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ASBB > SEC Filings for ASBB > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for ASB BANCORP INC

Form 10-Q for ASB BANCORP INC


8-Aug-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;

increased cybersecurity risk, including potential business disruptions or financial losses;

changes in technology;

our ability to attract and retain key personnel;

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 for the year ended December 31, 2013.

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.


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Critical Accounting Policies

During the three- and six-month periods ended June 30, 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.

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 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 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 FASB ASC Topic 715:
Compensation-Retirement Benefits ("FASB ASC Topic 715"), 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. FASB 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 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 FASB ASC Topic 718: Compensation
- Stock Compensation ("FASB ASC Topic 718"). FASB 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 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 June 30, 2014 and our operating performance for the three- and six-month periods ended June 30, 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 June 30, 2014 and December 31, 2013

The following table provides the changes in our significant asset and liability
categories at June 30, 2014 compared to December 31, 2013.

                                           June 30,       December 31,
(dollars in thousands)                       2014             2013          $ Change       % Change

Interest-earning assets
Interest-earning deposits with banks and
overnight and short-term investments       $  82,777     $       43,795     $  38,982           89.0 %
Investment securities                        153,921            189,570       (35,649 )        -18.8 %
Investments held at cost                       2,902              3,131          (229 )         -7.3 %
Loans held for sale                            2,759              4,142        (1,383 )        -33.4 %
Loans receivable, net of deferred fees       472,012            449,234        22,778            5.1 %
Total interest-earning assets                714,371            689,872        24,499            3.6 %

Noninterest-earning assets
Cash and due from banks                       11,048              8,996         2,052           22.8 %
Allowance for loan losses                     (5,770 )           (7,307 )       1,537           21.0 %
Premises and equipment, net of
accumulated depreciation                      12,145             12,493          (348 )         -2.8 %
Foreclosed real estate                        10,375             14,233        (3,858 )        -27.1 %
Deferred income tax assets, net of
deferred income tax liabilities                5,491              7,741        (2,250 )        -29.1 %
Other assets                                   6,836              7,007          (171 )         -2.4 %
Total noninterest-earning assets              40,125             43,163        (3,038 )         -7.0 %

Total assets                               $ 754,496     $      733,035     $  21,461            2.9 %

Interest-bearing liabilities
Interest-bearing deposits                  $ 503,897     $      498,767     $   5,130            1.0 %
Overnight and short-term borrowings              391                787          (396 )        -50.3 %
Federal Home Loan Bank advances               50,000             50,000             -            0.0 %
Total interest-bearing liabilities           554,288            549,554         4,734            0.9 %

Noninterest-bearing liabilities
Noninterest-bearing deposits                  88,786             74,019        14,767           20.0 %
Accounts payable and other liabilities         9,695              8,374         1,321           15.8 %
Total noninterest-bearing liabilities         98,481             82,393        16,088           19.5 %

Total liabilities                            652,769            631,947        20,822            3.3 %

Total equity                                 101,727            101,088           639            0.6 %

Total liabilities and equity               $ 754,496     $      733,035     $  21,461            2.9 %

Cash and cash equivalents                  $  93,825     $       52,791     $  41,034           77.7 %
Total core deposits (excludes
certificate accounts)                        432,201            405,722        26,479            6.5 %
Total certificates of deposit                160,482            167,064        (6,582 )         -3.9 %
Total deposits                               592,683            572,786        19,897            3.5 %
Total funding liabilities                    643,074            623,573        19,501            3.1 %


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Assets. Total assets increased $21.5 million, or 2.9%, to $754.5 million at June 30, 2014 from $733.0 million at December 31, 2013. Cash and cash equivalents increased $41.0 million, or 77.7%, to $93.8 million at June 30, 2014 from $52.8 million at December 31, 2013 in anticipation of loan growth. Investment securities decreased $35.7 million, or 18.8%, to $153.9 million at June 30, 2014 from $189.6 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 $22.8 million, or 5.1%, to $472.0 million at June 30, 2014 from $449.2 million at December 31, 2013 as new loan originations exceeded loan repayments, prepayments and foreclosures.

                                                      Six Months Ended
                                                          June 30,
(dollars in thousands)                               2014         2013

Loans originated:
Commercial:
Commercial mortgage                                $ 31,567     $  55,305
Construction and land development                     1,928         8,257
Commercial and industrial                             3,735         5,286
Non-commercial
Residential mortgage                                 27,984        74,674
Construction and land development                    11,909         8,662
Revolving mortgage                                    9,002         5,091
Consumer                                              7,165        11,976
Total loans originated                             $ 93,290     $ 169,251

Loan principal payments, prepayments and payoffs   $ 50,532     $  72,749

Residential mortgage loans sold                    $ 21,072     $  66,580

Nonperforming Assets. Nonperforming assets totaled $12.4 million, or 1.64% of total assets, at June 30, 2014, compared to $15.4 million, or 2.10% of total assets, at December 31, 2013. Nonperforming assets included $2.0 million in nonperforming loans and $10.4 million in foreclosed real estate at June 30, 2014 compared to $1.2 million and $14.2 million, respectively, at December 31, 2013.

Nonperforming loans increased $837,000 to $2.0 million, or 0.43% of total loans, at June 30, 2014 from $1.2 million, or 0.27% of total loans, at December 31, 2013. At June 30, 2014, nonperforming loans included seven residential mortgage loans that totaled $627,000, two commercial mortgage loans that totaled $914,000, three revolving home equity loans that totaled $144,000 and five commercial and industrial loans that totaled $342,000. As of June 30, 2014, the nonperforming loans had specific reserves totaling $132,000.

TDRs at June 30, 2014 totaled $5.5 million compared to $5.8 million at December 31, 2013. There were two additions to TDRs during the six months ended June 30, 2014. At June 30, 2014, $465,000 of the total $5.5 million of TDRs were not performing.

Foreclosed real estate at June 30, 2014 included 12 properties with a total recorded amount of $10.4 million compared to 11 properties with a total recorded amount of $14.2 million at December 31, 2013. During the six months ended June 30, 2014, three new properties totaling $173,000 were added to foreclosed real estate, while two properties totaling $388,000 were sold. In addition, the Bank sold 28 of its 44 units in a mixed-use condominium complex for net proceeds of $3.7 million. The Bank also recorded $269,000 in capital additions and $154,000 in loss provisions during the first six months of 2014.


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Liabilities. Total deposits increased $19.9 million, or 3.5%, to $592.7 million at June 30, 2014 from $572.8 million at December 31, 2013. During the six months ended June 30, 2014, the Company continued its focus on core deposit growth, from which it excludes certificates of deposit. Core deposits increased $26.5 million, or 6.5%, to $432.2 million at June 30, 2014 from $405.7 million at December 31, 2013.

Commercial checking and money market accounts increased $15.9 million to $111.1 million at June 30, 2014 from $95.2 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 $6.6 million, or 3.9%, to $160.5 million at June 30, 2014 from $167.1 million at December 31, 2013. Accounts payable and other liabilities increased $1.3 million, or 15.5%, to $9.7 million at June 30, 2014 from $8.4 million at December 31, 2013.

Results of Operations for the Three Months Ended June 30, 2014 and 2013

Overview. Net income was $941,000, or $0.21 per diluted share, for the quarter ended June 30, 2014 compared to a net loss of $206,000, or $0.04 per diluted share, for the quarter ended June 30, 2013. The provision for loan losses was a recovery of $1.4 million for the second quarter of 2014 compared to an expense of $16,000 for the same period of 2013. Noninterest expenses decreased $1.2 million and noninterest income decreased $968,000 during the second quarter of 2014 compared to the second quarter of 2013. Noninterest expenses for the second quarter of the previous year included an additional $1.2 million write-down of the Bank's largest foreclosed property, compared to a write-down of $133,000 in 2014. The residential units of this mixed-use property were sold during the second quarter of 2014. Net interest income increased $305,000, which was the result of a $213,000 decrease in interest expense that was partially offset by an increase of $92,000 in total interest and dividend income. The income tax provision increased $787,000 for the quarter ended June 30, 2014 compared to the same quarter of 2013, primarily due to pre-tax income in the second quarter of 2014 compared to a pre-tax loss in the second quarter of 2013.

                                              Three Months Ended
                                                   June 30,
(dollars in thousands)                        2014           2013         $ Change       % Change

Interest and dividend income               $     5,771     $   5,679     $       92            1.6 %
Interest expense                                   886         1,099           (213 )        -19.4 %
Net interest income                              4,885         4,580            305            6.7 %
Provision for (recovery of) loan losses         (1,390 )          16         (1,406 )           n/ m
Net interest income after provision for
loan losses                                      6,275         4,564          1,711           37.5 %
Noninterest income                               1,554         2,522           (968 )        -38.4 %
Noninterest expenses                             6,350         7,541         (1,191 )        -15.8 %
Income (loss) before income tax
provision (benefit)                              1,479          (455 )        1,934          425.1 %
Income tax provision (benefit)                     538          (249 )          787          316.1 %
Net income (loss)                                  941          (206 )        1,147          556.8 %


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Net Interest Income. Net interest income increased by $305,000, or 6.7%, to $4.9 million for the three months ended June 30, 2014 compared to $4.6 million for the three months ended June 30, 2013. Interest expense decreased $213,000, or 19.4%, to $886,000 for the three months ended June 30, 2014 from $1.1 million for the three months ended June 30, 2013, primarily due to a 14 basis point reduction in the average rate paid on interest-bearing liabilities and a decrease of $15.1 million in the average balance of total interest-bearing liabilities. Total interest and dividend income increased $92,000, or 1.6%, to $5.8 million for the three months ended June 30, 2014 from $5.7 million for the three months ended June 30, 2013, primarily as a result of an increase of $54.6 million in average loan balances, which was partially offset by a decrease of 25 basis points in the average yield on loans. The average balance of mortgage-backed and similar securities decreased $92.0 million for the three months ended June 30, 2014, which was partially offset by an increase of 14 basis points in the average yield compared to the same period of 2013.

Interest income on loans increased $333,000, or 7.1%, to $5.0 million during the three months ended June 30, 2014, primarily due to an increase in average outstanding loans of $54.6 million, or 13.4%. Loan originations decreased $40.5 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013, while residential mortgage loan sales decreased by $23.5 million. Loan principal repayments decreased $14.6 million to $27.4 million for the three months ended June 30, 2014 from $42.0 million for the three months ended June 30, 2013. The average balance of investment securities decreased $13.0 million, or 18.6%, to $57.0 million for the three months ended June 30, 2014, while the average balance of mortgage-backed securities decreased $92.0 million, or 48.8%, to $96.4 million from $188.4 million over the same comparable three-month periods. The average balance of mortgage-backed securities decreased as securities were sold in part to fund anticipated loan originations.

The previously discussed $213,000 decrease in interest expense for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 was primarily attributable to the decrease in interest paid on deposits, resulting from a 15 basis point decline in deposit rates and a $15.0 million decrease in the average deposit balance.

Provision for Loan Losses. The provision for loan losses was a credit of $(1.4) million for the three months ended June 30, 2014 compared to a provision expense of $16,000 for the three months ended June 30, 2013. In the second quarter of 2014, the Bank accessed and modified its loan loss methodology for unimpaired commercial construction and land development, unimpaired residential construction and land development, and unimpaired commercial and industrial loans. This modification resulted in further sub-segmentation of these classes of loans and the related historical charge-off rates. The purpose was to allocate the substantial historical charge-off rates created by three sub-segments of these loan classes against the significantly diminished or nonexistent current balances within these same loan sub-segments reflecting no continued credit exposure to the Bank. Specifically, additional sub-segments were identified where the Bank made (i) loans in excess of $2.5 million to construct commercial mixed-use buildings in small communities with low population growth, (ii) speculative loans to construct one-to-four family residences for the greater of 80% of the appraised value of the completed residence or 100% of the actual costs of construction, and (iii) loans secured by equity securities that do not have a readily determinable fair value. This change in methodology resulted in a nonrecurring reduction of approximately $1.3 million in the Bank's reserves for loans not considered impaired in the second quarter of 2014. The allowance for loan losses totaled $5.8 million, or 1.22% of total loans, at June 30, 2014 compared to $7.3 million, or 1.63% of total loans, at December 31, 2013. The Company charged off $56,000 in loans during the three months ended June 30, 2014 compared to $87,000 during the three months ended June 30, 2013.

Noninterest Income. Noninterest income decreased $968,000, or 38.4%, to $1.6 million for the three months ended June 30, 2014 from $2.5 million for the three months ended June 30, 2013. Factors that contributed to the decrease in noninterest income during the 2014 period were decreases of $603,000 in gains from the sale of investment securities, $347,000 in mortgage banking income and $41,000 in deposit and other service charge income, which were partially offset by an increase of $29,000 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, and 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 ATM and deposit overdraft fees.


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Noninterest Expenses. Noninterest expenses decreased $1.2 million, or 15.8%, to $6.4 million for the three months ended June 30, 2014 from $7.5 million for the three months ended June 30, 2013. The decrease was primarily attributable to decreases of $1.2 million in foreclosed property expenses, $67,000 in advertising and $54,000 in occupancy expenses, which were partially offset by increases of $168,000 in salaries and employee benefits and $58,000 in professional and outside services. The increase in salaries and benefits was primarily due to a $380,000 additional expense for accelerated vesting related to the disability of an executive officer participating in the Bank's equity incentive plan, which was partially offset by a net decrease of $212,000 in other employee compensation expenses. The decrease in foreclosed property expenses related to a $1.2 million write-down in the prior year on the Bank's largest foreclosed property comprised of condominium units compared to a write-down of $133,000 in 2014. The residential condominium units of this property were sold during the second quarter of 2014.

Income Tax Provision. Income tax provision increased $787,000 to $538,000 tax expense for the three months ended June 30, 2014 from an income tax benefit of $249,000 for the three-month period ended June 30, 2013, primarily due to an increase in pre-tax income. The effective tax rate was 36.38% for the three months ended June 30, 2014 compared to 54.73% for the three months ended June 30, 2013, with the decrease primarily resulting from the effects of favorable permanent tax differences relative to the size of the pre-tax income in 2014 compared to 2013.

Results of Operations for the Six Months Ended June 30, 2014 and 2013

Overview. Net income was $1.3 million, or $0.30 per diluted share, for the six
months ended June 30, 2014 compared to $534,000, or $0.11 per diluted share, for
. . .
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