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ASBB > SEC Filings for ASBB > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for ASB BANCORP INC

Form 10-Q for ASB BANCORP INC


8-Aug-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- and six-month periods ended June 30, 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 plan 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 stock option 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 June 30, 2013 and our operating performance for the three- and six-month periods ended June 30, 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 June 30, 2013 and December 31, 2012

The following table provides the changes in our significant asset and liability
categories at June 30, 2013 compared to December 31, 2012.



                                                 June 30,        December 31,
(dollars in thousands)                             2013              2012           $ change       % change

Interest-earning assets
Interest-earning deposits with banks and
overnight and short-term investments             $  28,397      $       37,029      $  (8,632 )        -23.3 %
Investment securities                              248,501             243,385          5,116            2.1 %
Investments held at cost                             3,131               3,429           (298 )         -8.7 %
Loans held for sale                                  9,051               9,759           (708 )         -7.3 %
Loans receivable, net of deferred fees             417,790             387,721         30,069            7.8 %

Total interest-earning assets                      706,870             681,323         25,547            3.7 %


Non-interest-earning assets
Cash and due from banks                              9,892              10,361           (469 )         -4.5 %
Allowance for loan losses                           (8,523 )            (8,513 )          (10 )         -0.1 %
Premises and equipment, net of accumulated
depreciation                                        12,944              13,306           (362 )         -2.7 %
Foreclosed real estate, net of reserves             16,660              19,411         (2,751 )        -14.2 %
Deferred income tax assets, net of deferred
income tax liabilities                               8,318               5,450          2,868           52.6 %
Securities sold but not settled                         -               21,260        (21,260 )       -100.0 %
Other assets                                         6,473               6,756           (283 )         -4.2 %

Total non-interest-earning assets                   45,764              68,031        (22,267 )        -32.7 %


Total assets                                     $ 752,634      $      749,354      $   3,280            0.4 %


Interest-bearing liabilities
Interest-bearing deposits                        $ 516,548      $      513,004      $   3,544            0.7 %
Overnight and short-term borrowings                    421                 411             10            2.4 %
Federal Home Loan Bank advances                     50,000              50,000             -             0.0 %

Total interest-bearing liabilities                 566,969             563,415          3,554            0.6 %


Non-interest-bearing liabilities
Non-interest-bearing deposits                       71,608              65,295          6,313            9.7 %
Accounts payable and other liabilities              10,207               9,115          1,092           12.0 %

Total non-interest-bearing liabilities              81,815              74,410          7,405           10.0 %


Total liabilities                                  648,784             637,825         10,959            1.7 %


Total equity                                       103,850             111,529         (7,679 )         -6.9 %


Total liabilities and equity                     $ 752,634      $      749,354      $   3,280            0.4 %


Cash and cash equivalents                        $  38,289      $       47,390      $  (9,101 )        -19.2 %
Total core deposits (excludes certificate
accounts)                                          401,808             389,095         12,713            3.3 %
Total certificates of deposit                      186,348             189,204         (2,856 )         -1.5 %
Total deposits                                     588,156             578,299          9,857            1.7 %
Total funding liabilities                          638,577             628,710          9,867            1.6 %


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Assets. Total assets increased $3.2 million, or 0.4%, to $752.6 million at June 30, 2013 from $749.4 million at December 31, 2012. Cash and cash equivalents decreased $9.1 million, or 19.2%, to $38.3 million at June 30, 2013 from $47.4 million at December 31, 2012. Investment securities increased $5.1 million, or 2.1%, to $248.5 million at June 30, 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 $30.1 million, or 7.8%, to $417.8 million at June 30, 2013 from $387.7 million at December 31, 2012 as new loan originations exceeded loan repayments, prepayments and foreclosures.

Loan originations totaled $169.3 million for the six months ended June 30, 2013 compared to $91.1 million for the six months ended June 30, 2012. Residential mortgage loan originations totaled $74.7 million and residential construction and land development loan originations totaled $8.7 million for the six months ended June 30, 2013 compared to $50.0 million and $6.3 million, respectively, for the comparable period of 2012. Originations of commercial mortgage loans totaled $55.3 million for the six months ended June 30, 2013 compared to $26.8 million for the same period in 2012. Originations of commercial construction and land development loans totaled $8.3 million and $1.1 million for the six-month periods ended June 30, 2013 and 2012, respectively. Commercial and industrial loan originations totaled $5.3 million for the six months ended June 30, 2013 compared to $3.5 million for the six months ended June 30, 2012. Revolving mortgage and consumer loan originations totaled $17.1 million for the six months ended June 30, 2013 compared to $3.5 million for the same period in 2012. The increase in originations was partially offset by $72.7 million in routine loan payments, prepayments and payoffs and $66.6 million in sales of residential mortgage loans for the six months ended June 30, 2013 compared to $70.0 million in routine payments, prepayments and payoffs and $45.8 million in residential mortgage sales for the six months ended June 30, 2012.

Nonperforming assets. Nonperforming assets totaled $18.2 million, or 2.42% of total assets, at June 30, 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 $16.7 million in foreclosed real estate at June 30, 2013, compared to $1.2 million and $19.4 million, respectively, at December 31, 2012.

Nonperforming loans increased $393,000, or 34.1%, to $1.5 million at June 30, 2013 from $1.2 million at December 31, 2012. At June 30, 2013, nonperforming loans included seven residential mortgage loans that totaled $824,000, one commercial mortgage loan in the amount of $387,000, two commercial and industrial loans that totaled $177,000, one revolving home equity loan in the amount of $94,000, and one construction and land development loan in the amount of $50,000. As of June 30, 2013, the nonperforming loans had specific reserves totaling $150,000.

Troubled debt restructurings at June 30, 2013 totaled $5.4 million compared to $5.2 million at December 31, 2012. There were four additions to troubled debt restructurings during the six months ended June 30, 2013. At June 30, 2013, $97,000 of the total $5.4 million of troubled debt restructurings were not performing.


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Foreclosed real estate at June 30, 2013 included 14 properties with a total carrying value of $16.7 million compared to 18 properties with a total carrying value of $19.4 million at December 31, 2012. During the six months ended June 30, 2013, there were two new properties in the amount of $291,000 added to foreclosed real estate, while six properties totaling $1.7 million were sold. The Bank also added $1.4 million in loss provisions.

Liabilities. Total deposits increased $9.9 million, or 1.7%, to $588.2 million at June 30, 2013 from $578.3 million at December 31, 2012. During the six months ended June 30, 2013, the Company continued its focus on core deposit growth, from which it excludes certificates of deposit. Core deposits increased $12.7 million, or 3.3%, to $401.8 million at June 30, 2013 from $389.1 million at December 31, 2012. Non-interest-bearing deposits increased $6.3 million, or 9.6%, to $71.6 million at June 30, 2013 from $65.3 million at December 31, 2012. Over the same period, certificates of deposit decreased $2.9 million, or 1.5%, to $186.3 million at June 30, 2013 from $189.2 million at December 31, 2012. Accounts payable and other liabilities increased $1.1 million, or 12.1%, to $10.2 million at June 30, 2013 from $9.1 million at December 31, 2012.

Results of Operations for the Three Months Ended June 30, 2013 and 2012

Overview. A net loss of $206,000, or $0.04 per share, was incurred for the quarter ended June 30, 2013 compared to a net loss of $114,000, or $0.02 per share, for the quarter ended June 30, 2012, primarily due to an increase of $2.0 million in noninterest expense, which was partially offset by a decrease of $1.3 million in the provision for loan losses and an increase of $523,000 in noninterest income. The increase in noninterest expense resulted in part from a $1.1 million increase in foreclosed property expenses. Net interest income decreased $75,000, which was a result of a $719,000 decrease in total interest and dividend income, partially offset by a decrease of $644,000 in total interest expense. Income tax benefit increased $136,000 for the quarter ended June 30, 2013 compared to the same quarter of the prior year.

                                                Three Months Ended
                                                     June 30,
(dollars in thousands)                         2013            2012         $ change        % change

Interest and dividend income                 $   5,679        $ 6,398       $    (719 )         -11.2 %
Interest expense                                 1,099          1,743            (644 )         -36.9 %
Net interest income                              4,580          4,655             (75 )          -1.6 %
Provision for loan losses                           16          1,293          (1,277 )         -98.8 %
Net interest income after provision for
loan losses                                      4,564          3,362           1,202            35.8 %
Noninterest income                               2,522          1,999             523            26.2 %
Noninterest expense                              7,541          5,588           1,953            34.9 %
Loss before income taxes                          (455 )         (227 )          (228 )        -100.4 %
Income tax benefit                                (249 )         (113 )          (136 )        -120.4 %
Net loss                                          (206 )         (114 )           (92 )         -80.7 %

Net Interest Income. Net interest income decreased by $75,000, or 1.6%, to $4.6 million for the three months ended June 30, 2013 from $4.7 million for the three months ended June 30, 2012. Total interest and dividend income decreased by $719,000, or 11.2%, to $5.7 million for the three months ended June 30, 2013 compared to $6.4 million for the three months ended June 30, 2012, primarily as a result of a 14 basis point decrease in yields on interest-earning assets, a $11.4 million decrease in average loan balances and a $35.7 million decrease in the average balances of all other interest-earning assets, including investments. The decline in total interest and dividend income was partially offset by a $644,000, or 36.9%, decrease in interest expense to $1.1 million for the three months ended June 30, 2013 from $1.7 million for the three months ended June 30, 2012. The decrease in interest expense resulted from a 37 basis point reduction in the average rate paid on interest-bearing liabilities and a decline of $40.2 million in the average balances of interest-bearing liabilities, comparing the three-month periods.


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Interest income on loans decreased $222,000, or 4.1%, to $4.7 million during the three months ended June 30, 2013 primarily due to a decrease in average outstanding loans of $11.4 million, or 2.7%. Loan originations increased $51.4 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012, while residential mortgage loan sales increased by $7.3 million. Loan principal repayments increased $14.0 million to $42.0 million for the three months ended June 30, 2013 from $28.0 million for the three months ended June 30, 2012. The average balance of investment securities increased $1.2 million, or 1.7%, to $70.0 million for the three months ended June 30, 2013, while the average balance of mortgage-backed securities decreased $15.7 million, or 7.7%, to $188.4 million from $204.1 million over the same comparable three-month periods. The average balances of mortgage-backed securities decreased as securities were sold in part to fund increased loan originations for the quarter.

The previously discussed $644,000 decrease in interest expense for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 was attributable to a $529,000 decrease in interest paid on deposits and a $115,000 decrease in interest paid on non-deposit borrowings. The decrease in deposit interest expense primarily resulted from a 37 basis point decline in deposit rates and a $30.0 million decline in average deposit balances. The decrease in interest expense on borrowings was largely attributable to a $10.0 million reduction in average borrowing balances.

Provision for Loan Losses. The provision for loan losses was $16,000 for the three months ended June 30, 2013 compared to $1.3 million for the three months ended June 30, 2012. The decrease in the provision was due to the combination of improvement in the economy, loan delinquencies and the credit quality of the loan portfolio, in addition to fewer charge-offs. The allowance for loan losses totaled $8.5 million, or 2.04% of total loans, at June 30, 2013 compared to $8.5 million, or 2.20% of total loans, at December 31, 2012. The Company charged off $87,000 in loans during the three months ended June 30, 2013 compared to $382,000 during the three months ended June 30, 2012.

Noninterest Income. Noninterest income increased $523,000, or 26.2%, to $2.5 million for the three months ended June 30, 2013 from $2.0 million for the three months ended June 30, 2012. Factors that contributed to the increase in noninterest income during the 2013 period were increases of $368,000 in gains from the sale of investment securities, $110,000 in mortgage banking income, $65,000 from debit card services and $59,000 in other income from a Small Business Investment Company ("SBIC") investment, which were partially offset by the decrease of $81,000 in fees from deposits and other services. The increase in investment security gains resulted primarily from the Bank's efforts to better position its portfolio for rising rates, while 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 expenses increased $2.0 million, or 34.9%, to $7.5 million for the three months ended June 30, 2013 from $5.6 million for the three months ended June 30, 2012. The increase was attributable to increases of $1.1 million in foreclosed property expenses, $618,000 in salaries and employee benefits, $114,000 in other noninterest expenses, and $73,000 in data processing expenses. The increase in foreclosed property expenses related primarily to the increase in the loss provision compared to the prior year. The increase in salaries and benefits was primarily due to increases of $318,000 in compensation expenses, $277,000 in expenses related to the Bank's equity incentive plan, and $23,000 in payroll taxes and other benefit plan expenses. The increase in other noninterest expenses was primarily attributable to increased loan related expenses due to higher loan originations during 2013.

Income Tax Benefit. Income tax benefit increased $136,000 to $249,000 for the three months ended June 30, 2013 from $113,000 for the three-month period ended June 30, 2012, primarily due to an increase in the pre-tax loss. The effective tax rate was 54.73% for the three months ended June 30, 2013 compared to 49.78% for the three months ended June 30, 2012, primarily due to the combined effect of higher tax-exempt income relative to the pre-tax loss from operations.


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Results of Operations for the Six Months Ended June 30, 2013 and 2012

Overview. Net income was $534,000, or $0.11 per share, for the six months ended June 30, 2013 compared to $170,000, or $0.03 per share, for the six months ended June 30, 2012. Income before income taxes increased $443,000, primarily due to a . . .

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