.4 %
Total certificates of deposit               191,288              189,204           2,084             1.1 %
Total deposits                              589,626              578,299          11,327             2.0 %
Total funding liabilities                   640,244              628,710          11,534             1.8 %


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Assets. Total assets increased $8.1 million, or 1.1%, to $757.5 million at March 31, 2013 from $749.4 million at December 31, 2012. Cash and cash equivalents increased $2.9 million, or 6.2%, to $50.3 million at March 31, 2013 from $47.4 million at December 31, 2012. Investment securities increased $18.5 million, or 7.6%, to $261.9 million at March 31, 2013 from $243.4 million at December 31, 2012, primarily due to the reinvestment of proceeds from the sale of investment securities in the fourth quarter of 2012 that settled in the first quarter of 2013. Loans receivable, net of deferred fees, increased $7.8 million, or 2.0%, to $395.5 million at March 31, 2013 from $387.7 million at December 31, 2012 as new loan originations exceeded loan repayments, prepayments, and foreclosures.

Loan originations totaled $75.2 million for the three months ended March 31, 2013 compared to $48.4 million for the three months ended March 31, 2012. Residential mortgage loan originations totaled $41.1 million and residential construction and land development loan originations totaled $3.1 million for the three months ended March 31, 2013 compared to $23.8 million and $3.9 million, respectively, for the comparable period of 2012. Originations of commercial mortgage loans totaled $20.7 million for the three months ended March 31, 2013 compared to $15.0 million for the same period in 2012. Originations of commercial construction and land development loans totaled $2.9 million and $1.1 million for the three-month period ended March 31, 2013 and March 31, 2012, respectively. Commercial and industrial loan originations totaled $2.2 million for the three months ended March 31, 2013 compared to $2.7 million for the three months ended March 31, 2012. Revolving mortgage and consumer loan originations totaled $5.1 million for the three months ended March 31, 2013 compared to $2.0 million for the same period in 2012. The increase in origination activity was offset by $32.0 million in routine loan payments, prepayments, and payoffs and $33.3 million in loan sales for the three months ended March 31, 2013 compared to $42.0 million in routine payments, prepayments, and payoffs and $19.8 million in loan sales for the three months ended March 31, 2012.

Nonperforming assets. Nonperforming assets totaled $19.7 million, or 2.60% of total assets, at March 31, 2013, compared to $20.6 million, or 2.74% of total assets, at December 31, 2012. Nonperforming assets included $1.5 million in nonperforming loans and $18.1 million in foreclosed real estate at March 31, 2013, compared to $1.2 million and $19.4 million, respectively, at December 31, 2012.

Nonperforming loans increased $397,000, or 34.5%, to $1.5 million at March 31, 2013 from $1.2 million at December 31, 2012. The increase in nonperforming loans to March 31, 2013 from December 31, 2012 was primarily attributable to the addition of one loan that stopped performing during the period. At March 31, 2013, nonperforming loans included one commercial mortgage in the amount of $389,000, three commercial and industrial loans that totaled $204,000, ten residential mortgage loans that totaled $830,000, and one home equity loan in the amount of $95,000. As of March 31, 2013, the nonperforming loans had specific reserves of $191,000.

Troubled debt restructurings at March 31, 2013 totaled $5.4 million compared to $5.2 million at December 31, 2012. There were three additions to troubled debt restructurings during the three months ended March 31, 2013. At March 31, 2013, $116,000 of the total $5.4 million of trouble debt restructurings were not performing.


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Foreclosed real estate at March 31, 2013 included 14 properties with a total carrying value of $18.1 million compared to 18 properties with a total carrying value of $19.4 million at December 31, 2012. During the three months ended March 31, 2013, there was one new property in the amount of $40,000 added to foreclosed real estate, while five properties totaling $1.3 million were sold, including one with a private mortgage insurance settlement pending. The Bank also added $59,000 in loss provisions.

Liabilities. Total deposits increased $11.3 million, or 2.0%, to $589.6 million at March 31, 2013 from $578.3 million at December 31, 2012. During the three months ended March 31, 2013, the Company continued its focus on core deposit growth, from which it excludes certificates of deposit. Core deposits increased $9.2 million, or 2.4%, to $398.3 million at March 31, 2013 from $389.1 million at December 31, 2012. Non-interest-bearing deposits increased $3.1 million, or 4.7%, to $68.4 million at March 31, 2013 from $65.3 million at December 31, 2012. Over the same period, certificates of deposit increased $2.1 million, or 1.1%, to $191.3 million at March 31, 2013 from $189.2 million at December 31, 2012.

Results of Operations for the Three Months Ended March 31, 2013 and 2012

Overview. Net income was $740,000, or $0.15 per share, for the three months ended March 31, 2013 compared to net income of $284,000, or $0.06 per share, for the three months ended March 31, 2012. Income before income taxes increased $671,000 primarily due to a $486,000 decrease in provision for loan losses, and a $246,000 decrease in total noninterest expenses, which were partially offset by a $70,000 decrease in total noninterest income. A $793,000 decrease in interest and dividend income was offset by a $802,000 decrease in interest expense.

                                                  Three Months Ended
                                                      March 31,
(dollars in thousands)                            2013           2012         $ change         % change

Interest and dividend income                   $    5,746       $ 6,539      $     (793 )          -12.1 %
Interest expense                                    1,117         1,919            (802 )          -41.8 %
Net interest income                                 4,629         4,620               9              0.2 %
Provision for loan losses                             112           598            (486 )          -81.3 %
Net interest income after provision for
loan losses                                         4,517         4,022             495             12.3 %
Noninterest income                                  1,888         1,958             (70 )           -3.6 %
Noninterest expense                                 5,320         5,566            (246 )           -4.4 %
Income before income tax provision                  1,085           414             671            162.1 %
Income tax provision                                  345           130             215            165.4 %
Net income                                            740           284             456            160.6 %

Net Interest Income. Net interest income was $4.6 million for each of the three-month periods ended March 31, 2013 and March 31, 2012. Total interest and dividend income decreased by $793,000, or 12.1%, to $5.7 million for the three months ended March 31, 2013 compared to $6.5 million for the three months ended March 31, 2012. The decrease in interest and dividend income was primarily a result of a 12 basis point decrease in yields on interest-earning assets, a $31.6 million decrease in average loan balances, and a $20.9 million decrease in the average balances of all other interest-earning assets, including investments. The decline in total interest and dividend income was offset by a $802,000, or 41.8%, decrease in interest expense to $1.1 million for the three months ended March 31, 2013 compared to $1.9 million for the three months ended March 31, 2012. The decrease in interest expense resulted from a 46 basis point reduction in the average rate paid on interest-bearing liabilities and a decline of $48.2 million in the average balances of interest-bearing liabilities, reflecting a fourth quarter 2012 $10.0 million prepayment of a FHLB advance, when comparing the three-month periods.


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Interest income on loans decreased $500,000, or 9.8%, to $4.6 million during the three months ended March 31, 2013, primarily due to a $31.6 million, or 7.3%, decrease in average outstanding loans to $399.6 million during the period. Loan originations increased $26.8 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Residential mortgage loan sales increased $13.5 million, while loan principal repayments decreased $11.3 million to $30.7 million for the three months ended March 31, 2013 from $42.0 million for the three months ended March 31, 2012. The average balance of investment and mortgage-backed securities increased $4.1 million, or 1.6%, to $260.4 million for the three months ended March 31, 2013 compared to $256.3 million for the three months ended March 31, 2012. The increased average balances of investment securities and mortgage-backed securities were primarily due to the reinvestment into securities of proceeds from loan repayments and from sales of foreclosed properties.

The decrease in interest expense of $802,000 was primarily attributable to a decrease in interest expense on interest-bearing deposits, which declined to $632,000 for the three months ended March 31, 2013 from $1.3 million for the comparable three months of 2012 as the average rate paid on interest-bearing deposits declined 46 basis points to 0.50% from 0.96% and average balances of interest-bearing deposits decreased $38.1 million to $512.6 million from $550.7 million for the respective periods. Average borrowings decreased $10.2 million to $50.6 million from $60.8 million for the comparable periods.

Provision for Loan Losses. The provision for loan losses was $112,000 for the three months ended March 31, 2013 compared to $598,000 for the three months ended March 31, 2012. The decrease in the provision was primarily due to a decrease in charge-offs, which were $105,000 for the first three months of 2013 compared to $716,000 million for the first three months of 2012.

Noninterest Income. Noninterest income decreased $70,000 to $1.9 million for the three months ended March 31, 2013 from $2.0 million for the three months ended March 31, 2012. Factors that contributed to the decrease in noninterest income during the 2013 period were decreases of $509,000 in gains on sale of investment securities and $116,000 in service charge income, partially offset by increases of $261,000 in mortgage banking income and $242,000 in other noninterest income, primarily related to an increase of $114,000 in other income from a SBIC investment. The increase in mortgage banking income was attributable to higher volumes of mortgage loans sold. The decrease in deposit and other service charge income was primarily the result of lower deposit overdraft fees.

Noninterest Expense. Noninterest expense decreased $246,000, or 4.4%, to $5.3 million for the three months ended March 31, 2013 compared to $5.6 million for the three months ended March 31, 2012. The primary reasons for the decrease were decreases of $181,000 in salaries and benefits, and $58,000 in professional and outside services, which were partially offset by an increase of $53,000 in foreclosed property expenses. The decrease in salaries and benefits was primarily due to a $481,000 one-time credit to pension expense resulting from the curtailment of benefits for future service, that was partially offset by increases of $164,000 in expenses related to the Bank's new equity incentive plan and $126,000 in compensation expenses. The increase in foreclosed property expenses related primarily to the increase in the loss provision compared to the prior year.

Income Tax Expense. Income tax expense increased by $215,000 for the three months ended March 31, 2013 compared to the three-month period ended March 31, 2012, primarily due to an increase in pre-tax income. The effective tax rate was 31.80% for the three months ended March 31, 2013 compared to 31.40% for the three months ended March 31, 2012, primarily due to the effect of lower tax-exempt income relative to pre-tax income.


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Average Balances and Yields

The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs are derived by dividing annualized income or expense by the average balances of assets or liabilities for the periods presented. Average balances have been calculated using daily balances. Nonaccrual loans are included in average balances only. Loan fees are included in interest income on loans and are not material. The yields on tax exempt loans and municipal investment securities have been calculated on a tax equivalent basis using a federal marginal tax rate of 34%.


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