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ASBB > SEC Filings for ASBB > Form 10-Q on 8-Nov-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


8-Nov-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 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 nine-month periods ended September 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, except for the discussion captioned "Foreclosed Real Estate" that was added below.


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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.

Foreclosed Real Estate. The Company's valuations of its foreclosed real estate involve significant judgments and assumptions by management, which have a material impact on the reported values of foreclosed real estate assets and noninterest expense recorded in the financial statements. The judgments and assumptions used by management are described in "Foreclosed Real Estate" under note 1 of the notes to the consolidated financial statements included in this quarterly report.

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 September 30, 2013 and our operating performance for the three- and nine-month periods ended September 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 September 30, 2013 and December 31, 2012

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

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

Interest-earning assets
Interest-earning deposits with banks and
overnight and short-term investments       $        68,450     $       37,029     $  31,421           84.9 %
Investment securities                              195,973            243,385       (47,412 )        -19.5 %
Investments held at cost                             3,131              3,429          (298 )         -8.7 %
Loans held for sale                                  4,887              9,759        (4,872 )        -49.9 %
Loans receivable, net of deferred fees             429,778            387,721        42,057           10.8 %
Total interest-earning assets                      702,219            681,323        20,896            3.1 %

Non-interest-earning assets
Cash and due from banks                              9,440             10,361          (921 )         -8.9 %
Allowance for loan losses                           (7,589 )           (8,513 )         924           10.9 %
Premises and equipment, net of
accumulated depreciation                            12,726             13,306          (580 )         -4.4 %
Foreclosed real estate, net of reserves             15,371             19,411        (4,040 )        -20.8 %
Deferred income tax assets, net of
deferred income tax liabilities                      8,337              5,450         2,887           53.0 %
Securities sold but not settled                      4,891             21,260       (16,369 )        -77.0 %
Other assets                                         5,907              6,756          (849 )        -12.6 %
Total non-interest-earning assets                   49,083             68,031       (18,948 )        -27.9 %

Total assets                               $       751,302     $      749,354     $   1,948            0.3 %

Interest-bearing liabilities
Interest-bearing deposits                  $       507,049     $      513,004     $  (5,955 )         -1.2 %
Overnight and short-term borrowings                    471                411            60           14.6 %
Federal Home Loan Bank advances                     50,000             50,000             -            0.0 %
Total interest-bearing liabilities                 557,520            563,415        (5,895 )         -1.0 %

Non-interest-bearing liabilities
Non-interest-bearing deposits                       76,810             65,295        11,515           17.6 %
Accounts payable and other liabilities              14,096              9,115         4,981           54.6 %
Total non-interest-bearing liabilities              90,906             74,410        16,496           22.2 %

Total liabilities                                  648,426            637,825        10,601            1.7 %

Total equity                                       102,876            111,529        (8,653 )         -7.8 %

Total liabilities and equity               $       751,302     $      749,354     $   1,948            0.3 %

Cash and cash equivalents                  $        77,890     $       47,390     $  30,500           64.4 %
Total core deposits (excludes
certificate accounts)                              406,730            389,095        17,635            4.5 %
Total certificates of deposit                      177,129            189,204       (12,075 )         -6.4 %
Total deposits                                     583,859            578,299         5,560            1.0 %
Total funding liabilities                          634,330            628,710         5,620            0.9 %


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Assets. Total assets increased $1.9 million, or 0.3%, to $751.3 million at September 30, 2013 from $749.4 million at December 31, 2012. Cash and cash equivalents increased $30.5 million, or 64.4%, to $77.9 million at September 30, 2013 from $47.4 million at December 31, 2012 in anticipation of loan growth. Investment securities decreased $47.4 million, or 19.5%, to $196.0 million at September 30, 2013 from $243.4 million at December 31, 2012, primarily due to the sale of investment securities to fund loan growth. Loans receivable, net of deferred fees, increased $42.1 million, or 10.8%, to $429.8 million at September 30, 2013 from $387.7 million at December 31, 2012 as new loan originations exceeded loan repayments, prepayments and foreclosures. Of the $42.1 million increase in loans receivable at September 30, 2013, $25.7 million was in commercial mortgages that were fixed rate, but carry five-year to seven-year calls allowing for re-pricing opportunities

Loan originations totaled $249.1 million for the nine months ended September 30, 2013 compared to $141.3 million for the nine months ended September 30, 2012. Residential mortgage loan originations totaled $101.4 million and residential construction and land development loan originations totaled $16.1 million for the nine months ended September 30, 2013 compared to $76.8 million and $8.2 million, respectively, for the comparable period of 2012. Originations of commercial mortgage loans totaled $77.9 million for the nine months ended September 30, 2013 compared to $44.0 million for the same period in 2012. Originations of commercial construction and land development loans totaled $11.8 million and $1.1 million for the nine-month periods ended September 30, 2013 and 2012, respectively. Commercial and industrial loan originations totaled $7.1 million for the nine months ended September 30, 2013 compared to $5.2 million for the nine months ended September 30, 2012. Revolving mortgage and consumer loan originations totaled $34.7 million for the nine months ended September 30, 2013 compared to $6.0 million for the same period in 2012. The increase in originations was partially offset by $119.8 million in routine loan payments, prepayments and payoffs and $91.3 million in sales of residential mortgage loans for the nine months ended September 30, 2013 compared to $88.7 million in routine payments, prepayments and payoffs and $64.3 million in residential mortgage sales for the nine months ended September 30, 2012.

Nonperforming assets. Nonperforming assets totaled $17.0 million, or 2.27% of total assets, at September 30, 2013, compared to $20.6 million, or 2.74% of total assets, at December 31, 2012. Nonperforming assets included $1.7 million in nonperforming loans and $15.4 million in foreclosed real estate at September 30, 2013, compared to $1.2 million and $19.4 million, respectively, at December 31, 2012.

Nonperforming loans increased $519,000, or 45.1%, to $1.7 million at September 30, 2013 from $1.2 million at December 31, 2012. At September 30, 2013, nonperforming loans included eight residential mortgage loans that totaled $723,000, one commercial mortgage loan in the amount of $378,000, five revolving home equity loans in the amount of $334,000, two commercial and industrial loans that totaled $157,000, and two construction and land development loans in the amount of $67,000. As of September 30, 2013, the nonperforming loans had specific reserves totaling $318,000.

Troubled debt restructurings at September 30, 2013 totaled $5.7 million compared to $5.2 million at December 31, 2012. There were five additions to troubled debt restructurings during the nine months ended September 30, 2013. At September 30, 2013, $475,000 of the total $5.7 million of troubled debt restructurings were not performing.

Foreclosed real estate at September 30, 2013 included 13 properties with a total carrying value of $15.4 million compared to 18 properties with a total carrying value of $19.4 million at December 31, 2012. During the nine months ended September 30, 2013, there were three new properties in the amount of $450,000 added to foreclosed real estate, while eight properties totaling $2.7 million were sold. The Bank also added $1.8 million in loss provisions, as discussed in our analysis of nonperforming assets.


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Liabilities. Total deposits increased $5.6 million, or 1.0%, to $583.9 million at September 30, 2013 from $578.3 million at December 31, 2012. During the nine months ended September 30, 2013, the Company continued its focus on core deposit growth, from which it excludes certificates of deposit. Core deposits increased $17.6 million, or 4.5%, to $406.7 million at September 30, 2013 from $389.1 million at December 31, 2012. Non-interest-bearing deposits increased $11.5 million, or 17.6%, to $76.8 million at September 30, 2013 from $65.3 million at December 31, 2012.

Commercial checking and commercial money market accounts increased $14.3 million to $99.6 million at September 30, 2013 from $85.3 million at December 31, 2012, reflecting expanded sources of lower cost funding. The addition of deposit relationships in conjunction with new commercial loans significantly contributed to this increase and reflects a commitment to establishing diversified relationships with business clients.

Over the same period, certificates of deposit decreased $12.1 million, or 6.4%, to $177.1 million at September 30, 2013 from $189.2 million at December 31, 2012. Accounts payable and other liabilities increased $5.0 million, or 54.6%, to $14.1 million at September 30, 2013 from $9.1 million at December 31, 2012 largely due to the purchase of investment securities before the end of the third quarter that settled during the fourth quarter.

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

Overview. Net income was $560,000, or $0.12 per share, for the quarter ended September 30, 2013 compared to net income of $457,000, or $0.09 per share, for the quarter ended September 30, 2012, primarily due to a decrease of $1.4 million in the provision for loan losses, partially offset by an increase of $743,000 in noninterest expense and a decrease of $548,000 in noninterest income. Net interest income increased $169,000, which was a result of a $506,000 decrease in interest expense, partially offset by a decrease of $337,000 in total interest and dividend income. Income tax provision increased $180,000 for the quarter ended September 30, 2013 compared to the same quarter of the prior year.

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

Interest and dividend income               $    5,751      $   6,088     $     (337 )         -5.5 %
Interest expense                                1,021          1,527           (506 )        -33.1 %
Net interest income                             4,730          4,561            169            3.7 %
Provision for (recovery of) loan losses          (863 )          542         (1,405 )       -259.2 %
Net interest income after provision for
loan losses                                     5,593          4,019          1,574           39.2 %
Noninterest income                              1,868          2,416           (548 )        -22.7 %
Noninterest expenses                            6,503          5,760            743           12.9 %
Income before income tax provision                958            675            283           41.9 %
Income tax provision                              398            218            180           82.6 %
Net income                                        560            457            103           22.5 %


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Net Interest Income. Net interest income increased by $169,000, or 3.7%, to $4.7 million for the three months ended September 30, 2013 compared to $4.6 million for the three months ended September 30, 2012. Interest expense decreased $506,000, or 33.1%, to $1.0 million for the three months ended September 30, 2013 from $1.5 million for the three months ended September 30, 2012, primarily due to a 31 basis point reduction in the average rate paid on interest-bearing liabilities and a decrease of $28.1 million in average balance of total interest-bearing liabilities. The decrease in interest expense was partially offset by a decrease in total interest and dividend income of $337,000, or 5.5%, to $5.8 million for the three months ended September 30, 2013 compared to $6.1 million for the three months ended September 30, 2012, primarily as a result of a 57 basis point decrease in the average yield on mortgage-backed securities, a $52.1 million decrease in the average balance of mortgage-backed securities and a 17 basis point decrease in the average yield on loans, which were partially offset by a $19.4 million increase in average loan balances.

Interest income on loans increased $51,000, or 1.1%, to $4.9 million during the three months ended September 30, 2013 primarily due to an increase in average outstanding loans of $19.5 million, or 4.7%. Loan originations increased $29.6 million for the three months ended September 30, 2013 compared to the three months ended September 30, 2012, while residential mortgage loan sales increased by $6.2 million. Loan principal repayments increased $28.3 million to $47.0 million for the three months ended September 30, 2013 from $18.7 million for the three months ended September 30, 2012. The average balance of investment securities decreased $15.8 million, or 20.3%, to $62.0 million for the three months ended September 30, 2013, while the average balance of mortgage-backed securities decreased $52.0 million, or 25.7%, to $150.7 million from $202.7 million over the same comparable three-month periods. The average balance of mortgage-backed securities decreased as securities were sold in part to fund increased loan originations for the quarter.

The previously discussed $506,000 decrease in interest expense for the three months ended September 30, 2013 compared to the three months ended September 30, 2012 was attributable to a $393,000 decrease in interest paid on deposits and a $113,000 decrease in interest paid on borrowings. The decrease in deposit interest expense primarily resulted from a 28 basis point decline in deposit rates and a $18.1 million decrease in the average deposit balance. The decrease in interest expense on borrowings was attributable to a $10.0 million reduction in the average borrowing balance.

Provision for Loan Losses. The provision for loan losses was a negative amount or credit of $(863,000) for the three months ended September 30, 2013 compared to a provision expense of $542,000 for the three months ended September 30, 2012. The significant decrease in the provision was primarily supported by declines in the Bank's trailing three-year loss history and recent trends of substantially improved levels of delinquent and nonperforming loans used to estimate general loan loss reserves. The allowance for loan losses totaled $7.6 million, or 1.77% of total loans, at September 30, 2013 compared to $8.5 million, or 2.20% of total loans, at December 31, 2012. The Company charged off $86,000 in loans during the three months ended September 30, 2013 compared to $1.9 million during the three months ended September 30, 2012.

Noninterest Income. Noninterest income decreased $548,000, or 22.7%, to $1.9 million for the three months ended September 30, 2013 from $2.4 million for the three months ended September 30, 2012. Factors that contributed to the decrease in noninterest income during the 2013 period were decreases of $706,000 in gains from the sale of investment securities and $36,000 in deposit and other service charge income, which were partially offset by increases of $117,000 in mortgage banking income, $54,000 in other noninterest income and $23,000 in debit card services. The decrease in investment security gains resulted primarily from sales of fewer investment securities at smaller net gains to fund loan growth, 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 ATM and deposit overdraft fees.


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Noninterest Expenses. Noninterest expenses increased $743,000, or 12.9%, to $6.5 million for the three months ended September 30, 2013 from $5.8 million for the three months ended September 30, 2012. The increase was primarily attributable to increases of $450,000 in salaries and employee benefits and $361,000 in foreclosed property expenses, which were partially offset by decreases of $56,000 in occupancy expense, and $46,000 in advertising. The increase in salaries and benefits was primarily due to increases of $143,000 in compensation . . .
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