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ASBB > SEC Filings for ASBB > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for ASB BANCORP INC

Form 10-Q for ASB BANCORP INC


9-May-2014

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-month period ended March 31, 2014, 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, 2013 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.


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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. 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 fair value of stock at date of grant to estimate the fair value of stock options and restricted stock, respectively. These valuations 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 March 31, 2014 and our operating performance for the three-month period ended March 31, 2014. 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, 2014 and December 31, 2013

The following table provides the changes in our significant asset and liability
categories at March 31, 2014 compared to December 31, 2013.

                                           March 31,       December 31,
(dollars in thousands)                        2014             2013          $ change       % change

Interest-earning assets
Interest-earning deposits with banks and
overnight and short-term investments       $   88,550     $       43,795     $  44,755          102.2 %
Investment securities                         156,036            189,570       (33,534 )        -17.7 %
Investments held at cost                        2,902              3,131          (229 )         -7.3 %
Loans held for sale                             3,076              4,142        (1,066 )        -25.7 %
Loans receivable, net of deferred fees        455,434            449,234         6,200            1.4 %
Total interest-earning assets                 705,998            689,872        16,126            2.3 %

Noninterest-earning assets
Cash and due from banks                        10,004              8,996         1,008           11.2 %
Allowance for loan losses                      (7,189 )           (7,307 )         118            1.6 %
Premises and equipment, net of
accumulated depreciation                       12,315             12,493          (178 )         -1.4 %
Deferred income tax assets, net of
deferred income tax liabilities                 6,850              7,741          (891 )        -11.5 %
Other assets                                   20,111             21,240        (1,129 )         -5.3 %
Total noninterest-earning assets               42,091             43,163        (1,072 )         -2.5 %

Total assets                               $  748,089     $      733,035     $  15,054            2.1 %

Interest-bearing liabilities
Interest-bearing deposits                  $  502,831     $      498,767     $   4,064            0.8 %
Overnight and short-term borrowings               831                787            44            5.6 %
Federal Home Loan Bank advances                50,000             50,000             -            0.0 %
Total interest-bearing liabilities            553,662            549,554         4,108            0.7 %

Noninterest-bearing liabilities
Noninterest-bearing deposits                   82,921             74,019         8,902           12.0 %
Accounts payable and other liabilities          9,559              8,374         1,185           14.2 %
Total noninterest-bearing liabilities          92,480             82,393        10,087           12.2 %

Total liabilities                             646,142            631,947        14,195            2.2 %

Total equity                                  101,947            101,088           859            0.8 %

Total liabilities and equity               $  748,089     $      733,035     $  15,054            2.1 %

Cash and cash equivalents                  $   98,554     $       52,791     $  45,763           86.7 %
Total core deposits (excludes
certificate accounts)                         423,567            405,722        17,845            4.4 %
Total certificates of deposit                 162,185            167,064        (4,879 )         -2.9 %
Total deposits                                585,752            572,786        12,966            2.3 %
Total funding liabilities                     636,583            623,573        13,010            2.1 %


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Assets. Total assets increased $15.1 million, or 2.1%, to $748.1 million at March 31, 2014 from $733.0 million at December 31, 2013. Cash and cash equivalents increased $45.8 million, or 86.7%, to $98.6 million at March 31, 2014 from $52.8 million at December 31, 2013 in anticipation of loan growth. Investment securities decreased $33.5 million, or 17.7%, to $156.0 million at March 31, 2014 from $189.5 million at December 31, 2013, primarily due to the sale of investment securities to fund anticipated loan growth. Loans receivable, net of deferred fees, increased $6.2 million, or 1.4%, to $455.4 million at March 31, 2014 from $449.2 million at December 31, 2013 as new loan originations exceeded loan repayments, prepayments and foreclosures.

                                                     Three Months Ended
                                                          March 31,
(dollars in thousands)                                2014          2013

Loans originated:
Commercial:
Commercial mortgage                                $    8,710     $ 20,697
Construction and land development                       1,928        2,907
Commercial and industrial                               2,116        2,197
Non-commercial
Residential mortgage                                   14,301       41,106
Construction and land development                       5,992        3,147
Revolving mortgage                                      4,417        1,144
Consumer                                                2,229        3,961
Total loans originated                             $   39,693     $ 75,159

Loan principal payments, prepayments and payoffs   $   23,069     $ 32,020

Residential mortgage loans sold                    $   11,269     $ 33,320

Nonperforming assets. Nonperforming assets totaled $15.5 million, or 2.07% of total assets, at March 31, 2014, compared to $15.4 million, or 2.10% of total assets, at December 31, 2013. Nonperforming assets included $1.9 million in nonperforming loans and $13.6 million in foreclosed real estate at March 31, 2014 compared to $1.2 million and $14.2 million, respectively, at December 31, 2013.

Nonperforming loans increased $708,000 to $1.9 million, or 0.42% of total loans, at March 31, 2014 from $1.2 million, or 0.27% of total loans, at December 31, 2013. At March 31, 2014, nonperforming loans included seven residential mortgage loans that totaled $618,000, two commercial mortgage loans that totaled $929,000, three revolving home equity loans that totaled $222,000, and three commercial and industrial loans that totaled $119,000. As of March 31, 2014, the nonperforming loans had specific reserves totaling $125,000.

Troubled debt restructurings at March 31, 2014 totaled $5.5 million compared to $5.8 million at December 31, 2013. There were two additions to troubled debt restructurings during the three months ended March 31, 2014. At March 31, 2014, $492,000 of the total $5.5 million of troubled debt restructurings were not performing.

Foreclosed real estate at March 31, 2014 included 11 properties with a total recorded amount of $13.6 million compared to 11 properties with a total recorded amount of $14.2 million at December 31, 2013. During the three months ended March 31, 2014, two new properties totaling $152,000 were added to foreclosed real estate, while two properties totaling $388,000 were sold. In addition, the Bank sold two of its 44 units in a mixed-use condominium complex for proceeds of $605,000. The Bank also recorded $263,000 in capital additions and $19,000 in loss provisions during the first quarter of 2014.


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Liabilities. Total deposits increased $13.0 million, or 2.3%, to $585.8 million at March 31, 2014 from $572.8 million at December 31, 2013. During the three months ended March 31, 2014, the Company continued its focus on core deposit growth, from which it excludes certificates of deposit. Core deposits increased $17.8 million, or 4.4%, to $423.6 million at March 31, 2014 from $405.7 million at December 31, 2013.

Commercial checking accounts increased $9.8 million to $80.2 million at March 31, 2014 from $70.4 million at December 31, 2013, 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 $4.9 million, or 2.9%, to $162.2 million at March 31, 2014 from $167.1 million at December 31, 2013. Accounts payable and other liabilities increased $1.2 million, or 14.2%, to $9.6 million at March 31, 2014 from $8.4 million at December 31, 2013.

Results of Operations for the Three Months Ended March 31, 2014 and 2013

Overview. Net income was $404,000, or $0.09 per share, for the three months
ended March 31, 2014 compared to $740,000, or $0.15 per share, for the three
months ended March 31, 2013. Income before income taxes decreased $567,000,
primarily due to an increase of $540,000 in noninterest expenses and a $432,000
decrease in noninterest income, which were partially offset by an increase of
$225,000 in net interest income and a decrease of $180,000 in provision for loan
losses.

                                              Three Months Ended
                                                   March 31,
(dollars in thousands)                        2014           2013         $ change       % change

Interest and dividend income               $    5,741      $   5,746     $       (5 )         -0.1 %
Interest expense                                  887          1,117           (230 )        -20.6 %
Net interest income                             4,854          4,629            225            4.9 %
Provision for (recovery of) loan losses           (68 )          112           (180 )       -160.7 %
Net interest income after provision for
(recovery of) loan losses                       4,922          4,517            405            9.0 %
Noninterest income                              1,456          1,888           (432 )        -22.9 %
Noninterest expenses                            5,860          5,320            540           10.2 %
Income before income tax provision                518          1,085           (567 )        -52.3 %
Income tax provision                              114            345           (231 )        -67.0 %
Net income                                        404            740           (336 )        -45.4 %

Net Interest Income. Net interest income increased by $225,000, or 4.9%, to $4.9 million for the three months ended March 31, 2014 as compared to $4.6 million for the three months ended March 31, 2013. Interest expense decreased $230,000, or 20.6%, to $887,000 for the three months ended March 31, 2014 from $1.1 million for the three months ended March 31, 2013, primarily due to a 17 basis point reduction in the average rate paid on interest-bearing deposits and a decrease of $13.6 million in the average balance of total interest-bearing deposits. The lower cost of interest-bearing deposits was primarily attributable to an average rate reduction of 25 basis points on certificates of deposit as well as a lower average balance of certificates of deposit, which were partially offset by increases in the average balances of NOW, money market and savings accounts as the Company continued its focus on core deposit growth, from which it excludes certificates of deposit. Total interest and dividend income was $5.7 million for each of the three-month periods ended March 31, 2014 and 2013. The average balance of total interest-earning assets decreased $12.4 million, which was partially offset by a 6 basis point increase in the average yields on interest-earning assets. Interest income on loans increased $322,000 primarily due to a $55.0 million increase in the average balance of loans, partially offset by a 28 basis point reduction in the yield earned on loans in 2014. Interest on securities decreased $349,000 in 2014 primarily as a result of an $80.8 million decrease in the average balance of mortgage-backed and similar securities, coupled with a 19 basis point reduction in yield earned on these securities.


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Provision for Loan Losses. The Bank recorded a recovery of or credit to its loan losses in the amount of $(68,000) for the three months ended March 31, 2014 compared to a provision expense of $112,000 for the three months ended March 31, 2013. The decrease in the provision was primarily supported by declines in the Bank's trailing three-year loss history and recent trends of sustained lower levels of delinquent and nonperforming loans used to estimate general loss reserves. Charge-offs were $94,000 for the first three months of 2014 compared to $105,000 for the first three months of 2013.

Noninterest Income. Noninterest income decreased $432,000 to $1.5 million for the three months ended March 31, 2014 from $1.9 million for the three months ended March 31, 2013. Factors that contributed to the decrease in noninterest income during the 2014 period were decreases of $368,000 in mortgage banking income, $114,000 in other income from an investment in a Small Business Investment Company and $45,000 in deposit fees, which were partially offset by $121,000 in higher securities gains. The decrease in mortgage banking income was attributable to lower volumes of mortgage loans sold. The decrease in deposit and other service charge income was primarily the result of lower deposit overdraft fees.

Noninterest Expenses. Noninterest expenses increased $540,000, or 10.2%, to $5.9 million for the three months ended March 31, 2014 from $5.3 million for the three months ended March 31, 2013. The higher 2014 noninterest expenses primarily reflected increases related to revisions to the Company's pension plan in the first quarter of 2013. Noninterest expenses in the first quarter of 2014 included a $113,000 increase in equity incentive plan expenses and a $71,000 increase in other noninterest expenses primarily attributable to increased loan related expenses partially offset by expense reductions in most other categories. Noninterest expenses in the first quarter of 2013 included a $499,000 one-time credit to pension expense resulting from the curtailment of benefits for future service.

Income Tax Provision. Income tax expense decreased by $231,000 for the three months ended March 31, 2014 compared to the three-month period ended March 31, 2013, primarily due to a decrease in pre-tax income. The effective tax rate was 22.01% for the three months ended March 31, 2014 compared to 31.80% for the three months ended March 31, 2013, with the decrease primarily resulting from the increase in favorable permanent tax differences relative to the size of the pre-tax income in 2014 compared to 2013.

Average Balances and Yields

The following table presents 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 included on a tax-equivalent basis using a federal marginal tax rate of 34%.


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                                               For the Three Months Ended March 31,
                                         2014                                        2013
                                       Interest                                    Interest
                         Average         and           Yield/        Average         and           Yield/
(dollars in
thousands)               Balance      Dividends         Cost         Balance      Dividends         Cost

Assets

Interest-earning
deposits with banks     $  65,010     $       47           0.29 %   $  43,378     $       41           0.38 %
Loans receivable          454,621          4,922           4.39 %     399,645          4,600           4.67 %
Investment securities      59,878            374           3.34 %      67,780            371           2.87 %
Mortgage-backed and
similar securities        111,877            362           1.31 %     192,657            714           1.50 %
Other
interest-earning
assets                      3,111             36           4.69 %       3,406             20           2.38 %
Total
interest-earning
assets                    694,497          5,741           3.42 %     706,866          5,746           3.36 %
Allowance for loan
losses                     (7,315 )                                    (8,412 )
Noninterest-earning
assets                     51,159                                      58,350

Total assets            $ 738,341                                   $ 756,804

Liabilities and
equity

NOW accounts            $ 144,471             54           0.15 %   $ 141,003             93           0.27 %
Money market accounts     154,066             65           0.17 %     152,430            105           0.28 %
Savings accounts           35,542              9           0.10 %      30,551              7           0.09 %
Certificates of
deposit                   164,964            274           0.67 %     188,619            427           0.92 %
Total
interest-bearing
deposits                  499,043            402           0.33 %     512,603            632           0.50 %
Overnight and
short-term borrowings         886              1           0.46 %         629              1           0.64 %
Federal Home Loan
Bank advances              50,000            484           3.93 %      50,000            484           3.93 %
Total
interest-bearing
liabilities               549,929            887           0.65 %     563,232          1,117           0.80 %
Noninterest-bearing
deposits                   77,023                                      66,199
Other
noninterest-bearing
liabilities                 8,753                                      16,844
Total liabilities         635,705                                     646,275

Total equity              102,636                                     110,529

Total liabilities and
equity                  $ 738,341                                   $ 756,804

Net interest income                   $    4,854                                  $    4,629
. . .
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