ASBB Asb Bancorp, Inc.

Item 3 — Advisory Vote on the Approval of Compensation of the Named Executive Officers

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) requires, among other things, that the Company permit a non-binding advisory vote on the compensation of its named executive officers, as described in the tabular disclosure regarding named executive officer compensation and the accompanying narrative disclosure in this proxy statement.

We believe that our executive compensation policies and procedures are strongly aligned with the long-term interests of our shareholders. We also believe that levels of compensation received by our senior executive officers are fair, reasonable and within the ranges of compensation paid by comparable financial institutions to similarly situated executives.

This proposal, commonly known as a “say-on-pay” proposal, gives the Company’s shareholders the opportunity to endorse or not endorse the Company’s executive compensation program and policies through the following resolution:

“Resolved, that the Company’s shareholders approve the compensation paid to the Company’s named executive officers, as described in the Compensation Discussion and Analysis and compensation tables and narrative disclosure in this proxy statement.”

 

We urge shareholders to read the “Compensation Discussion and Analysis” and the related narrative and tabular disclosure that follow it.  The “Compensation Discussion and Analysis” provides detailed information regarding our executive compensation program, policy and processes, as well as the compensation of our named executive officers.

Because the vote is advisory, it will not be binding upon the Company or its Board of Directors or Compensation Committee. However, the Compensation Committee will take into account the outcome of the vote when considering future executive compensation arrangements.

The Board of Directors recommends that shareholders vote “FOR” approval of the compensation of the named executive officers as described in the “Compensation Discussion and   Analysis” and compensation tables and narrative disclosure in this proxy statement.

Item 4 — Re-Approval of the Performance Goals Included in the ASB Bancorp, Inc. 2012 Equity Incentive Plan

The Company’s 2012 Equity Incentive Plan (the “2012 Plan”) (included as Appendix A) is intended to allow awards under the 2012 Plan to qualify as tax-deductible performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).  Section 162(m) generally places a $1 million annual limit on a company’s tax deduction for compensation paid to certain senior executives (sometimes referred to as “covered employees”), other than compensation that satisfies the applicable requirements for a performance-based compensation exception. The Company’s covered employees include its Chief Executive Officer and each of its other three most highly-paid executive officers, other than the Chief Financial Officer.  A performance-based award made under the 2012 Plan is eligible for this performance-based compensation exception provided that certain Section 162(m) requirements are met. One of these requirements relates to shareholder approval (and, in certain cases, re-approval) of the material terms of the performance goals underlying the performance-based award.

The performance goals in the 2012 Plan were approved by shareholders on May 24, 2012.  In order for certain performance-based awards that may be made in the future under the 2012 Plan to be eligible for the performance-based compensation exception under Section 162(m), among other things Section 162(m) requires re-approval of those performance goals after five years if the compensation committee has retained discretion to vary the targets under the performance goals from year to year. The Compensation Committee has retained discretion to vary the targets under the performance goals from year to year. Accordingly, the Company is seeking re-approval of the performance goals included in the 2012 Plan in order to preserve the Company’s ability to grant certain awards in the future that qualify as tax-deductible performance-based compensation under Section 162(m).

We are not asking shareholders to approve an increase in the number of shares available under the 2012 Plan or any change in the 2012 Plan.

The following discussion summarizes the material terms of the performance goals and other material terms of the 2012 Plan. This discussion should be reviewed along with, and is qualified in its entirety by reference to, the full text of the 2012 Plan, which is included in this Proxy Statement as Appendix A.

MATERIAL TERMS OF THE PERFORMANCE GOALS

Eligible Participants . Officers, employees, and directors of the Company and its subsidiaries are eligible to receive awards under the 2012 Plan. The Compensation Committee will determine who

 

participates in the Plan. As of March 29, 2017, there were approximately 170 officers, employees, and directors eligible to participate in the 2012 Plan, with approximately 21 individuals holding outstanding awards.

Plan and Individual Award Limits .  The 2012 Plan provides that the maximum number of shares of the Company’s common stock that may be delivered pursuant to awards under the 2012 Plan is 781,837, of which the maximum number of shares of common stock that may be delivered pursuant to an award of restricted stock under the 2012 Plan is 223,382 and the maximum number of shares of common stock that may be delivered pursuant to option exercises is 558,455, in each case subject to adjustment as provided in Article 10 of the 2012 Plan. No participant may be granted, in each case during any calendar year, stock options intended to qualify under Section 162(m) covering in excess of 139,613 shares. The aggregate fair market value (determined as of the grant date) of all shares of common stock with respect to which incentive stock options are first exercisable by a participant in any calendar year may not exceed $100,000 (or any higher value as may be permitted under Section 422 of the Code).

Performance Goals .  Under the 2012 Plan, the vesting or payment of performance-based awards will be subject to the satisfaction of certain performance goals. The performance goals applicable to a particular award will be determined by the Compensation Committee at the time of grant. To the extent an award is intended to qualify for the performance-based exemption from the $1 million deduction limit under Section 162(m) of the Code, as described below, the performance goals will be based on the attainment of specified levels of one or more of the following measures: tangible book value and changes to tangible book value, basic earnings per common share, basic cash earnings per common share, diluted earnings per common share, diluted cash earnings per common share, net income, cash earnings, net interest income, noninterest income, general and administrative expense to average assets ratio, cash general and administrative expense to average assets ratio, efficiency ratio, cash efficiency ratio, return on average assets, cash return on average assets, return on average stockholders’ equity, cash return on average stockholders’ equity, return on average tangible stockholders’ equity, cash return on average tangible stockholders’ equity, core earnings, operating income, operating efficiency ratio, net interest rate spread, loan production volume, nonperforming loans, cash flow, strategic business objectives, consisting of one or more objectives based upon meeting specified cost targets, business expansion goals, and goals relating to acquisitions or divestitures, or goals relating to capital raising and capital management, or any combination of the foregoing. Each goal may be expressed on an absolute and/or relative basis, may be based on or otherwise employ comparisons based on internal targets, past performance of the Company or any subsidiary, operating unit or division of the Company and/or the past or current performance of other companies, and in the case of earnings-based measures, may use or employ comparisons relating to capital, stockholders’ equity and/or shares of common stock outstanding, or to assets or net assets.

ADDITIONAL SUMMARY DESCRIPTION OF THE 2012 PLAN

General.   Awards granted under the 2012 Plan may be in the form of non-statutory stock options, incentive stock options, restricted stock, performance shares, other stock-based awards or any combination of those awards. The 2012 Plan provides that awards may be made under the 2012 Plan for ten years following the adoption of the 2012 Plan by the Company’s board of directors, which occurred on March 20, 2012. The purpose of the 2012 Plan is to help promote the Company’s success by linking the interests of the participants to the interests of the Company’s shareholders, by providing participants with an incentive for outstanding performance.

Administration .  The Company’s Compensation Committee will administer the 2012 Plan. However, at times, the Board of Directors may administer the 2012 Plan. The Compensation Committee is intended to consist entirely of two or more “outside directors” within the meaning of Section 162(m) and who are “non-employee directors” as defined in Rule 16b-3 under the Securities Exchange Act of

 

1934 (the “Exchange Act”). The Compensation Committee will designate participants; determine the type or types of awards to be granted to each participant and the number, terms and conditions of awards; establish, adopt or revise any rules and regulations it deems advisable to administer the 2012 Plan; and make all other decisions and determinations necessary under the 2012 Plan. Any determination made by the Compensation Committee under the 2012 Plan will be made in the sole discretion of the Compensation Committee and such determinations will be final and binding on all persons.

Available Shares .  The 2012 Plan initially reserved 781,837 shares of our common stock for the issuance of awards, of which approximately 60,355 remained available as of April 6, 2017. Shares underlying awards that expire or are forfeited or terminated without being exercised or awards that are settled for cash will again be available for the grant of additional awards within the limits provided by the 2012 Plan. Shares withheld by or delivered to the Company to satisfy the exercise price of options or tax withholding obligations with respect to any award granted under the 2012 Plan will nonetheless be deemed to have been issued under the 2012 Plan.

Stock Options.   The 2012 Plan authorizes the grant of both incentive and non-statutory stock options, both of which are exercisable for shares of Company common stock. Incentive stock options can only be granted to our employees. The Board of Directors or the Compensation Committee will determine the exercise price at which a participant may exercise an option. Unless an individual award agreement provides otherwise, a participant may pay the option exercise price in the form of cash or check. In addition, where the Board of Directors or the Compensation Committee and applicable laws, rules and regulations permit, a participant may also make payment: (1) by delivery of shares of Company common stock; (2) by shares of common stock withheld upon exercise; (3) by cashless exercise; or (4) a combination of these methods. At the time of grant, the Board of Directors or the Company’s Compensation Committee will determine the term and conditions of an option and the period or periods during which a participant may exercise each option (which may not exceed ten years for incentive and non-statutory stock options, or five years for incentive stock options with respect to an employee who owns more than 10% of the total combined voting power of all classes of our stock. As of March 29, 2017, the fair market value (as that term is defined under the 2012 Plan) of a share of Company common stock was $34.00.

Restricted Stock.   The 2012 Plan provides for the award of restricted stock. Restricted stock awards are awards of Company common stock subject to certain conditions, which conditions must be met for the restricted stock award to vest and be earned, in whole or in part, and no longer subject to forfeiture. The Board of Directors or the Compensation Committee has the authority to determine the nature, length and starting date of the period during which a participant may earn a restricted stock award and will determine the conditions that must be satisfied in order for a restricted stock award to vest. Except for these conditions and any others imposed by the Board of Directors or the Compensation Committee, upon the grant of restricted stock, the recipient will have rights of a shareholder with respect to the restricted stock, including the right to vote the restricted stock and to receive all dividends and other distributions paid or made with respect to the restricted stock (which dividends relating to restricted stock subject to performance vesting conditions will only vest upon the vesting of the restricted stock relating to such dividends). During the restriction period set by the Board of Directors or the Compensation Committee, the recipient may not sell, transfer, pledge, exchange or otherwise encumber the restricted stock.

Performance Shares.   The 2012 Plan provides for the award of performance shares. An award of a performance share is a grant of a right to receive shares of Company common stock, which is contingent upon the achievement of performance or other objectives during a specified period. The Board of Directors or the Compensation Committee has the authority to determine the nature, length and starting date of the period during which a participant may earn a performance share and will determine the

 

conditions that must be satisfied for a performance share to vest. These conditions may include specific performance objectives, continued service or employment for a specific period of time or a combination of conditions. The 2012 Plan sets forth some of the business criteria that can be used as a condition of earning a performance share.

Other Stock-Based Awards.   The Board of Directors or the Compensation Committee is also authorized, subject to limitations under applicable law, to grant other awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, the Company’s common stock or factors that may influence the value of stock awards with value and payment contingent upon performance of the Company or other factors designated by the Board of Directors or the Compensation Committee. The Board of Directors or the Compensation Committee shall determine the terms and conditions of such awards.

Limitations on Transfer; Beneficiaries .  Generally, participants may not assign or transfer awards, other than by will or the laws of descent and distribution or, except in the case of an incentive stock option, by a qualified domestic relations order. The Compensation Committee may permit other transfers, however, where it concludes that a transfer will not accelerate taxation, will not cause any option intended to be an incentive stock option to fail to qualify as such, and that a transfer is otherwise appropriate and desirable, taking into account any factors deemed relevant, including, without limitation, applicable state or federal tax or securities laws or regulations. In no event will it be permissible to transfer outstanding unexercised awards in exchange for value. A participant may, in the manner determined by the Compensation Committee, designate a beneficiary to exercise the rights of the participant and receive any distribution with respect to any award upon the participant’s death.

Vesting Requirements .  Under the 2012 Plan, awards may be earned over a specified time period and/or by reference to the attainment of specified performance conditions. Under applicable FDIC rules, awards made under a time-based vesting schedule may vest no more rapidly than at the rate of 20% per year, beginning on the first anniversary of the grant date. Subject to this regulatory limitation, the Compensation Committee may also include performance-based vesting conditions in any award. The 2012 Plan identifies a variety of industry-specific performance metrics from among which the Compensation Committee may choose the vesting conditions applicable to a specific award or portion of an award.

Acceleration Upon Certain Events .  Unless an award agreement provides otherwise, if a participant’s service terminates by reason of death or disability, all of the participant’s outstanding options and restricted stock awards will become fully exercisable and all time-based vesting restrictions on the outstanding awards will lapse. The vesting of awards will also accelerate upon a change in control, as defined in the 2012 Plan.

Adjustments .   In the event of a stock split, a dividend payable in shares of Company common stock, or a combination or consolidation of the Company’s common stock into a lesser number of shares, the 2012 Plan provides for the automatic proportionate adjustment of the share authorization limits, and the shares then subject to each award under the 2012 Plan, without any change in the aggregate purchase price for each award. If the Company is involved in another corporate transaction or event that affects its common stock, such as an extraordinary cash dividend, recapitalization, merger, consolidation, split-up, spin-off, combination or exchange of shares, the share authorization limits under the 2012 Plan will be adjusted proportionately and the Compensation Committee will adjust the 2012 Plan and outstanding awards as necessary to preserve the benefits or potential benefits of the awards.

Termination and Amendment .  The Board of Directors or the Compensation Committee may, at any time and from time to time, terminate, modify or amend the 2012 Plan. Shareholders must approve

 

amendments to the 2012 Plan that will materially increase the number of shares of stock issuable under the 2012 Plan, expand the types of awards provided under the 2012 Plan, materially expand the class of participants eligible to participate in the 2012 Plan, materially extend the term of the 2012 Plan, reduce the exercise price of stock options or otherwise constitute a material amendment requiring shareholder approval under applicable stock market or stock exchange listing requirements, laws, policies or regulations. In addition, the Board of Directors or the Compensation Committee may condition any amendment on the approval of the shareholders for any other reason. No termination or amendment of the 2012 Plan may adversely affect any award previously granted under the 2012 Plan without the written consent of the affected participant.

Federal Income Tax Consequences .  The following is a summary of certain federal income tax consequences of awards made under the 2012 Plan based upon the laws in effect on the date hereof. The discussion is general in nature and does not take into account a number of considerations which may apply in light of the circumstances of a particular participant under the 2012 Plan. The income tax consequences under applicable state and local tax laws may not be the same as under federal income tax laws.

·

Non-Statutory Stock Options.  An option holder does not recognize any income upon the grant of a non-statutory stock option under the 2012 Plan. When the optionee exercises a non-statutory option, however, he or she will recognize ordinary income equal to the excess of the fair market value of the common stock received upon exercise of the option at the time of exercise over the exercise price, and the Company will be allowed a corresponding federal income tax deduction, subject to any applicable limitations under Internal Revenue Code Section 162(m). Any gain that the optionee realizes when he or she later sells or disposes of the option shares will be short-term or long-term capital gain, depending on how long the optionee held the shares.

·

Incentive Stock Options.  An option holder typically does not recognize any income upon the grant or exercise of an incentive stock option. If the optionee holds the option shares for at least two years after the date we grant the option and for one year after receiving the shares upon exercise, the difference between the exercise price and the amount realized upon sale or disposition of the option shares will be long-term capital gain or loss, and the Company will not be entitled to a federal income tax deduction. If the optionee disposes of the option shares in a sale, exchange, or other disqualifying disposition before the expiration of the required holding periods, he or she will recognize taxable ordinary income in an amount equal to the excess of the fair market value of the option shares at the time of exercise over the exercise price, and the Company will be allowed a federal income tax deduction equal to that same amount. While the exercise of an incentive stock option may not result in current taxable income, the excess of the fair market value of the option shares at the time of exercise over the exercise price may be an item of adjustment for determining the optionee’s alternative minimum taxable income.

·

Restricted Stock.  Unless a participant makes an election to accelerate recognition of income to the date of grant as described below, a participant will not recognize income, and the Company will not be allowed a federal income tax deduction at the time a restricted stock award is granted, provided that the award is subject to restrictions on transfer and is subject to a substantial risk of forfeiture. When the restrictions lapse, the participant will recognize ordinary income equal to the fair market value of the common stock as of that date (less any amount he or she paid for the stock), and the Company will be allowed a corresponding federal income tax deduction at that time, subject to any applicable limitations under Internal Revenue Code Section 162(m). If the participant files an election under Section 83(b) of the Code within 30 days after the date of grant of the restricted stock, he or she will recognize ordinary income as of the date of grant equal to the fair market value of the stock on that date (less any amount paid for the stock), and the

 

Company will be allowed a corresponding federal income tax deduction at that time, subject to any applicable limitations under Section 162(m) of the Code. Any future income recognized in the stock will be taxable to the participant at capital gains rates. However, if the participant later forfeits the stock, the participant will not be able to recover the tax previously paid pursuant to a Code Section 83(b) election.

·

Performance Shares and Other Stock-Based Awards.  When the restrictions lapse on the awards, the participant will recognize ordinary income equal to the fair market value of the common stock as of that date (less any amount he or she paid for the stock), and the Company will be allowed a corresponding federal income tax deduction at that time, subject to any applicable limitations under Section 162(m) of the Code. Any future income recognized in the stock will be taxable to the participant at capital gains rates

PLAN BENEFITS

The number of awards granted under the 2012 Plan in any year is subject to the Compensation Committee’s discretion and is, therefore, not determinable for any future year.  It is not possible to determine the actual amount of compensation that will be earned under the 2012 Plan for the year ended December 31, 2017 or in future years because the awards earned will depend on future performance as measured against the applicable performance goals established by the Compensation Committee. For further details on the awards granted during 2016, please refer to the director and executive compensation tables beginning on 11 and 37, respectively, of this Proxy Statement.

In accordance with SEC rules, the following table lists all outstanding options granted to the individuals and groups indicated below under the 2012 Plan as of March 29, 2017. The option awards listed below for the covered directors and executives include the option awards listed in the director and executive compensation tables beginning on page 11 and 37, respectively, of this Proxy Statement and are not additional awards.

 

The amounts in the table above do not include the following numbers of shares of our common stock previously subject to stock options granted under the 2012 Plan that are no longer subject to such stock options because such stock options have expired or been exercised: all current executive officers as a group, 10,000 shares; all current directors who are not executive officers as a group, -0- shares; and all current employees, including all current officers who are not executive officers, as a group: 1,600 shares.

As of March 29, 2017, the closing price of our common stock on the NASDAQ Global Market was $34.00   per share.

SHAREHOLDER VOTE REQUIRED

The affirmative vote of a majority of votes cast by the Company’s shareholders at the annual meeting is required for approval of this Proposal No. 4.

The Board of Directors recommends that shareholders vote “FOR” the re-approval of the performance goals included in the ASB Bancorp, Inc. 2012 Equity Incentive Plan.

 

COMPENSATION DISCUSSION AND ANALYSIS

The following discussion provides a description of our decision making process and philosophy for compensating our named executive officers in 2016.  This discussion also describes the material components of our 2016 compensation program.  This discussion should be read together with the compensation tables for our named executive officers located in the “Executive Compensation” section of this proxy statement.

Our 2016 named executive officers were:

Suzanne S. DeFerie, President and Chief Executive Officer

Kirby A. Tyndall, Executive Vice President and Chief Financial Officer

David A. Kozak, Executive Vice President and Chief Credit Officer

Vikki D. Bailey, Executive Vice President and Chief Retail Officer

Below is information regarding our non-director named executive officers.  Ages presented are as of December 31, 2016.

Kirby A. Tyndall has served as Executive Vice President and Chief Financial Officer of Asheville Savings Bank since September 2010.  Mr. Tyndall was Vice President and Finance Special Projects Coordinator at Asheville Savings Bank from November 2009 to September 2010. Age 61.

David A. Kozak has served as Executive Vice President and Chief Credit Officer of Asheville Savings Bank since December 2014.  Mr. Kozak was Executive Vice President and Senior Lending Officer of Asheville Savings Bank from April 2008 to July 2010 and served as Executive Vice President and Chief Lending Officer from August 2010 to December 2014. Age 56.

Vikki D. Bailey has served as Executive Vice President and Chief Retail Officer of Asheville Savings Bank since December 2012.  Ms. Bailey was Senior Vice President and Regional Manager at Asheville Savings Bank from September 2011 to December 2012.  Prior to September 2011, Ms. Bailey served in various capacities since she joined Asheville Savings Bank in 1976. Age 58.

Executive Summary

It is the intent of the Compensation Committee to provide our named executive officers with a total compensation package that is market competitive, promotes the achievement of our strategic objectives and is aligned with operating and other performance metrics to support long-term shareholder value.  In addition to providing our named executive officers with competitive benefits, we also encourage stock ownership.

Consistent with the terms of its charter, the Compensation Committee reviews our executive compensation program annually to ensure that the program incorporates features that mitigate potential for risk taking.

Key Business Results.   In 2016, the Company successfully pursued many important goals that contributed to strengthening the balance sheet and growing value for shareholders.

Key business results include:

·

Net income decreased to $1.2 million, or $0.33 per diluted common share, for the year ended December 31, 2016 from $3.6 million, or $0.89 per diluted common share, for the year ended

 

December 31, 2015. Excluding the impact of the one-time charge for settlement of the Bank’s qualified pension plan liability during the fourth quarter of 2016, net of income taxes, net income increased to $6.0 million, or $1.65 per diluted common share, for the year ended December 31, 2016 from $3.6 million, or $0.89 per diluted common share, for 2015.

·

Asset quality improved as nonperforming assets declined 24.1% to $6.3 million, or 0.79% of total assets, at December 31, 2016, compared to $8.3 million, or 1.06% of total assets, at December 31, 2015.

·

The Bank had strong loan growth reflected by $291.5 million in new loan originations, including $140.9 million in commercial loans, as the Bank capitalized on growth opportunities in the markets it serves.

·

Core deposits grew to $516.1 million at December 31, 2016 compared to $495.6 million at December 31, 2015.  Core deposits are total deposits excluding time deposits.

Compensation Highlights.   In light of the Company’s financial performance in 2016, the Company’s pay for performance philosophy and management’s contribution to the achievement of our strategic initiatives, the Compensation Committee took the following actions with respect to the compensation programs for our named executive officers:

·

Payments under Our Short-Term Cash-Based Incentive Compensation Plan.   Based on the Company’s 2016 financial performance and updated weights for performance measures, our named executive officers earned lower cash incentives under our 2016 Management Incentive Plan.  Actual payouts of 66.3% of target were made.  See “Short-Term Incentive Compensation Benefits” for information on the 2016 performance measures and payments made to our named executive officers.

·

Use of Equity Awards .  Following the adoption of our 2012 Equity Incentive Plan, the Company granted our named executive officers stock options and restricted stock awards. The stock option grants and restricted stock awards vest over a five-year period.  See “Long-Term Incentive Compensation” for the terms and conditions of the equity awards granted to our named executive officers. There were no equity awards granted to our named executive officers in 2016.

·

Employment Agreement Renewals.  The Compensation Committee recommended and the Board of Directors approved the extension of the term of Ms. DeFerie’s employment agreement through December 31, 2019, and the extension of the term of the employment agreements for the other named executive officers through December 31, 2018.

Summary of Compensation Practices in 2016.   Our named executive officers’ 2016 compensation package consisted primarily of the following components (in addition to general health and welfare arrangements in which all of our full-time employees participate).

 

 

Compensation Philosophy

Our compensation philosophy starts from the premise that our success depends, in large part, on the dedication and commitment of the people we place in key operating positions to drive our business strategy.  We strive to satisfy the demands of our business model by providing our management team with incentives tied to the successful implementation of our business objectives.  However, we recognize that we operate in a competitive environment for talent.  Therefore, our approach to compensation considers the full range of compensation techniques that enable us to compare favorably with our peers as we seek to attract and retain key personnel.

We base our compensation decisions on the following principles:

·

Meeting the Demands of the Market – Our goal is to compensate our employees at competitive levels that position us as the employer of choice among our peers who provide similar financial services in the markets we serve.

·

Driving Performance – We structure our short-term and long-term incentive compensation plans around the attainment of corporate performance goals that return positive results to our bottom line.

·

Reflecting Our Business Philosophy – Our approach to compensation reflects our values and the way we do business in the communities we serve.

·

Aligning with Shareholders – With the adoption of our 2012 Equity Incentive Plan, we use equity compensation as a key component of our compensation mix to develop a culture of ownership among our key personnel and to align their individual financial interest with the interests of our shareholders.

Role of Compensation Committee

Our Compensation Committee has been charged with the responsibility for establishing, implementing and monitoring adherence to our compensation philosophy and assuring the named executive officers are effectively compensated in a manner which is internally equitable and externally competitive.

The Compensation Committee reviews all of the elements of compensation for our named executive officers annually to ensure that the mix of benefits accurately reflects our compensation philosophy.  During 2016, the Compensation Committee reviewed the performance measures under the ASB Bancorp, Inc. 2012 Equity Incentive Plan and consulted regarding re-approval of such measures by the Company’s shareholders pursuant to Section 162(m) of the Internal Revenue Code.  The Compensation Committee operates under a written charter that establishes its responsibilities.  The

 

Compensation Committee reviews the charter annually to ensure that the scope of the charter is consistent with the Compensation Committee’s role.  A copy of our Compensation Committee Charter can be found on our web site ( http://ir.ashevillesavingsbank.com/govdocs.aspx?iid=4289733 ).

Role of Compensation Consultant

The Compensation Committee may engage the services of compensation consultants from time to time. The Compensation Committee retained the services of ChaseCompGroup, LLC, a division of Arthur J. Gallagher & Co., an independent compensation consulting firm, to conduct an executive compensation review for our named executive officers for the 2016 and 2017 compensation.  The review provided the Compensation Committee with information that allowed the Committee to develop a compensation program for our named executive officers that we believe was competitive with our peers.  Specifically, ChaseCompGroup, LLC provided the following services to the Committee:

·

Assisted the Compensation Committee of the Board of Directors in reviewing the Company’s compensation philosophy.

·

Provided education to the Compensation Committee regarding industry compensation trends.

·

Determined the Company’s compensation peer group of publicly-traded financial institutions.

·

Reviewed the competitiveness of the compensation elements of the Company’s top executives, including base salary, annual incentive or bonus, long-term incentives (stock options and restricted stock), all other compensation, and changes in retirement benefits as compared to that of the customized peer group.

·

Reviewed the competitiveness of the Company’s director compensation elements as compared to that of the customized peer group.

While the Compensation Committee considers input from ChaseCompGroup, LLC when making compensation decisions, the Committee’s final decisions reflect many factors and considerations.

Compensation Committee’s Relationship with its Independent Compensation Consultant

The Compensation Committee considered the independence of ChaseCompGroup, LLC in accordance with SEC rules and NASDAQ listing standards. The Compensation Committee requested and received a report from ChaseCompGroup addressing the independence of ChaseCompGroup and its senior advisors. The following factors were considered: (1) other services provided to us by ChaseCompGroup; (2) fees paid by us as a percentage of ChaseCompGroup’s total revenue; (3) policies or procedures maintained by ChaseCompGroup that are designed to prevent a conflict of interest; (4) any business or personal relationships between the senior advisors and a member of the Compensation Committee; (5) any Company stock owned by the senior advisors; (6) any business or personal relationships between our executive officers and the senior advisors; and (7) any other actual or potential conflicts of interest. The Compensation Committee concluded that the work performed by ChaseCompGroup and ChaseCompGroup’s senior advisors involved in the engagements did not raise any conflict of interest.

 

Role of Management

Our Chief Executive Officer and Human Resources Manager develop recommendations, in consultation with external advisors, regarding the appropriate mix and level of compensation that should be provided to our named executive officers and directors.  During 2016, the Human Resources Manager provided the Compensation Committee with compensation information gathered by the Company’s  external compensation consultant, ChaseCompGroup, from the peer group shown below that allowed the Committee to view our executive compensation program in light of the compensation programs provided by our peers.

The Chief Executive Officer develops recommendations for the other named executive officers and the Compensation Committee, with Board approval, determines our Chief Executive Officer’s compensation package.  The management recommendations consider the objectives of our compensation philosophy and the range of compensation programs authorized by the Compensation Committee.  The Chief Executive Officer meets with the Compensation Committee to discuss the recommendations and also reviews with the Committee her recommendations concerning the compensation of our named executive officers.  Our Chief Executive Officer does not participate in Committee discussions relating to her compensation.

Peer Group

In 2016, for purposes of benchmarking our total compensation to our peers, ChaseCompGroup, LLC developed a peer group consisting of fifteen publicly traded banks with asset sizes ranging between $532 million and $1.5 billion as of December 31, 2015, as reported by SNLFinancial, located in medium-sized metropolitan areas (as well as non-coastal regions) in North Carolina, South Carolina, Virginia, and eastern Tennessee, positioning us at approximately the 42 ^nd percentile of our peer group.  The compensation data and financial performance results for the institutions noted below were obtained through a variety of sources including publicly disclosed information, North Carolina Bankers Association annual compensation review and American Bankers Association compensation survey.

The custom peer group was refined, as four of the previous peers had been acquired or were in the process of merging with another organization and one due to performance.  The final group consists of fifteen publicly traded banks, all of which were included in our previous 2015 study.

The Compensation Committee reviews the peer group on an annual basis with our Human Resources Manager to ensure it continues to reflect the Company’s asset size and excludes institutions that have been acquired.  Periodically, the Compensation Committee retains the services of an independent compensation consulting firm to conduct an executive compensation review for the named executive officers, as explained in further detail above, and engaged ChaseCompGroup, LLC during 2016

 

to review 2016 executive compensation in order to provide advice regarding the 2017 executive compensation for the named executive officers.

Elements Used to Implement Our Compensation Objectives

We believe that we can meet the objectives of our compensation philosophy by achieving a balance among base salary, short-term incentives and long-term incentives, retirement benefits and health and welfare arrangements that is competitive with our industry peers and creates appropriate incentives for our named executive officers.

Base Salary

Our Compensation Committee sets base salaries for our named executive officers based primarily on:

·

each individual officer’s performance and contribution to our Company;

·

the Bank’s financial performance for the prior year; and

·

base salaries paid to executive officers at comparable companies.

For 2016, the Committee’s information on base salaries at comparable companies comes from a variety of sources including, but not limited to, an analysis prepared by the Bank’s Human Resources Manager.  See “Peer Group” for information on the peer financial institutions that were used by the Compensation Committee to benchmark base salaries.

See “Executive Compensation — Summary Compensation Table” for the base salaries paid to our named executive officers in 2016.

Short-Term Incentive Compensation Benefits

Management Incentive Plan (“MIP”). The MIP is intended to provide participants with an incentive to enhance the profitability of the Bank within the constraints of safe, sound banking practices by providing participants with a cash payment if the Bank attains certain corporate performance goals during the performance period.  The performance period runs from January 1 ^st through December 31 ^st . The Chief Executive Officer of the Bank administers the MIP with the consent and approval of the Board of Directors and the Compensation Committee.

Under the MIP, each named executive officer is given a minimum, target and maximum incentive opportunity which can be reached upon the attainment of certain performance goals.  The incentive opportunities are based on a percentage of base salary.  The plan called for the following incentive opportunities for each named executive officer for 2016:  Ms. DeFerie – minimum 16.9%; target 33.8%; maximum 50.7%; Messrs. Tyndall and Kozak and Ms. Bailey – minimum 13.2%; target 26.3%; maximum 39.5%.  At the beginning of the 2013 performance period, the Compensation Committee, upon the recommendation of management as an expense reduction initiative, elected to reduce the incentive award opportunity for all participants by 50% for the 2013 and 2014 performance periods.  For the 2015 and 2016 performance periods, 25% of the incentive award opportunity was reinstated. See the table under “ Short-Term Incentive Compensation Benefits — 2016 Management Incentive Plan Awards” for incentives earned in 2016.

 

The 2016 MIP goals were established by the Compensation Committee and measured based on: (i) corporate net income, (ii) asset quality, (iii) ending loan balances, and (iv) average core deposit balances. Each goal was given a specific weighting with the highest weighting assigned to corporate net income (40%).

To be eligible to receive an MIP payout, plan participants must be employed by the Bank on the last day of the plan year. However, the Compensation Committee, in its sole discretion, may pay awards on a pro rata basis if the named executive officers are not employed as of the payment date due to retirement or disability. Before MIP awards are distributed, our Board of Directors, or its designated committee, must approve the awards and confirm that all of the corporate goals, as set forth in the tables below, have been satisfied.

2016 Management Incentive Plan Awards

The following tables set forth the performance measures and the weight given to each measure for each named executive officer.  The tables also illustrate the threshold, target and maximum levels of incentive compensation each named executive was eligible to earn upon the achievement of each of the noted goals.  The Board of Directors can also exercise negative discretion and make no payments under the MIP despite the satisfaction of the noted performance goals.  All of the named executive officers participated in the 2016 MIP.  See “Executive Compensation — Summary Compensation Table” for details on MIP awards earned in 2016.

 

Health and Welfare Plans

Our health and welfare benefit plans are open to all full-time employees.  Generally, under each plan, our named executive officers receive either the same benefit as all other salaried employees or a benefit that is exactly proportional, as a percentage of salary, to the benefits that others receive.  In addition, the Bank also provides a long-term disability income replacement benefit to all employees equal to 60% of base salary.  Our named executive officers are entitled to an additional 15%, which results in providing our officers with a 75% income replacement benefit in the event of a disability.  A Bank-paid long-term care insurance policy is provided to Ms. DeFerie and Messrs. Tyndall and Kozak. Ms. Bailey is not eligible for long-term care insurance due to the plan being frozen to new participants prior to her appointment as executive officer.

Retirement Plans

401(k) Plan .  Participation in our tax-qualified 401(k) plan is available to all of our employees who meet minimum eligibility requirements.  This plan allows our employees to save money for retirement in a tax-advantaged manner.  The Bank matches 100% of the first 3% a participant defers into the plan and 50% of the next 2%.  All of the named executive officers elected to participate in the 401(k) plan.

Employee Stock Ownership Plan (ESOP).   Participation in our tax qualified ESOP is available to all of our employees over the age of 21 with at least one year of service and 1,000 hours of service per year.  The plan provides our employees with the opportunity to accumulate a retirement benefit in our common stock at no cost to the employees.  All of the named executive officers participate in the ESOP.

 

Defined Benefit Plan .  Participants in the Bank’s defined benefit pension plan receive retirement benefits based on a participant’s years of service and average compensation over all years of service with the Bank.  Participants are 100% vested in their pension plan benefits after five years of service.  The pension plan was frozen to new participation effective December 31, 2009 and the plan’s benefit accruals for future services were frozen effective March 31, 2013.  The decision to freeze the pension plan for eligibility and future accruals was based on an analysis of the total costs associated with the Bank’s retirement program, including the implementation of the ESOP in connection with the Bank’s mutual to stock conversion.  All of the named executive officers participate in the defined benefit pension plan except for Mr. Tyndall, who began employment with the Bank after the plan was frozen to new participants. In April 2016, the Bank decided to terminate its Qualified Pension Plan effective July 1, 2016 for all participants. The pension plan liability was settled for all participants in November 2016.

Non-Qualified Defined Benefit Pension Plan .  Our non-qualified defined benefit pension plan (the “Excess Plan”) is intended to provide supplemental retirement benefits to a select group of management or highly compensated employees. Participants are entitled to an accrued benefit under the Excess Plan equal to the difference between the accrued benefit under our tax-qualified defined benefit pension plan without regard to the limits imposed by Sections 401(a)(17) and 415 of the Internal Revenue Code on compensation and the actual accrued benefit under the defined benefit pension plan.  Participants vest in their Excess Plan benefit in accordance with the vesting schedule in the defined benefit pension plan.

As of December 31, 2016, Ms. DeFerie was the only named executive officer participating in the Excess Plan.  The Excess Plan was frozen to new participation effective December 31, 2009 and the plan’s benefit accruals for future services was frozen effective March 31, 2013.  The decision to freeze the Excess Plan for eligibility and future accruals was based on an analysis of the total costs associated with the Bank’s retirement program, including the implementation of the ESOP in connection with the Bank’s mutual to stock conversion. In July 2016, the Bank decided to terminate its Non-Qualified Pension Plan liability for all remaining participants effective August 15, 2016.  The settlement is expected to be recognized in the third quarter of 2017.

Our retirement plans and arrangements are consistent with the arrangements provided to senior executive officers in the banking industry and assist us in attracting and retaining top talent by providing executives with financial security in retirement.

Long-Term Incentive Compensation

In 2012, our shareholders approved the ASB Bancorp, Inc. 2012 Equity Incentive Plan.  The plan provides for the grant of restricted stock and stock options to eligible employees and members of our Board of Directors.  Our Compensation Committee developed a long-term incentive program that uses our equity incentive plan to align the interests of our directors and named executive officers with our shareholders and focuses our executives on long-term sustained performance through the grant of stock options and restricted stock.  Consistent with our compensation philosophy, in February 2013, our Compensation Committee awarded each of our named executive officers stock options and restricted stock under our 2012 Equity Incentive Plan. There were no equity awards granted to our named executive officers in 2016.

Stock Compensation Grant and Award Practices; Timing Issues

The Compensation Committee periodically consults with compensation experts to ensure that our equity award program is competitive with our peers.  As a general matter, the Compensation Committee’s process is independent of any consideration of the timing of the release of material non-public

 

information, including with respect to the determination of grant dates or stock option exercise prices.  Similarly, we have never timed the release of material non-public information to affect the value of executive compensation.  In general, the release of such information reflects long-established timetables for the disclosure of material non-public information such as earnings reports or, with respect to other events reportable under federal securities laws, the applicable requirements of such laws with respect to timing of disclosure.  The Compensation Committee’s decisions are reviewed by the full Board of Directors.

Stock Ownership Guidelines

The Company believes that it is in the best interest of the Company and its shareholders to align the personal financial interests of the Company’s directors and officers with those of shareholders of the Company.  As such, the Board of Directors implemented stock ownership guidelines in the first quarter of 2013 for our directors and named executive officers that allow our directors and named executive officers to satisfy the guidelines within a three-year period.  The guidelines are based on multiples of annual compensation and all directors and named executive officers currently meet the guidelines, with the exception of recently appointed director, Mr. Kenneth Wrench, who is within his initial three-year period as a director to meet these guidelines.

Employment Agreements

We maintain employment agreements with our named executive officers to ensure the stability of our management team by providing the executives with financial protection if an executive is terminated in connection with a change in control of the Company or in the event an executive is involuntarily terminated by the Bank or the Company for reasons other than Cause (as defined in the employment agreements). We believe that the terms and conditions of our employment agreements are consistent with the agreements provided to senior officers in the thrift industry and reflect best practices, such as the exclusion of tax gross ups. See “Executive Compensation ― Employment Agreements” and “— Potential Post-Termination Benefits” for a detailed discussion of the terms of the employment agreements and the benefits provided upon termination of service for our named executive officers.

On an annual basis, the Compensation Committee recommends to the Board whether it should extend the terms of an agreement with a named executive officer.  The Compensation Committee’s recommendation reflects its evaluation of the executive’s role in the Company and his or her overall job performance.  Effective December 31, 2016, all of the employment agreements with our named executive officers were extended for an additional year.

Tax and Accounting Considerations

In consultation with our advisors, we evaluate the tax and accounting treatment of each of our compensation programs at the time of adoption and on an annual basis to ensure an understanding of the financial impact of the program.   To preserve maximum flexibility in the design and implementation of our compensation program, we have not adopted a formal policy that requires all compensation to be tax deductible.  However, to the greatest extent possible, it is our intent to structure our compensation programs in a tax efficient manner.