PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ASB BANCORP, INC. AND SUBSIDIARY
|
CONSOLIDATED
BALANCE SHEETS (Unaudited)
|
(Dollars in thousands, except par values)
|
|
June 30,
2017
|
|
|
December 31,
2016*
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
10,657
|
|
|
$
|
10,862
|
|
Interest-earning deposits with banks
|
|
|
42,654
|
|
|
|
35,862
|
|
Total cash and cash equivalents
|
|
|
53,311
|
|
|
|
46,724
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale (amortized cost of $96,979 at June 30, 2017 and $102,482 at December 31, 2016)
|
|
|
95,935
|
|
|
|
99,909
|
|
Securities held to maturity (estimated fair value of $3,782 at June 30, 2017 and $3,875 at December 31, 2016)
|
|
|
3,615
|
|
|
|
3,672
|
|
Investment in Federal Home Loan Bank stock, at cost
|
|
|
1,566
|
|
|
|
2,829
|
|
Loans held for sale
|
|
|
4,097
|
|
|
|
7,145
|
|
Loans receivable (net of deferred loan fees of $178 at June 30, 2017 and $241 at December 31, 2016)
|
|
|
613,603
|
|
|
|
603,582
|
|
Allowance for loan losses
|
|
|
(6,659
|
)
|
|
|
(6,544
|
)
|
Loans receivable, net
|
|
|
606,944
|
|
|
|
597,038
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
10,854
|
|
|
|
11,122
|
|
Foreclosed real estate
|
|
|
5,034
|
|
|
|
5,069
|
|
Deferred income tax assets, net
|
|
|
3,274
|
|
|
|
3,863
|
|
Bank owned life insurance
|
|
|
10,355
|
|
|
|
10,185
|
|
Other assets
|
|
|
6,403
|
|
|
|
8,267
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
801,388
|
|
|
$
|
795,823
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
$
|
136,712
|
|
|
$
|
123,999
|
|
Interest-bearing deposits
|
|
|
540,735
|
|
|
|
523,624
|
|
Total deposits
|
|
|
677,447
|
|
|
|
647,623
|
|
Overnight and short-term borrowings
|
|
|
311
|
|
|
|
392
|
|
Federal Home Loan Bank advances
|
|
|
20,000
|
|
|
|
50,000
|
|
Accounts payable and other liabilities
|
|
|
7,363
|
|
|
|
6,671
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
705,121
|
|
|
|
704,686
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.01 par value; 60,000,000 shares authorized; 3,788,025 shares issued at June 30, 2017 and December 31, 2016
|
|
|
38
|
|
|
|
38
|
|
Additional paid-in capital
|
|
|
20,533
|
|
|
|
20,170
|
|
Retained earnings
|
|
|
80,292
|
|
|
|
77,306
|
|
Accumulated other comprehensive loss, net of tax
|
|
|
(886
|
)
|
|
|
(1,865
|
)
|
Unearned Employee Stock Ownership Plan (ESOP) shares
|
|
|
(2,669
|
)
|
|
|
(2,824
|
)
|
Unearned equity incentive plan shares
|
|
|
(661
|
)
|
|
|
(1,310
|
)
|
Stock-based deferral plan shares
|
|
|
(380
|
)
|
|
|
(378
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
96,267
|
|
|
|
91,137
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
801,388
|
|
|
$
|
795,823
|
|
*
|
Derived from audited consolidated financial statements.
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
ASB BANCORP, INC. AND SUBSIDIARY
|
CONSOLIDATED STATEMENTS OF
INCOME (Unaudited)
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(Dollars in thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
6,466
|
|
|
$
|
6,120
|
|
|
$
|
12,760
|
|
|
$
|
12,143
|
|
Securities
|
|
|
527
|
|
|
|
560
|
|
|
|
1,047
|
|
|
|
1,148
|
|
Other earning assets
|
|
|
121
|
|
|
|
75
|
|
|
|
230
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
7,114
|
|
|
|
6,755
|
|
|
|
14,037
|
|
|
|
13,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
422
|
|
|
|
362
|
|
|
|
812
|
|
|
|
716
|
|
Overnight and short-term borrowings
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
Federal Home Loan Bank advances
|
|
|
179
|
|
|
|
490
|
|
|
|
605
|
|
|
|
980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
601
|
|
|
|
854
|
|
|
|
1,417
|
|
|
|
1,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
6,513
|
|
|
|
5,901
|
|
|
|
12,620
|
|
|
|
11,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
75
|
|
|
|
104
|
|
|
|
132
|
|
|
|
503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
6,438
|
|
|
|
5,797
|
|
|
|
12,488
|
|
|
|
11,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking income
|
|
|
375
|
|
|
|
396
|
|
|
|
820
|
|
|
|
709
|
|
Deposit and other service charge income
|
|
|
699
|
|
|
|
734
|
|
|
|
1,433
|
|
|
|
1,397
|
|
Income from debit card services
|
|
|
422
|
|
|
|
472
|
|
|
|
851
|
|
|
|
907
|
|
Gain on sale of investment securities, net
|
|
|
-
|
|
|
|
716
|
|
|
|
27
|
|
|
|
1,172
|
|
Other noninterest income
|
|
|
261
|
|
|
|
158
|
|
|
|
572
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
1,757
|
|
|
|
2,476
|
|
|
|
3,703
|
|
|
|
4,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
3,377
|
|
|
|
3,271
|
|
|
|
6,608
|
|
|
|
6,584
|
|
Occupancy expense, net
|
|
|
374
|
|
|
|
438
|
|
|
|
804
|
|
|
|
872
|
|
Foreclosed property expenses
|
|
|
122
|
|
|
|
64
|
|
|
|
160
|
|
|
|
107
|
|
Data processing fees
|
|
|
603
|
|
|
|
648
|
|
|
|
1,220
|
|
|
|
1,315
|
|
Federal deposit insurance premiums
|
|
|
62
|
|
|
|
90
|
|
|
|
125
|
|
|
|
203
|
|
Advertising
|
|
|
107
|
|
|
|
131
|
|
|
|
208
|
|
|
|
233
|
|
Professional and outside services
|
|
|
182
|
|
|
|
223
|
|
|
|
402
|
|
|
|
543
|
|
Merger-related expenses
|
|
|
520
|
|
|
|
-
|
|
|
|
520
|
|
|
|
-
|
|
Other noninterest expenses
|
|
|
915
|
|
|
|
772
|
|
|
|
1,803
|
|
|
|
1,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expenses
|
|
|
6,262
|
|
|
|
5,637
|
|
|
|
11,850
|
|
|
|
11,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
1,933
|
|
|
|
2,636
|
|
|
|
4,341
|
|
|
|
4,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
781
|
|
|
|
940
|
|
|
|
1,355
|
|
|
|
1,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,152
|
|
|
$
|
1,696
|
|
|
$
|
2,986
|
|
|
$
|
2,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share – Basic
|
|
$
|
0.33
|
|
|
$
|
0.47
|
|
|
$
|
0.86
|
|
|
$
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share – Diluted
|
|
$
|
0.31
|
|
|
$
|
0.45
|
|
|
$
|
0.80
|
|
|
$
|
0.75
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
ASB BANCORP, INC. AND SUBSIDIARY
|
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (Unaudited)
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,152
|
|
|
$
|
1,696
|
|
|
$
|
2,986
|
|
|
$
|
2,817
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains
on securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of securities gains
recognized in net income
|
|
|
-
|
|
|
|
(716
|
)
|
|
|
(27
|
)
|
|
|
(1,172
|
)
|
Deferred income tax benefit
|
|
|
-
|
|
|
|
262
|
|
|
|
10
|
|
|
|
429
|
|
Gains arising during the period
|
|
|
1,155
|
|
|
|
1,837
|
|
|
|
1,556
|
|
|
|
3,344
|
|
Deferred income tax expense
|
|
|
(415
|
)
|
|
|
(673
|
)
|
|
|
(560
|
)
|
|
|
(1,225
|
)
|
Unrealized holding gains adjustment, net of tax
|
|
|
740
|
|
|
|
710
|
|
|
|
979
|
|
|
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
|
(60
|
)
|
|
|
(174
|
)
|
|
|
(118
|
)
|
|
|
(347
|
)
|
Net pension gain
|
|
|
60
|
|
|
|
174
|
|
|
|
118
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
740
|
|
|
|
710
|
|
|
|
979
|
|
|
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
1,892
|
|
|
$
|
2,406
|
|
|
$
|
3,965
|
|
|
$
|
4,193
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
ASB BANCORP, INC. AND SUBSIDIARY
|
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS’ EQUITY (Unaudited)
|
(Dollars in thousands)
|
|
Six Months Ended
June 30, 2017
|
|
|
|
|
|
|
Common stock
|
|
|
|
December 31, 2016
|
|
$
|
38
|
|
June 30, 2017
|
|
$
|
38
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
December 31, 2016
|
|
$
|
20,170
|
|
ESOP shares allocated
|
|
|
485
|
|
Stock-based compensation expense
|
|
|
527
|
|
Vesting of restricted stock
|
|
|
(649
|
)
|
June 30, 2017
|
|
$
|
20,533
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
December 31, 2016
|
|
$
|
77,306
|
|
Net income
|
|
|
2,986
|
|
June 30, 2017
|
|
$
|
80,292
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss), net of tax
|
|
|
|
|
December 31, 2016
|
|
$
|
(1,865
|
)
|
Other comprehensive income
|
|
|
979
|
|
June 30, 2017
|
|
$
|
(886
|
)
|
|
|
|
|
|
Unearned ESOP shares
|
|
|
|
|
December 31, 2016
|
|
$
|
(2,824
|
)
|
ESOP shares allocated
|
|
|
155
|
|
June 30, 2017
|
|
$
|
(2,669
|
)
|
|
|
|
|
|
Unearned equity incentive plan shares
|
|
|
|
|
December 31, 2016
|
|
$
|
(1,310
|
)
|
Vesting of restricted stock
|
|
|
649
|
|
June 30, 2017
|
|
$
|
(661
|
)
|
|
|
|
|
|
Stock-based deferral plan shares
|
|
|
|
|
December 31, 2016
|
|
$
|
(378
|
)
|
Stock-based deferral plan shares purchased
|
|
|
(2
|
)
|
June 30, 2017
|
|
$
|
(380
|
)
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
|
|
December 31, 2016
|
|
$
|
91,137
|
|
Net income
|
|
|
2,986
|
|
Other comprehensive income
|
|
|
979
|
|
ESOP shares allocated
|
|
|
640
|
|
Stock-based compensation expense
|
|
|
527
|
|
Stock-based deferral plan shares purchased
|
|
|
(2
|
)
|
June 30, 2017
|
|
$
|
96,267
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
ASB BANCORP, INC. AND SUBSIDIARY
|
CONSOLIDATED STATEMENTS OF
CASH FLOWS (Unaudited)
|
|
|
Six Months Ended
June 30,
|
|
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
|
|
|
|
|
Net income
|
|
$
|
2,986
|
|
|
$
|
2,817
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
132
|
|
|
|
503
|
|
Provision for losses on foreclosed properties
|
|
|
23
|
|
|
|
18
|
|
Depreciation
|
|
|
386
|
|
|
|
391
|
|
Gain on sale of foreclosed real estate
|
|
|
(16
|
)
|
|
|
-
|
|
Increase in cash surrender value of bank owned life insurance
|
|
|
(170
|
)
|
|
|
(10
|
)
|
Deferred income tax expense (benefit)
|
|
|
39
|
|
|
|
(110
|
)
|
Net amortization of premiums on securities
|
|
|
926
|
|
|
|
1,112
|
|
Gain on sale of investment securities
|
|
|
(27
|
)
|
|
|
(1,172
|
)
|
Net amortization of deferred fees on loans
|
|
|
117
|
|
|
|
52
|
|
Mortgage loans originated for sale
|
|
|
(28,534
|
)
|
|
|
(25,196
|
)
|
Proceeds from sale of mortgage loans
|
|
|
32,402
|
|
|
|
28,600
|
|
Gain on sale of mortgage loans
|
|
|
(820
|
)
|
|
|
(709
|
)
|
ESOP compensation expense
|
|
|
640
|
|
|
|
387
|
|
Stock-based compensation expense
|
|
|
527
|
|
|
|
529
|
|
Excess tax benefits from equity awards
|
|
|
(228
|
)
|
|
|
(136
|
)
|
Decrease in income tax receivable
|
|
|
1,378
|
|
|
|
209
|
|
Decrease in interest receivable
|
|
|
56
|
|
|
|
340
|
|
Net change in other assets and liabilities
|
|
|
1,350
|
|
|
|
1,156
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
11,167
|
|
|
|
8,781
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of securities available for sale
|
|
|
(1,179
|
)
|
|
|
(16,833
|
)
|
Proceeds from sales of securities available for sale
|
|
|
1,194
|
|
|
|
50,150
|
|
Principal repayments on mortgage-backed and asset-backed securities
|
|
|
4,646
|
|
|
|
5,866
|
|
Redemption (purchase) of FHLB stock
|
|
|
1,263
|
|
|
|
(22
|
)
|
Net increase in loans receivable
|
|
|
(10,155
|
)
|
|
|
(30,391
|
)
|
Additions to foreclosed real estate
|
|
|
(2
|
)
|
|
|
-
|
|
Net proceeds from sales of foreclosed real estate
|
|
|
30
|
|
|
|
840
|
|
Purchases of premises and equipment
|
|
|
(119
|
)
|
|
|
(251
|
)
|
Net proceeds from sales of fixed and
other
assets
|
|
|
1
|
|
|
|
-
|
|
Purchases of bank owned life insurance
|
|
|
-
|
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,321
|
)
|
|
|
(641
|
)
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
ASB BANCORP, INC. AND SUBSIDIARY
|
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited)
|
|
|
Six Months Ended
June 30,
|
|
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
Net increase in deposits
|
|
$
|
29,824
|
|
|
$
|
9,781
|
|
Net repayments of Federal Home Loan Bank advances
|
|
|
(30,000
|
)
|
|
|
-
|
|
Net proceeds from (repayments of) overnight and short-term borrowings
|
|
|
(81
|
)
|
|
|
123
|
|
Stock-based deferral plan shares purchased
|
|
|
(2
|
)
|
|
|
(20
|
)
|
Proceeds from the exercise of stock options
|
|
|
-
|
|
|
|
79
|
|
Excess tax benefits from equity awards
|
|
|
-
|
|
|
|
136
|
|
Common stock repurchased
|
|
|
-
|
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(259
|
)
|
|
|
10,020
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
6,587
|
|
|
|
18,160
|
|
Cash and cash equivalents at beginning of period
|
|
|
46,724
|
|
|
|
33,401
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
53,311
|
|
|
$
|
51,561
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest on deposits, advances and other borrowings
|
|
$
|
1,471
|
|
|
$
|
1,697
|
|
Income taxes
|
|
|
214
|
|
|
|
1,240
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing transactions:
|
|
|
|
|
|
|
|
|
Transfers from loans to foreclosed real estate
|
|
$
|
-
|
|
|
$
|
5
|
|
Net unsettled security purchases
|
|
|
-
|
|
|
|
6,456
|
|
Increase in unrealized gains and losses on securities available for sale
|
|
|
1,556
|
|
|
|
3,344
|
|
Decrease in deferred income taxes resulting from other comprehensive income
|
|
|
(550
|
)
|
|
|
(796
|
)
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements do not contain all necessary disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for a complete set of financial statements and, therefore, should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K of ASB Bancorp, Inc. for the year ended December 31, 2016 filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2017. These financial statements were prepared on a basis consistent with the audited consolidated financial statements previously referenced and include all normal and recurring adjustments that management believes are necessary in order to conform to GAAP. The results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or any other future period.
Organization
– ASB Bancorp, Inc. (the “Parent”) was incorporated on May 12, 2011 by Asheville Savings Bank, S.S.B. (the “Bank”) to be the Bank’s holding company upon completion of the Bank’s conversion from the mutual to stock form of organization.
The Bank is headquartered in Asheville, North Carolina and provides mortgage, consumer and commercial banking services primarily in Buncombe, Henderson, McDowell, Transylvania and Madison counties in North Carolina. The Bank is regulated by the Office of the North Carolina Commissioner of Banks (“NCCoB”) and the Federal Deposit Insurance Corporation (“FDIC”). The Company is regulated by the Board of Governors of the Federal Reserve System (the “FRB”) and the NCCoB.
As described in more detail in note 8 to the consolidated financial statements, on May 1, 2017, the Parent entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with First Bancorp, the holding company for First Bank, Southern Pines, North Carolina, pursuant to which the Parent will merge with and into First Bancorp (the “Merger”), and the Bank will merge with and into First Bank. The parties anticipate closing the Merger during the fourth quarter of 2017.
Principles of Consolidation
– The consolidated financial statements include the accounts of the Parent and its wholly owned subsidiary, the Bank (collectively, the “Company”). The Bank has two wholly-owned subsidiaries, Appalachian Financial Services, Inc., which has on occasion managed the Bank’s real estate acquired through debt default but is currently inactive, and Wenoca, Inc., which serves as the Bank’s trustee regarding deeds of trust. Both subsidiaries are organized as North Carolina corporations. For purposes of the consolidated financial statements, all significant intercompany accounts and transactions have been eliminated. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America.
Use of Estimates
– The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Investment Securities
– Realized gains and losses on sales of investment securities are recognized at the time of sale (“trade date”) based upon the specific identification method.
Interest income includes amortization of purchase premiums and discounts. Realized gains and losses are derived from the amortized cost of the security sold. Declines in the fair value of held to maturity and available for sale debt securities below their cost that are deemed to be other than temporary because of credit risk impairment are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other factors, (i) the length of time and the extent to
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, (iii) the intent of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and (iv) whether it is more likely than not that the Company will be required to sell the investment prior to a recovery.
Loans
– Loans that management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized fees and costs on originated loans. The net amount of nonrefundable loan origination fees and certain direct costs associated with the lending processes are deferred and amortized to interest income over the contractual lives of the loans.
Loan Segments and Classes
The Bank’s portfolio segments and classes within those segments are subject to risks that could have an adverse impact on the credit quality of the loan portfolio. Management has identified the risks described below as significant risks that are generally similar among the loan segments and classes.
Commercial Loan Segment
The Bank’s commercial loans are centrally underwritten based primarily on the customer’s ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. The Bank’s commercial lenders and underwriters work to understand the borrower’s businesses and management experiences. The majority of the Bank’s commercial loans are secured by collateral, so collateral values are important to the transaction. In commercial loan transactions where the principals or other parties provide personal guarantees, the Bank’s commercial lenders and underwriters analyze the relative financial strength and liquidity of each guarantor. Risks that are common to the Bank’s commercial loan classes include general economic conditions, demand for the borrowers’ products and services, the personal circumstances of the principals, and reductions in collateral values.
In addition to these common risks for the Bank’s commercial loans, the various commercial loan classes also have certain risks specific to them.
Commercial Construction and Land Development
loans are highly dependent on the supply and demand for commercial real estate in the Bank’s markets as well as the demand for the newly constructed residential homes and lots being developed by the Bank’s commercial loan borrowers. Prolonged deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for the Bank’s commercial borrowers.
Commercial Mortgage and Commercial and Industrial
loans are primarily dependent on the ability of the Bank’s commercial loan customers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a borrower’s actual business results significantly underperform the original projections, the ability of that borrower to service the Bank’s loan on a basis consistent with the contractual terms may be at risk. While these loans and leases are generally secured by real property, personal property, or business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation.
Non-Commercial Loan Segment
The Bank underwrites its non-commercial loans using automated credit scoring and analysis tools. These credit scoring tools take into account factors such as payment history, credit utilization, length of credit
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
history, types of credit currently in use, and recent credit inquiries. To the extent that the loan is secured by collateral, the value of the collateral is also evaluated. Common risks to each class of non-commercial loans include general economic conditions within the Bank’s markets, such as unemployment and potential declines in collateral values, and the personal circumstances of the borrowers.
In addition to these common risks for the Bank’s non-commercial loans, various non-commercial loan classes may also have certain risks specific to them.
Residential Mortgage and Non-Commercial Construction and Land Development
loans are to individuals and are typically secured by one-to-four family residential property, undeveloped land, and partially developed land in anticipation of pending construction of a personal residence. Significant and rapid declines in real estate values can cause residential mortgage loan borrowers to have debt levels in excess of the current market value of the collateral. Recent declines in value have led to unprecedented levels of foreclosures and losses within the banking industry. Non-commercial construction and land development loans can experience delays in completion and cost overruns that exceed the borrower’s financial ability to complete the project. Such cost overruns can result in foreclosure of partially completed and unmarketable collateral.
Revolving Mortgage
loans are often secured by second liens on residential real estate, thereby making such loans particularly susceptible to declining collateral values. A substantial decline in collateral value could render the Bank’s second lien position to be effectively unsecured. Additional risks include lien perfection inaccuracies and disputes with first lien holders that may further weaken collateral positions. Further, the open-end structure of these loans creates the risk that customers may draw on the lines in excess of the collateral value if there have been significant declines since origination.
Consumer
loans are often closed-end whereby the loan is fully disbursed when the loan closes and is repaid according to agreed upon specified dates. Consumer loans include loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination in excess of principal repayment.
Credit Quality Indicators
Loans are monitored for credit quality on a recurring basis and the composition of the loans outstanding by credit quality indicator is provided below.
Loan credit quality indicators are developed through review of individual borrowers on an ongoing basis, although certain non-commercial loans, including residential mortgage, revolving mortgage and consumer loans, are evaluated upon origination and are reevaluated upon a change in delinquency status. Most commercial loans are evaluated at least annually with more frequent evaluation of more severely criticized loans or leases. The indicators represent the rating for loans as of the date presented based on the most recent assessment performed. These credit quality indicators are defined as follows:
Pass
– A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification.
Special Mention
– A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Substandard
– A substandard asset is inadequately protected by the current net worth and paying capacity of the obligor and/or the realizable value of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected.
Doubtful
– An asset classified as doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values.
Loss
– Assets classified loss are considered uncollectible and of such little value that their continuing to be carried as an asset is not warranted. This classification is not necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full write-off even though partial recovery may be effected in the future.
Allowance for Loan Losses
– The allowance for loan losses is management’s estimate of probable credit losses that are inherent in the Bank’s loan portfolios at the balance sheet date. The allowance increases when the Bank provides for loan losses through charges to operating earnings and when the Bank recovers amounts from loans previously written down or charged off. The allowance decreases when the Bank writes down or charges off loan amounts that are deemed uncollectible.
Management determines the allowance for loan losses based on periodic evaluations that are inherently subjective and require substantial judgment because the evaluations require the use of material estimates that are susceptible to significant change. The Bank generally uses two allowance methodologies that are primarily based on management’s determination as to whether or not a loan is considered to be impaired.
Commercial loans, as well as non-commercial loans that are classified as substandard and secured by real estate, are evaluated for impairment on a loan-by-loan basis and are considered impaired when it is probable, based on current information, that the borrower will be unable to pay contractual interest or principal as required by the loan agreement. Loans that experience insignificant payment delays and payment shortfalls are not necessarily considered impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment history, and the amount of the shortfall relative to the principal and interest owed. Loans that are deemed to be troubled debt restructurings, which are discussed below, are also included as impaired loans. Impaired loans are measured at their estimated fair value based on either the value of the loan’s expected future cash flows discounted at the loan’s effective interest rate or on the collateral value, net of the estimated costs of disposal, if the loan is collateral dependent. For loans considered impaired, an individual allowance for loan losses is recorded when the loan principal balance exceeds the estimated fair value.
For loans not considered impaired, management determines the allowance for loan losses based on estimated loss percentages that are determined by and applied to the various classes of loans that comprise the segments of the Bank’s loan portfolio. The estimated loss percentages by loan class are based on a number of factors that include by class (i) average historical losses over the past three years, (ii) levels and trends in delinquencies, impairments, and net charge-offs, (iii) trends in the volume and direction of loan balances within that class, terms, and concentrations, (iv) trends in interest rates, (v) effects of changes in the Bank’s risk tolerance, underwriting standards, lending policies, procedures, and practices, and (vi) national and local business and economic conditions.
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Future material adjustments to the allowance for loan losses may be necessary due to improving or deteriorating economic conditions, delinquencies, charge-off levels or declining collateral values. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses and may require the Bank to make adjustments to the allowance for loan losses based upon judgments that differ significantly from those of management.
Nonperforming Assets
– Nonperforming assets can include loans that are past due 90 days or more and continue to accrue interest, loans on which interest is not being accrued, foreclosed real estate and repossessed assets.
Loans Past Due 90 Days or More, Nonaccruing, Impaired, or Restructured
– The Bank’s policies related to loans that are placed on nonaccruing status conform to guidelines prescribed by bank regulatory authorities. Generally, the Bank suspends the accrual of interest on loans (i) that are maintained on a cash basis because of the deterioration of the financial condition of the borrower, (ii) for which payment in full of principal or interest is not expected, or (iii) on which principal or interest has been in default for a period of 90 days or more, unless the loan is both well secured and in the process of collection. While a loan is on nonaccruing status, the Bank recognizes interest income only to the extent cash payments are received in excess of collection of the principal outstanding on the loan. Loans are returned to accruing status when all principal and interest amounts contractually due are brought current and concern no longer exists as to the future collectability of principal and interest, which is generally confirmed when the loan demonstrates performance for six consecutive months or payment cycles.
A troubled debt restructuring (“TDR”) occurs when a borrower is experiencing financial difficulty and the Bank grants a concession it would not otherwise consider to provide the borrower relief from one or more of the contractual loan conditions. Concessions that the Bank might consider include the allowance of interest-only payments on more than a temporary basis, the reduction of interest rates, the extension of the loan term, the forgiveness of principal, or a combination of these. The Bank might require additional collateral or additional guarantors as conditions to modifying loans as TDRs.
The Bank might consider modifying both accruing or nonaccruing loans as TDRs. When a modification includes a reduction of principal that resulted from a partial charge-off of the loan, the Bank typically accounts for the TDR as a nonaccruing loan.
The Bank classifies TDRs as impaired loans and evaluates the need for an allowance for loan loss on a loan-by-loan basis consistent with its evaluation of impaired loans that have not been modified as TDRs. An allowance is based on either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the estimated fair value of the underlying collateral less any selling costs, if the loan is deemed to be collateral dependent.
The Bank’s policy for recognition of interest income on loans considered to be impaired, including restructured loans, is the same as its interest income recognition policy for loans not considered to be impaired.
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Charge-Offs
– The Bank charges off loan balances, in whole or in part, when available, verifiable, and documentable information confirms that specific loans, or portions of specific loans, are uncollectible or unrecoverable. For unsecured loans, losses are confirmed when it can be determined that the borrower, or any guarantor, is unwilling or unable to pay the amounts as agreed. When the borrower, or any guarantors, are unwilling or unable to pay the amounts as agreed on a loan secured by collateral and any recovery is dependent upon the sale of the collateral, the loan is deemed to be collateral dependent. Repayments or recoveries for collateral dependent loans are directly affected by the value of the collateral at liquidation. As such, loan repayment can be affected by factors that influence the amount recoverable, the timing of the recovery, or a combination of the two. Such factors include economic conditions that affect the markets in which the loan or its collateral is sold, bankruptcy, repossession and foreclosure laws, and consumer banking regulations. Losses are also confirmed when the loan, or a portion of the loan, is classified as loss resulting from loan reviews conducted by the Bank.
Charge-offs of loans in the commercial loan segment are recognized when the uncollectibility of the loan balance and the inability to recover sufficient value from the sale of any collateral securing the loan is confirmed. The uncollectibility of the loan balance is evidenced by the inability of the commercial borrower to generate cash flows sufficient to repay the loan as agreed causing the loan to become delinquent. For collateral dependent commercial loans, the Bank determines the fair value of the collateral based on appraisals, current market conditions, and estimated costs to sell the collateral. For collateral dependent commercial loans where the loan balance, including any accrued interest, net deferred fees or costs, and unamortized premiums or discounts, exceeds the fair value of the collateral securing the loan, the deficiency is identified as unrecoverable, is deemed to be a confirmed loss, and is charged off.
Charge-offs of loans in the non-commercial loan segment are generally confirmed and recognized in a manner similar to loans in the commercial loan segment. Secured non-commercial loans that are identified as uncollectible and are deemed to be collateral dependent are confirmed as loss to the extent the fair value of the collateral is insufficient to recover the loan balance. Closed-end consumer loans that become 120 cumulative days past due and open-end consumer loans that become 180 cumulative days past due are charged off to the extent that the fair value of any collateral, less estimated costs to sell the collateral, is insufficient to recover the loan balance. Closed-end and open-end loans secured by residential real estate that become 180 days past due are charged off to the extent that the fair value of the residential real estate securing the loan, less estimated costs to sell the collateral, is insufficient to recover the loan balance. Loans determined to be fraudulent are charged off within 90 days of discovery. Loans to borrowers in bankruptcy are subject to modification by the bankruptcy court and are charged off to the extent that the fair value of any collateral securing the loan, less estimated costs to sell the collateral, is insufficient to recover the loan balance, unless the Bank expects repayment is likely to occur. Such loans are charged off within 60 days of the receipt of notification from a bankruptcy court or when the loans become 120 days past due, whichever is shorter.
Foreclosed Real Estate and Repossessed Assets
– Foreclosed real estate and repossessed assets consist of real estate and other assets acquired as a result of customers’ loan defaults. Foreclosed real estate and repossessed assets are stated at the lower of the related loan balance or the fair value of the property net of the estimated costs of disposal with a charge to the allowance for loan losses upon foreclosure or repossession. Any write-downs subsequent to foreclosure or repossession are charged against operating earnings. To the extent recoverable, costs relating to the development and improvement of real property are capitalized, whereas those costs relating to holding the property are charged to expense.
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Bank Owned Life Insurance
– The Bank purchased bank owned life insurance (“BOLI”) as a financing tool for employee benefits. The earnings on the BOLI are recorded as other noninterest income. Since the Bank intends to hold the BOLI until the death of the insured, the Bank benefits from the tax-exempt nature of income resulting from increases in the cash surrender values of the life insurance policies. The value of the life insurance to the Bank is the tax preferred treatment of increases in policy cash values and death benefits and the cash flow generated at the death of the insured. The largest risk to the BOLI program is credit risk of the insurance carriers. To mitigate this risk, annual financial condition reviews are completed on all carriers.
Comprehensive Income
– Comprehensive income is defined as the change in equity of an enterprise during a period from transactions and other events and circumstances from non-owner sources and, accordingly, includes both net income and amounts referred to as other comprehensive income (“OCI”). The items of OCI are included in the Consolidated Statements of Comprehensive Income. The accumulated balance of OCI is included in the equity section of the Consolidated Balance Sheets. The Company’s components of accumulated OCI include unrealized gains and/or losses on investment securities classified as available for sale and certain changes in the Company’s benefit obligations under its retirement plans. The Company adjusts the level of accumulated OCI related to its retirement plans on an annual basis, consistent with the receipt of its annual actuarial studies.
The changes in the components of the Company’s accumulated other comprehensive loss, net of income taxes, are presented as follows:
(Dollars in thousands)
|
|
Beginning
Balance
|
|
|
OCI Before
Reclassification
|
|
|
Amount
Reclassified
|
|
|
Net
OCI
|
|
|
Ending
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities
|
|
$
|
(1,408
|
)
|
|
$
|
740
|
|
|
$
|
-
|
|
|
$
|
740
|
|
|
$
|
(668
|
)
|
Benefit plan liability
|
|
|
(218
|
)
|
|
|
(38
|
)
|
|
|
38
|
|
|
|
-
|
|
|
|
(218
|
)
|
Accumulated other comprehensive income (loss), net of tax
|
|
$
|
(1,626
|
)
|
|
$
|
702
|
|
|
$
|
38
|
|
|
$
|
740
|
|
|
$
|
(886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities
|
|
$
|
931
|
|
|
$
|
1,164
|
|
|
$
|
(454
|
)
|
|
$
|
710
|
|
|
$
|
1,641
|
|
Benefit plan liability
|
|
|
(5,326
|
)
|
|
|
(110
|
)
|
|
|
110
|
|
|
|
-
|
|
|
|
(5,326
|
)
|
Accumulated other comprehensive income (loss), net of tax
|
|
$
|
(4,395
|
)
|
|
$
|
1,054
|
|
|
$
|
(344
|
)
|
|
$
|
710
|
|
|
$
|
(3,685
|
)
|
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(Dollars in thousands)
|
|
Beginning
Balance
|
|
|
OCI Before
Reclassification
|
|
|
Amount
Reclassified
|
|
|
Net
OCI
|
|
|
Ending
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities
|
|
$
|
(1,647
|
)
|
|
$
|
996
|
|
|
$
|
(17
|
)
|
|
$
|
979
|
|
|
$
|
(668
|
)
|
Benefit plan liability
|
|
|
(218
|
)
|
|
|
(76
|
)
|
|
|
76
|
|
|
|
-
|
|
|
|
(218
|
)
|
Accumulated other comprehensive income (loss), net of tax
|
|
$
|
(1,865
|
)
|
|
$
|
920
|
|
|
$
|
59
|
|
|
$
|
979
|
|
|
$
|
(886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities
|
|
$
|
265
|
|
|
$
|
2,119
|
|
|
$
|
(743
|
)
|
|
$
|
1,376
|
|
|
$
|
1,641
|
|
Benefit plan liability
|
|
|
(5,326
|
)
|
|
|
(220
|
)
|
|
|
220
|
|
|
|
-
|
|
|
|
(5,326
|
)
|
Accumulated other comprehensive income (loss), net of tax
|
|
$
|
(5,061
|
)
|
|
$
|
1,899
|
|
|
$
|
(523
|
)
|
|
$
|
1,376
|
|
|
$
|
(3,685
|
)
|
The Company’s reclassifications out of accumulated OCI are as follows:
Details About Accumulated Other
Comprehensive Income Components
|
|
Amount Reclassified
From Accumulated Other
Comprehensive Income
|
|
Affected Line Item In The Statement
Where Net Income Is Presented
|
(Dollars in thousands)
|
|
Three
Months
Ended
June 30,
2017
|
|
|
Three
Months
Ended
June 30,
2016
|
|
|
|
|
|
|
|
|
|
|
Reclassification of securities gains recognized in net income
|
|
$
|
-
|
|
|
$
|
(716
|
)
|
Gain on sale of investment securities
|
Deferred income tax expense
|
|
|
-
|
|
|
|
262
|
|
Income tax provision
|
Total reclassifications for the period
|
|
$
|
-
|
|
|
$
|
(454
|
)
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension benefit
|
|
$
|
60
|
|
|
$
|
174
|
|
Salaries and employee benefits
|
Deferred income tax expense
|
|
|
(22
|
)
|
|
|
(64
|
)
|
Income tax provision
|
Total reclassifications for the period
|
|
$
|
38
|
|
|
$
|
110
|
|
Net of tax
|
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Details About Accumulated Other
Comprehensive Income Components
|
|
Amount Reclassified
From Accumulated Other
Comprehensive Income
|
|
Affected Line Item In The Statement
Where Net Income Is Presented
|
(Dollars in thousands)
|
|
Six
Months
Ended
June 30,
2017
|
|
|
Six
Months
Ended
June 30,
2016
|
|
|
|
|
|
|
|
|
|
|
Reclassification of securities gains recognized in net income
|
|
$
|
(27
|
)
|
|
$
|
(1,172
|
)
|
Gain on sale of investment securities
|
Deferred income tax expense
|
|
|
10
|
|
|
|
429
|
|
Income tax provision
|
Total reclassifications for the period
|
|
$
|
(17
|
)
|
|
$
|
(743
|
)
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension benefit
|
|
$
|
118
|
|
|
$
|
347
|
|
Salaries and employee benefits
|
Deferred income tax expense
|
|
|
(42
|
)
|
|
|
(127
|
)
|
Income tax provision
|
Total reclassifications for the period
|
|
$
|
76
|
|
|
$
|
220
|
|
Net of tax
|
Income Taxes
– The establishment of provisions for federal and state income taxes is a complex area of accounting that involves the use of significant judgments and estimates in applying relevant tax statutes. The Company is subject to audit by federal and state tax authorities, the results of which may produce tax liabilities that differ from the Company’s tax estimates and provisions. The Company continually evaluates its exposure to possible tax assessments arising from audits and it records its estimate of possible exposure based on current facts and circumstances. The Parent and the Bank have entered into a formal agreement that will allow them, if so elected, to file consolidated federal and state income tax returns, where permitted, and each to pay its respective share of income taxes due.
Deferred tax assets and liabilities are recognized for the tax effects of differing carrying values of assets and liabilities for tax and financial statement purposes that will reverse in future periods. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. When uncertainty exists concerning the recoverability of a deferred tax asset, the carrying value of the asset may be reduced by a valuation allowance. The amount of any valuation allowance established is based upon an estimate of the deferred tax asset that is more likely than not to be recovered. Increases or decreases in the valuation allowance result in increases or decreases to the provision for income taxes.
The Bank’s loss carry forward period under applicable North Carolina income tax laws is 15 years with a remaining loss carry forward period of 12 years. The Bank includes interest and penalties related to income tax liabilities in noninterest expense. The Bank’s tax filings for the years 2013 and thereafter are currently open to audit under statutes of limitations by the Internal Revenue Service and the North Carolina Department of Revenue.
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Pension Plan
– Prior to November 2016, the Bank had a qualified defined benefit pension plan. The Bank recognized the overfunded or underfunded status of the plan as an asset or liability in its consolidated balance sheets and recognized changes in the funded status in the year in which the change occurred 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. GAAP also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. GAAP requires additional disclosure in the notes to financial statements about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. The Bank settled its qualified pension plan liability in November 2016 for all participants. The settlement was recognized in the fourth quarter of 2016 when participants received annuities or lump sum payments of their accrued benefit balances.
In addition, the Bank currently has a non-qualified pension plan, which is an unfunded plan. The Bank decided to settle its non-qualified pension plan for all participants effective August 15, 2016. The settlement is expected to be recognized in the third quarter of 2017. See note 5 included in the consolidated financial statements regarding the plan termination.
Employee Stock Ownership Plan (“ESOP”)
– In connection with the mutual-to-stock conversion on October 11, 2011, the Bank established an ESOP for the benefit of all of its eligible employees. Full-time employees of the Bank who have been credited with at least 1,000 hours of service during a twelve-month period and who have attained age 21 are eligible to participate in the ESOP. Shares allocated under the ESOP vest at the rate of 20% per year of service beginning with the completion of two years of service and fully vest upon the completion of six years of service. The Bank anticipates it will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to the Parent over a period of 15 years in accordance with the terms of the loan.
Unallocated ESOP shares are not considered outstanding (including for the calculation of net income per common share as discussed below) and are shown as a reduction of shareholders’ equity. Dividends on unallocated ESOP shares, if paid, are considered to be compensation expense. The Company recognizes compensation cost equal to the fair value of the ESOP shares during the periods in which they are committed to be released. The fair value of the annual share allocations is recorded on a monthly basis with fair value determined by calculating the average closing stock price for each day during the month. To the extent that the fair value of the Company’s ESOP shares differs from the cost of such shares, the difference is recognized in shareholders’ equity. The Company recognizes a tax deduction equal to the cost of the shares released. Because the ESOP is internally leveraged through a loan from the Parent to the ESOP, the loan receivable by the Parent from the ESOP is not reported as an asset nor is the debt of the ESOP shown as a liability in the consolidated financial statements.
Equity Incentive Plan
– The Company issued restricted stock and stock options under the 2012 Equity Incentive Plan (the “2012 Equity Incentive Plan”) to key officers and outside directors during the first quarter of 2013 and to additional key officers and a newly appointed outside director during 2014. There were no grants under the 2012 Equity Incentive Plan during 2016 or during the first six months of 2017. The Company uses a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured based on the fair value of the award as of the grant date and recognized over the vesting period.
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Income Per Common Share
– Where presented, basic net income per common share is the Company’s net income available to common shareholders, which represents net income less dividends paid or payable to preferred stock shareholders, if any, divided by the weighted average number of common shares outstanding during the period. In calculating the weighted average number of common shares outstanding, shares held by the ESOP are not considered to be outstanding until they are committed to be released for allocation and the weighted average of unvested restricted shares are not considered outstanding until the shares vest.
For diluted income per common share, net income available to common shareholders is divided by the weighted average number of common shares issued and outstanding for each period plus amounts representing the dilutive effect of stock options and restricted stock. The effects of restricted stock and stock options are excluded from the computation of diluted income per common share in periods in which the effect would be antidilutive. Potential common shares that might be issued by the Company relate solely to outstanding stock options and restricted stock and are determined using the treasury stock method.
Net income per common share has been computed based on the following:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(Dollars in thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,152
|
|
|
$
|
1,696
|
|
|
$
|
2,986
|
|
|
$
|
2,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
3,788,025
|
|
|
|
3,985,922
|
|
|
|
3,788,025
|
|
|
|
3,985,698
|
|
Less: Weighted average unvested restricted shares
|
|
|
(41,017
|
)
|
|
|
(81,313
|
)
|
|
|
(48,972
|
)
|
|
|
(89,229
|
)
|
Less: Weighted average unallocated ESOP shares
|
|
|
(270,828
|
)
|
|
|
(302,160
|
)
|
|
|
(274,697
|
)
|
|
|
(306,062
|
)
|
Weighted average common shares used to compute net income per common share – Basic
|
|
|
3,476,180
|
|
|
|
3,602,449
|
|
|
|
3,464,356
|
|
|
|
3,590,407
|
|
Add: Effect of dilutive securities
|
|
|
283,834
|
|
|
|
140,009
|
|
|
|
267,424
|
|
|
|
140,909
|
|
Weighted average common shares used to compute net income per common share – Diluted
|
|
|
3,760,014
|
|
|
|
3,742,458
|
|
|
|
3,731,780
|
|
|
|
3,731,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share – Basic
|
|
$
|
0.33
|
|
|
$
|
0.47
|
|
|
$
|
0.86
|
|
|
$
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share – Diluted
|
|
$
|
0.31
|
|
|
$
|
0.45
|
|
|
$
|
0.80
|
|
|
$
|
0.75
|
|
For the three and six months ended June 30, 2017 and 2016, there were no options to purchase shares of common stock and there were no restricted stock shares excluded from the computation of net income per common share because their effect would be anti-dilutive.
During the first quarter of 2017, the Company adopted the new guidance in
Accounting Standards Update
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting,
on a prospective basis for the reporting for its 2012 Equity Incentive Plan. The adoption had the effect of increasing net income by decreasing income taxes by $228,000 during the first quarter of 2017. The adoption also increased the weighted average common shares on a diluted basis by 50,589 shares and 46,797 shares for the three- and six-month periods ended June 30, 2017, respectively.
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
– Certain reclassifications have been made to the financial statements of the prior periods presented to conform to the current period presentation. The reclassifications had no effect on net income, net income per common share, or shareholders’ equity as previously reported.
Recent Accounting Pronouncements
Accounting Standards Update ASU 2016-01
– In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities,
which amends the guidance on the classification and measurement of financial instruments and also amends certain disclosure requirement associated with the fair value of those instruments. For public entities, the amendments in ASU 2016-01 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating this guidance to determine the impact on the Company’s consolidated financial statements.
Accounting Standards Update ASU 2016-02
– In February 2016, the FASB issued ASU 2016-02,
Leases.
ASU 2016-02 introduces a new lease model that refines the evaluation for lease accounting and addresses other concerns related to the current leases model. For public entities, the new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The Company is currently evaluating this guidance to determine the impact on the Company’s consolidated financial statements. Upon adoption, the Company expects to report higher assets and liabilities as a result of including additional leases on the Consolidated Balance Sheet.
Accounting Standards Update ASU 2016-09
– In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting
, which simplifies several aspects of the accounting for employee share-based payments, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. For public entities, ASU 2016-09 is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2016. The Company adopted the new guidance on a prospective basis in the first quarter of 2017, and upon adoption, the Company elected to estimate forfeitures of equity-based awards. The adoption had the effect of increasing net income by decreasing income taxes by $228,000 and increasing the weighted average common shares on a diluted basis by 41,359 shares during the first quarter of 2017.
Accounting Standards Update ASU 2016-13
– In June 2016, the FASB issued ASU 2016-13,
Measurement
of Credit Losses on Financial Instruments (Topic 326),
which improves financial reporting by requiring timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2016-13 requires the measurement of all expected credit losses for financial assets not recorded at fair value based on historical experience, current conditions, and reasonable and supportable forecasts. For public entities that are SEC filers, ASU 2016-13 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. This standard will be required to be implemented through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the amendments are effective. Upon adoption, the Company expects that the allowance for credit losses will likely be higher; however, the Company is still in the process of determining the magnitude of the increase and its impact on the Company’s consolidated financial statements.
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Standards Update ASU 2016-15
– In August 2016, the FASB issued ASU 2016-15,
Statement
of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
which was issued to address diversity in practice of how certain cash receipts and cash payments are currently presented and classified in the statement of cash flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017 and for interim periods within those fiscal years. Early adoption is permitted. The amendments should be applied using a retrospective transition method to each period presented. The Company is currently evaluating this guidance to determine the impact on the Company’s consolidated financial statements.
Accounting Standards Update ASU 2016-20
– In December 2016, the FASB issued ASU 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,
to make a limited number of revisions to the guidance in Update 2014-09, which is not yet effective. The effective date and transition requirements for the amendments in ASU 2016-20 are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the
Effective Date,
defers the effective date of Update 2014-09 by one year. Public business entities are now required to adopt 2014-09 for reporting periods beginning after December 15, 2017 and for interim periods within those fiscal years. All entities will be required to apply the standard retrospectively, either using a full retrospective or a modified retrospective approach. Early adoption is not permitted. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, adoption of the new guidance is not expected to have a material impact on the components of the Company’s Consolidated Statement of Income most closely associated with financial instruments, including securities gains/losses and interest income. The Company is currently evaluating this guidance to determine the impact on other components of noninterest income. If the Company chooses a full retrospective approach, the adoption will require a restatement for 2016 and 2017 to show comparative financial statements with a cumulative adjustment as of January 1, 2016 to disclose revenue and the direct effects of change in accounting principle.
Accounting Standards Update ASU 2017-07
– In March 2017, the FASB issued ASU 2017-07,
Improving
the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,
which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The amendments in ASU 2017-07 are effective for public business entities for annual periods beginning after December 15, 2017 and for interim periods within those annual periods. Early adoption is permitted. The amendments should be applied using a retrospective transition method to each period presented. The Company is currently evaluating this guidance to determine the impact on the Company’s consolidated financial statements.
Accounting Standards Update ASU 2017-09
– In May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting,
which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. ASU 2017-09 is effective for all entities for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. ASU 2017-09 is currently not applicable to the Company; however, it will evaluate the new guidance to determine the impact on the Company's consolidated financial statements upon modification of any share-based payment awards.
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
2. INVESTMENT SECURITIES
Securities Available for Sale
– The maturities, amortized cost, unrealized gains, unrealized losses and fair values of securities available for sale are as follows:
Type And Maturity Group
(Dollars in thousands)
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Sponsored Enterprise (GSE) and agency securities due -
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
1,004
|
|
|
$
|
-
|
|
|
$
|
(1
|
)
|
|
$
|
1,003
|
|
After 1 year but within 5 years
|
|
|
1,072
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
1,067
|
|
Asset-backed securities issued by the Small Business Administration (SBA)
|
|
|
3,746
|
|
|
|
29
|
|
|
|
(5
|
)
|
|
|
3,770
|
|
Residential mortgage-backed securities
issued by GSEs (1)
|
|
|
36,156
|
|
|
|
97
|
|
|
|
(524
|
)
|
|
|
35,729
|
|
State and local government securities due -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 10 years
|
|
|
54,216
|
|
|
|
599
|
|
|
|
(1,224
|
)
|
|
|
53,591
|
|
Mutual funds
|
|
|
785
|
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
775
|
|
Total
|
|
$
|
96,979
|
|
|
$
|
725
|
|
|
$
|
(1,769
|
)
|
|
$
|
95,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Sponsored Enterprise (GSE) and agency securities due -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
1,011
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,011
|
|
After 1 year but within 5 years
|
|
|
1,085
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
1,078
|
|
Asset-backed securities issued by the Small Business Administration (SBA)
|
|
|
4,407
|
|
|
|
17
|
|
|
|
(11
|
)
|
|
|
4,413
|
|
Residential mortgage-backed securities
issued by GSEs (1)
|
|
|
40,619
|
|
|
|
88
|
|
|
|
(733
|
)
|
|
|
39,974
|
|
State and local government securities due -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 10 years
|
|
|
54,583
|
|
|
|
54
|
|
|
|
(1,967
|
)
|
|
|
52,670
|
|
Mutual funds
|
|
|
777
|
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
763
|
|
Total
|
|
$
|
102,482
|
|
|
$
|
159
|
|
|
$
|
(2,732
|
)
|
|
$
|
99,909
|
|
(1)
|
Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at June 30, 2017 and December 31, 2016 or during the six- and twelve-month periods, respectively, then ended.
|
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
2. INVESTMENT SECURITIES (Continued)
Securities Held to Maturity
– The maturities, amortized cost, unrealized gains, unrealized losses and fair values of securities classified as held to maturity are as follows:
Type And Maturity Group
(Dollars in thousands)
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GSE and agency securities due -
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
1,001
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
1,003
|
|
Residential mortgage-backed securities issued by GSEs (1)
|
|
|
172
|
|
|
|
14
|
|
|
|
-
|
|
|
|
186
|
|
State and local government securities due -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 year but within 5 years
|
|
|
973
|
|
|
|
65
|
|
|
|
-
|
|
|
|
1,038
|
|
After 5 years but within 10 years
|
|
|
1,469
|
|
|
|
86
|
|
|
|
-
|
|
|
|
1,555
|
|
Total
|
|
$
|
3,615
|
|
|
$
|
167
|
|
|
$
|
-
|
|
|
$
|
3,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. GSE and agency securities due -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
1,009
|
|
|
$
|
18
|
|
|
$
|
-
|
|
|
$
|
1,027
|
|
Residential mortgage-backed securities issued by GSEs (1)
|
|
|
223
|
|
|
|
17
|
|
|
|
-
|
|
|
|
240
|
|
State and local government securities due -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 years but within 10 years
|
|
|
2,440
|
|
|
|
168
|
|
|
|
-
|
|
|
|
2,608
|
|
Total
|
|
$
|
3,672
|
|
|
$
|
203
|
|
|
$
|
-
|
|
|
$
|
3,875
|
|
(1)
|
Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at June 30, 2017 and December 31, 2016 or during the six- and twelve-month periods, respectively, then ended.
|
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
2. INVESTMENT SECURITIES (Continued)
The following tables show investment gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2017 and December 31, 2016. The total number of securities with unrealized losses at June 30, 2017 and December 31, 2016 were 41 and 56, respectively. The unrealized losses relate to debt and equity securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased. The unrealized losses are not likely to reverse unless and until market interest rates decline to the levels that existed when the securities were purchased. Management has the intent to hold securities with unrealized losses until a recovery of the market value occurs. Management has determined that it is more likely than not that the Company will not be required to sell any of the securities with unrealized losses prior to a recovery of market value sufficient to negate the unrealized loss. Management has analyzed the creditworthiness of the underlying issuers and determined that the Company will collect all contractual cash flows and, therefore, all impairment is considered to be temporary.
|
|
June 30, 2017
|
|
|
|
Less Than 12 Months
|
|
|
12 Months Or More
|
|
|
Total
|
|
(Dollars in thousands)
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available For Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US GSE and agency
|
|
$
|
2,070
|
|
|
$
|
(6
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,070
|
|
|
$
|
(6
|
)
|
Asset-backed SBA
|
|
|
-
|
|
|
|
-
|
|
|
|
975
|
|
|
|
(5
|
)
|
|
|
975
|
|
|
|
(5
|
)
|
Residential mortgage-backed GSE (1)
|
|
|
6,631
|
|
|
|
(53
|
)
|
|
|
23,054
|
|
|
|
(471
|
)
|
|
|
29,685
|
|
|
|
(524
|
)
|
State and local government
|
|
|
14,590
|
|
|
|
(543
|
)
|
|
|
11,566
|
|
|
|
(681
|
)
|
|
|
26,156
|
|
|
|
(1,224
|
)
|
Mutual funds
|
|
|
785
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
785
|
|
|
|
(10
|
)
|
Total temporarily impaired securities
|
|
$
|
24,076
|
|
|
$
|
(612
|
)
|
|
$
|
35,595
|
|
|
$
|
(1,157
|
)
|
|
$
|
59,671
|
|
|
$
|
(1,769
|
)
|
(1)
|
Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at June 30, 2017 or during the six-month period then ended.
|
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
2. INVESTMENT SECURITIES (Continued)
|
|
December 31, 2016
|
|
|
|
Less Than 12 Months
|
|
|
12 Months Or More
|
|
|
Total
|
|
(Dollars in thousands)
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available For Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US GSE and agency
|
|
$
|
2,088
|
|
|
$
|
(7
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,088
|
|
|
$
|
(7
|
)
|
Asset-backed SBA
|
|
|
1,647
|
|
|
|
(3
|
)
|
|
|
1,049
|
|
|
|
(8
|
)
|
|
|
2,696
|
|
|
|
(11
|
)
|
Residential mortgage-backed GSE (1)
|
|
|
15,274
|
|
|
|
(549
|
)
|
|
|
18,352
|
|
|
|
(184
|
)
|
|
|
33,626
|
|
|
|
(733
|
)
|
State and local government
|
|
|
46,333
|
|
|
|
(1,967
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
46,333
|
|
|
|
(1,967
|
)
|
Mutual funds
|
|
|
776
|
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
776
|
|
|
|
(14
|
)
|
Total temporarily impaired securities
|
|
$
|
66,118
|
|
|
$
|
(2,540
|
)
|
|
$
|
19,401
|
|
|
$
|
(192
|
)
|
|
$
|
85,519
|
|
|
$
|
(2,732
|
)
|
(1)
|
Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at December 31, 2016 or during the twelve-month period then ended.
|
Investment securities pledged as collateral follows:
(Dollars in thousands)
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Pledged to Federal Reserve Discount Window
|
|
$
|
7,007
|
|
|
$
|
8,264
|
|
Pledged to repurchase agreements for commercial customers
|
|
|
1,067
|
|
|
|
840
|
|
Interest income from taxable and tax-exempt securities recognized in interest and dividend income follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from taxable securities
|
|
$
|
140
|
|
|
$
|
213
|
|
|
$
|
272
|
|
|
$
|
434
|
|
Interest income from tax-exempt securities
|
|
|
387
|
|
|
|
347
|
|
|
|
775
|
|
|
|
714
|
|
Total interest income from securities
|
|
$
|
527
|
|
|
$
|
560
|
|
|
$
|
1,047
|
|
|
$
|
1,148
|
|
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
2. INVESTMENT SECURITIES (Continued)
Proceeds and gross realized gains from sales of securities recognized in net income follow:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of securities
|
|
$
|
-
|
|
|
$
|
31,902
|
|
|
$
|
1,194
|
|
|
$
|
50,150
|
|
Gross realized gains from sales of securities
|
|
|
-
|
|
|
|
746
|
|
|
|
27
|
|
|
|
1,216
|
|
Gross realized losses from sales of securities
|
|
|
-
|
|
|
|
(30
|
)
|
|
|
-
|
|
|
|
(44
|
)
|
3. LOANS RECEIVABLE
Loans receivable by segment and class follow:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
Commercial construction and land development
|
|
$
|
22,342
|
|
|
$
|
27,813
|
|
Commercial mortgage
|
|
|
246,475
|
|
|
|
241,125
|
|
Commercial and industrial
|
|
|
27,088
|
|
|
|
23,819
|
|
Total commercial
|
|
|
295,905
|
|
|
|
292,757
|
|
Non-commercial:
|
|
|
|
|
|
|
|
|
Non-commercial construction and land development
|
|
|
24,005
|
|
|
|
20,801
|
|
Residential mortgage
|
|
|
211,667
|
|
|
|
200,590
|
|
Revolving mortgage
|
|
|
64,591
|
|
|
|
66,870
|
|
Consumer
|
|
|
17,613
|
|
|
|
22,805
|
|
Total non-commercial
|
|
|
317,876
|
|
|
|
311,066
|
|
Total loans receivable
|
|
|
613,781
|
|
|
|
603,823
|
|
Less: Deferred loan fees
|
|
|
(178
|
)
|
|
|
(241
|
)
|
Total loans receivable net of deferred loan fees
|
|
|
613,603
|
|
|
|
603,582
|
|
Less: Allowance for loan losses
|
|
|
(6,659
|
)
|
|
|
(6,544
|
)
|
Loans receivable, net
|
|
$
|
606,944
|
|
|
$
|
597,038
|
|
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
3. LOANS RECEIVABLE (Continued)
Loans receivable by segment, class, and grade follow:
(Dollars in thousands)
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial construction and land development
|
|
$
|
22,221
|
|
|
$
|
121
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22,342
|
|
Commercial mortgage
|
|
|
237,934
|
|
|
|
7,808
|
|
|
|
733
|
|
|
|
-
|
|
|
|
-
|
|
|
|
246,475
|
|
Commercial and industrial
|
|
|
26,196
|
|
|
|
691
|
|
|
|
201
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,088
|
|
Total commercial
|
|
|
286,351
|
|
|
|
8,620
|
|
|
|
934
|
|
|
|
-
|
|
|
|
-
|
|
|
|
295,905
|
|
Non-commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-commercial construction and land development
|
|
|
24,005
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,005
|
|
Residential mortgage
|
|
|
205,955
|
|
|
|
5,139
|
|
|
|
573
|
|
|
|
-
|
|
|
|
-
|
|
|
|
211,667
|
|
Revolving mortgage
|
|
|
61,266
|
|
|
|
2,878
|
|
|
|
447
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,591
|
|
Consumer
|
|
|
17,099
|
|
|
|
441
|
|
|
|
73
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,613
|
|
Total non-commercial
|
|
|
308,325
|
|
|
|
8,458
|
|
|
|
1,093
|
|
|
|
-
|
|
|
|
-
|
|
|
|
317,876
|
|
Total loans receivable
|
|
$
|
594,676
|
|
|
$
|
17,078
|
|
|
$
|
2,027
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
613,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial construction and land development
|
|
$
|
27,677
|
|
|
$
|
136
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
27,813
|
|
Commercial mortgage
|
|
|
229,571
|
|
|
|
10,954
|
|
|
|
600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
241,125
|
|
Commercial and industrial
|
|
|
22,872
|
|
|
|
735
|
|
|
|
212
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,819
|
|
Total commercial
|
|
|
280,120
|
|
|
|
11,825
|
|
|
|
812
|
|
|
|
-
|
|
|
|
-
|
|
|
|
292,757
|
|
Non-commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-commercial construction and land development
|
|
|
20,801
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,801
|
|
Residential mortgage
|
|
|
193,235
|
|
|
|
6,200
|
|
|
|
1,155
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200,590
|
|
Revolving mortgage
|
|
|
63,479
|
|
|
|
2,829
|
|
|
|
562
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66,870
|
|
Consumer
|
|
|
22,360
|
|
|
|
393
|
|
|
|
52
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,805
|
|
Total non-commercial
|
|
|
299,875
|
|
|
|
9,422
|
|
|
|
1,769
|
|
|
|
-
|
|
|
|
-
|
|
|
|
311,066
|
|
Total loans receivable
|
|
$
|
579,995
|
|
|
$
|
21,247
|
|
|
$
|
2,581
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
603,823
|
|
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
3. LOANS RECEIVABLE (Continued)
Loans receivable by segment, class, and delinquency status follow:
|
|
Past Due
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
31-89 Days
|
|
|
90 Days
Or More
|
|
|
Total
|
|
|
Current
|
|
|
Total
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial construction and land development
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22,342
|
|
|
$
|
22,342
|
|
Commercial mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
246,475
|
|
|
|
246,475
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
53
|
|
|
|
53
|
|
|
|
27,035
|
|
|
|
27,088
|
|
Total commercial
|
|
|
-
|
|
|
|
53
|
|
|
|
53
|
|
|
|
295,852
|
|
|
|
295,905
|
|
Non-commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-commercial construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,005
|
|
|
|
24,005
|
|
Residential mortgage
|
|
|
6
|
|
|
|
176
|
|
|
|
182
|
|
|
|
211,485
|
|
|
|
211,667
|
|
Revolving mortgage
|
|
|
257
|
|
|
|
211
|
|
|
|
468
|
|
|
|
64,123
|
|
|
|
64,591
|
|
Consumer
|
|
|
77
|
|
|
|
31
|
|
|
|
108
|
|
|
|
17,505
|
|
|
|
17,613
|
|
Total non-commercial
|
|
|
340
|
|
|
|
418
|
|
|
|
758
|
|
|
|
317,118
|
|
|
|
317,876
|
|
Total loans receivable
|
|
$
|
340
|
|
|
$
|
471
|
|
|
$
|
811
|
|
|
$
|
612,970
|
|
|
$
|
613,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial construction and land development
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
27,813
|
|
|
$
|
27,813
|
|
Commercial mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
241,125
|
|
|
|
241,125
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
63
|
|
|
|
63
|
|
|
|
23,756
|
|
|
|
23,819
|
|
Total commercial
|
|
|
-
|
|
|
|
63
|
|
|
|
63
|
|
|
|
292,694
|
|
|
|
292,757
|
|
Non-commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-commercial construction and land development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,801
|
|
|
|
20,801
|
|
Residential mortgage
|
|
|
293
|
|
|
|
626
|
|
|
|
919
|
|
|
|
199,671
|
|
|
|
200,590
|
|
Revolving mortgage
|
|
|
156
|
|
|
|
240
|
|
|
|
396
|
|
|
|
66,474
|
|
|
|
66,870
|
|
Consumer
|
|
|
250
|
|
|
|
-
|
|
|
|
250
|
|
|
|
22,555
|
|
|
|
22,805
|
|
Total non-commercial
|
|
|
699
|
|
|
|
866
|
|
|
|
1,565
|
|
|
|
309,501
|
|
|
|
311,066
|
|
Total loans receivable
|
|
$
|
699
|
|
|
$
|
929
|
|
|
$
|
1,628
|
|
|
$
|
602,195
|
|
|
$
|
603,823
|
|
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
3. LOANS RECEIVABLE (Continued)
The recorded investment in loans, by segment and class, that are not accruing interest or are 90 days or more past due and still accruing interest follows:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
(Dollars in thousands)
|
|
Nonaccruing
|
|
|
Past Due
90 Days
Or More
And Still
Accruing
|
|
|
Nonaccruing
|
|
|
Past Due
90 Days
Or More
And Still
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
53
|
|
|
$
|
-
|
|
|
$
|
63
|
|
|
$
|
-
|
|
Total commercial
|
|
|
53
|
|
|
|
-
|
|
|
|
63
|
|
|
|
-
|
|
Non-commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
176
|
|
|
|
-
|
|
|
|
626
|
|
|
|
-
|
|
Revolving mortgage
|
|
|
293
|
|
|
|
-
|
|
|
|
323
|
|
|
|
-
|
|
Consumer
|
|
|
31
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total non-commercial
|
|
|
500
|
|
|
|
-
|
|
|
|
949
|
|
|
|
-
|
|
Total loans receivable
|
|
$
|
553
|
|
|
$
|
-
|
|
|
$
|
1,012
|
|
|
$
|
-
|
|
The Bank services loans for Habitat for Humanity of Western North Carolina as an in-kind donation. The balances of these loans were $16.8 million at June 30, 2017 and $16.7 million at December 31, 2016.
Loans made to directors and executive officers in the ordinary course of business with terms consistent with those offered to the Bank’s other customers follow:
(Dollars in thousands)
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Director and executive officer loans, beginning of period
|
|
$
|
3,356
|
|
|
$
|
3,530
|
|
New loans
|
|
|
115
|
|
|
|
191
|
|
Repayments of loans
|
|
|
(247
|
)
|
|
|
(365
|
)
|
Director and executive officer loans, end of period
|
|
$
|
3,224
|
|
|
$
|
3,356
|
|
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
4. ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses by segment follows:
|
|
Three Months Ended June 30, 2017
|
|
|
Six Months Ended June 30, 2017
|
|
(Dollars in thousands)
|
|
Commercial
|
|
|
Non-
Commercial
|
|
|
Total
|
|
|
Commercial
|
|
|
Non-
Commercial
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
3,989
|
|
|
$
|
2,584
|
|
|
$
|
6,573
|
|
|
$
|
3,968
|
|
|
$
|
2,576
|
|
|
$
|
6,544
|
|
Provision for loan losses
|
|
|
53
|
|
|
|
22
|
|
|
|
75
|
|
|
|
61
|
|
|
|
71
|
|
|
|
132
|
|
Charge-offs
|
|
|
-
|
|
|
|
(43
|
)
|
|
|
(43
|
)
|
|
|
-
|
|
|
|
(96
|
)
|
|
|
(96
|
)
|
Recoveries
|
|
|
13
|
|
|
|
41
|
|
|
|
54
|
|
|
|
26
|
|
|
|
53
|
|
|
|
79
|
|
Balance at end of period
|
|
$
|
4,055
|
|
|
$
|
2,604
|
|
|
$
|
6,659
|
|
|
$
|
4,055
|
|
|
$
|
2,604
|
|
|
$
|
6,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
|
Six Months Ended June 30, 2016
|
|
(Dollars in thousands)
|
|
Commercial
|
|
|
Non-
Commercial
|
|
|
Total
|
|
|
Commercial
|
|
|
Non-
Commercial
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
4,179
|
|
|
$
|
2,543
|
|
|
$
|
6,722
|
|
|
$
|
3,710
|
|
|
$
|
2,579
|
|
|
$
|
6,289
|
|
Provision for loan losses
|
|
|
26
|
|
|
|
78
|
|
|
|
104
|
|
|
|
490
|
|
|
|
13
|
|
|
|
503
|
|
Charge-offs
|
|
|
(224
|
)
|
|
|
(36
|
)
|
|
|
(260
|
)
|
|
|
(224
|
)
|
|
|
(44
|
)
|
|
|
(268
|
)
|
Recoveries
|
|
|
5
|
|
|
|
12
|
|
|
|
17
|
|
|
|
10
|
|
|
|
49
|
|
|
|
59
|
|
Balance at end of period
|
|
$
|
3,986
|
|
|
$
|
2,597
|
|
|
$
|
6,583
|
|
|
$
|
3,986
|
|
|
$
|
2,597
|
|
|
$
|
6,583
|
|
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
4. ALLOWANCE FOR LOAN LOSSES (Continued)
Ending balances of loans and the related allowance, by segment and class, follow:
|
|
Allowance For Loan Losses
|
|
|
Total Loans Receivable
|
|
(Dollars in thousands)
|
|
Loans
Individually
Evaluated
For
Impairment
|
|
|
Loans
Collectively
Evaluated
|
|
|
Total
|
|
|
Loans
Individually
Evaluated
For
Impairment
|
|
|
Loans
Collectively
Evaluated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial construction and land development
|
|
$
|
-
|
|
|
$
|
241
|
|
|
$
|
241
|
|
|
$
|
-
|
|
|
$
|
22,342
|
|
|
$
|
22,342
|
|
Commercial mortgage
|
|
|
-
|
|
|
|
3,451
|
|
|
|
3,451
|
|
|
|
142
|
|
|
|
246,333
|
|
|
|
246,475
|
|
Commercial and industrial
|
|
|
4
|
|
|
|
359
|
|
|
|
363
|
|
|
|
201
|
|
|
|
26,887
|
|
|
|
27,088
|
|
Total commercial
|
|
|
4
|
|
|
|
4,051
|
|
|
|
4,055
|
|
|
|
343
|
|
|
|
295,562
|
|
|
|
295,905
|
|
Non-commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-commercial construction and land development
|
|
|
-
|
|
|
|
212
|
|
|
|
212
|
|
|
|
-
|
|
|
|
24,005
|
|
|
|
24,005
|
|
Residential mortgage
|
|
|
13
|
|
|
|
1,392
|
|
|
|
1,405
|
|
|
|
1,605
|
|
|
|
210,062
|
|
|
|
211,667
|
|
Revolving mortgage
|
|
|
81
|
|
|
|
738
|
|
|
|
819
|
|
|
|
338
|
|
|
|
64,253
|
|
|
|
64,591
|
|
Consumer
|
|
|
-
|
|
|
|
168
|
|
|
|
168
|
|
|
|
-
|
|
|
|
17,613
|
|
|
|
17,613
|
|
Total non-commercial
|
|
|
94
|
|
|
|
2,510
|
|
|
|
2,604
|
|
|
|
1,943
|
|
|
|
315,933
|
|
|
|
317,876
|
|
Total loans receivable
|
|
$
|
98
|
|
|
$
|
6,561
|
|
|
$
|
6,659
|
|
|
$
|
2,286
|
|
|
$
|
611,495
|
|
|
$
|
613,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial construction and land development
|
|
$
|
-
|
|
|
$
|
295
|
|
|
$
|
295
|
|
|
$
|
-
|
|
|
$
|
27,813
|
|
|
$
|
27,813
|
|
Commercial mortgage
|
|
|
8
|
|
|
|
3,338
|
|
|
|
3,346
|
|
|
|
2,894
|
|
|
|
238,231
|
|
|
|
241,125
|
|
Commercial and industrial
|
|
|
6
|
|
|
|
321
|
|
|
|
327
|
|
|
|
212
|
|
|
|
23,607
|
|
|
|
23,819
|
|
Total commercial
|
|
|
14
|
|
|
|
3,954
|
|
|
|
3,968
|
|
|
|
3,106
|
|
|
|
289,651
|
|
|
|
292,757
|
|
Non-commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-commercial construction and land development
|
|
|
-
|
|
|
|
177
|
|
|
|
177
|
|
|
|
-
|
|
|
|
20,801
|
|
|
|
20,801
|
|
Residential mortgage
|
|
|
22
|
|
|
|
1,309
|
|
|
|
1,331
|
|
|
|
2,172
|
|
|
|
198,418
|
|
|
|
200,590
|
|
Revolving mortgage
|
|
|
83
|
|
|
|
767
|
|
|
|
850
|
|
|
|
241
|
|
|
|
66,629
|
|
|
|
66,870
|
|
Consumer
|
|
|
-
|
|
|
|
218
|
|
|
|
218
|
|
|
|
-
|
|
|
|
22,805
|
|
|
|
22,805
|
|
Total non-commercial
|
|
|
105
|
|
|
|
2,471
|
|
|
|
2,576
|
|
|
|
2,413
|
|
|
|
308,653
|
|
|
|
311,066
|
|
Total loans receivable
|
|
$
|
119
|
|
|
$
|
6,425
|
|
|
$
|
6,544
|
|
|
$
|
5,519
|
|
|
$
|
598,304
|
|
|
$
|
603,823
|
|
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
4. ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired loans and the related allowance, by segment and class, follow:
|
|
|
|
|
Recorded Investment
|
|
|
|
|
(Dollars in thousands)
|
|
Unpaid
Principal
Balance
|
|
|
With A
Recorded
Allowance
|
|
|
With No
Recorded
Allowance
|
|
|
Total
|
|
|
Related
Recorded
Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage
|
|
$
|
142
|
|
|
$
|
-
|
|
|
$
|
143
|
|
|
$
|
143
|
|
|
$
|
-
|
|
Commercial and industrial
|
|
|
290
|
|
|
|
148
|
|
|
|
53
|
|
|
|
201
|
|
|
|
4
|
|
Total commercial
|
|
|
432
|
|
|
|
148
|
|
|
|
196
|
|
|
|
344
|
|
|
|
4
|
|
Non-commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
1,623
|
|
|
|
708
|
|
|
|
896
|
|
|
|
1,604
|
|
|
|
13
|
|
Revolving mortgage
|
|
|
354
|
|
|
|
81
|
|
|
|
257
|
|
|
|
338
|
|
|
|
81
|
|
Total non-commercial
|
|
|
1,977
|
|
|
|
789
|
|
|
|
1,153
|
|
|
|
1,942
|
|
|
|
94
|
|
Total impaired loans
|
|
$
|
2,409
|
|
|
$
|
937
|
|
|
$
|
1,349
|
|
|
$
|
2,286
|
|
|
$
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage
|
|
$
|
2,894
|
|
|
$
|
2,894
|
|
|
$
|
-
|
|
|
$
|
2,894
|
|
|
$
|
8
|
|
Commercial and industrial
|
|
|
697
|
|
|
|
149
|
|
|
|
63
|
|
|
|
212
|
|
|
|
6
|
|
Total commercial
|
|
|
3,591
|
|
|
|
3,043
|
|
|
|
63
|
|
|
|
3,106
|
|
|
|
14
|
|
Non-commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
2,089
|
|
|
|
583
|
|
|
|
1,589
|
|
|
|
2,172
|
|
|
|
22
|
|
Revolving mortgage
|
|
|
255
|
|
|
|
83
|
|
|
|
158
|
|
|
|
241
|
|
|
|
83
|
|
Total non-commercial
|
|
|
2,344
|
|
|
|
666
|
|
|
|
1,747
|
|
|
|
2,413
|
|
|
|
105
|
|
Total impaired loans
|
|
$
|
5,935
|
|
|
$
|
3,709
|
|
|
$
|
1,810
|
|
|
$
|
5,519
|
|
|
$
|
119
|
|
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
4. ALLOWANCE FOR LOAN LOSSES (Continued)
The average recorded investment in impaired loans and interest income recognized on impaired loans follows:
|
|
Three Months Ended
June 30, 2017
|
|
|
Three Months Ended
June 30, 2016
|
|
(Dollars in thousands)
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial construction and land development
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
126
|
|
|
$
|
-
|
|
Commercial mortgage
|
|
|
48
|
|
|
|
1
|
|
|
|
3,344
|
|
|
|
32
|
|
Commercial and industrial
|
|
|
202
|
|
|
|
2
|
|
|
|
226
|
|
|
|
-
|
|
Total commercial
|
|
|
250
|
|
|
|
3
|
|
|
|
3,696
|
|
|
|
32
|
|
Non-commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
1,612
|
|
|
|
13
|
|
|
|
2,997
|
|
|
|
14
|
|
Revolving mortgage
|
|
|
339
|
|
|
|
-
|
|
|
|
85
|
|
|
|
-
|
|
Total non-commercial
|
|
|
1,951
|
|
|
|
13
|
|
|
|
3,082
|
|
|
|
14
|
|
Total loans receivable
|
|
$
|
2,201
|
|
|
$
|
16
|
|
|
$
|
6,778
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2017
|
|
|
Six Months Ended
June 30, 2016
|
|
(Dollars in thousands)
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial construction and land development
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
126
|
|
|
$
|
-
|
|
Commercial mortgage
|
|
|
1,463
|
|
|
|
32
|
|
|
|
3,496
|
|
|
|
64
|
|
Commercial and industrial
|
|
|
205
|
|
|
|
4
|
|
|
|
235
|
|
|
|
-
|
|
Total commercial
|
|
|
1,668
|
|
|
|
36
|
|
|
|
3,857
|
|
|
|
64
|
|
Non-commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
1,769
|
|
|
|
26
|
|
|
|
2,942
|
|
|
|
28
|
|
Revolving mortgage
|
|
|
320
|
|
|
|
-
|
|
|
|
89
|
|
|
|
-
|
|
Total non-commercial
|
|
|
2,089
|
|
|
|
26
|
|
|
|
3,031
|
|
|
|
28
|
|
Total loans receivable
|
|
$
|
3,757
|
|
|
$
|
62
|
|
|
$
|
6,888
|
|
|
$
|
92
|
|
The Bank did not restructure any loans during the three months ended June 30, 2017 and June 30, 2016, or during the six months ended June 30, 2017 and June 30, 2016. There were no loans modified as TDRs within the preceding twelve months that stopped performing during the three months or six months ended June 30, 2017 and June 30, 2016.
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
4. ALLOWANCE FOR LOAN LOSSES (Continued)
In the determination of the allowance for loan losses, management considers TDRs on commercial loans, and the subsequent nonperformance in accordance with their modified terms, by measuring impairment on a loan-by-loan basis based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
The Bank’s loans that were considered to be TDRs follow:
(Dollars in thousands)
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Nonperforming restructured loans
|
|
$
|
11
|
|
|
$
|
13
|
|
Performing restructured loans
|
|
|
1,576
|
|
|
|
4,543
|
|
Total
|
|
$
|
1,587
|
|
|
$
|
4,556
|
|
As of June 30, 2017 and December 31, 2016, the Bank had $119,000 and $496,000, respectively, of residential real estate loans in the process of foreclosure and $930,000 and $953,000, respectively, of foreclosed residential real estate property included in foreclosed real estate.
5. BENEFIT PLANS
Defined Benefit Plans
– Prior to November 2016, the Bank had a qualified defined benefit pension plan covering substantially all of its employees. The benefits were based on years of service and the employee’s compensation during employment. The Bank’s funding policy was based on actuarially determined amounts. Prior service costs were amortized using the straight line method. Contributions were intended to provide for not only benefits attributed to service to date but also for those expected to be earned in the future. In addition, the Bank currently has a non-qualified plan covering certain officers whose benefit under the qualified plan would be reduced as a result of Internal Revenue Code limitations. The non-qualified plan is an unfunded plan and any benefits payable shall be paid from the general assets of the Bank.
The Bank settled its qualified pension plan liability in November 2016 for all participants. The settlement was recognized in the fourth quarter of 2016 when participants received annuities or lump sum payments of their accrued benefit balances. The Bank decided to settle its non-qualified pension plan for all participants effective August 15, 2016. The settlement expense is estimated at approximately $200,000 and is expected to be recognized in the third quarter of 2017.
Net periodic cost related to defined benefit plans include the following components for the periods indicated:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Qualified Defined Benefit Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Net Periodic Benefit Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
6
|
|
|
$
|
14
|
|
|
$
|
13
|
|
|
$
|
28
|
|
Amortization of net loss
|
|
|
60
|
|
|
|
11
|
|
|
|
118
|
|
|
|
23
|
|
Net periodic pension cost
|
|
$
|
66
|
|
|
$
|
25
|
|
|
$
|
131
|
|
|
$
|
51
|
|
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
5. BENEFIT PLANS (Continued)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified Defined Benefit Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Net Periodic Benefit Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
-
|
|
|
$
|
237
|
|
|
$
|
-
|
|
|
$
|
472
|
|
Expected return on plan assets
|
|
|
-
|
|
|
|
(202
|
)
|
|
|
-
|
|
|
|
(401
|
)
|
Amortization of net loss
|
|
|
-
|
|
|
|
163
|
|
|
|
-
|
|
|
|
324
|
|
Net periodic pension cost
|
|
$
|
-
|
|
|
$
|
198
|
|
|
$
|
-
|
|
|
$
|
395
|
|
Employee Stock Ownership Plan
– In conjunction with the Parent’s initial public offering in 2011, the Bank established an ESOP to provide eligible employees the opportunity to own Parent stock. The Parent provided a loan to the ESOP in the amount of $4,468,000, which was used to purchase 446,764 shares of the Parent’s common stock at a price of $10.00 per share in the Parent’s initial public offering. The loan bears a fixed interest rate of 3.25% and provides for annual payments of interest and principal over the 15 year term of the loan.
The Bank committed to make contributions to the ESOP sufficient to support the debt service of the loan. The loan is secured by the shares purchased, which are held in a trust until released for allocation to the participants as principal and interest payments are made by the ESOP to the Parent.
Shares released are allocated to each eligible participant based on the ratio of each participant’s
compensation, as defined in the ESOP, to the total compensation of all eligible plan participants. Forfeited
shares shall be reallocated among other active participants in the Plan. At the discretion of the Bank, cash
dividends, when paid on allocated shares, will be distributed to participants’ accounts or used to repay the
principal and interest on the ESOP loan used to acquire Parent stock on which dividends were paid. Cash
dividends on unallocated shares will be used to repay the outstanding debt of the ESOP.
Shares held by the ESOP include the following:
|
|
June 30,
2017
|
|
|
|
|
|
Allocated ESOP shares, December 31, 2016
|
|
|
141,710
|
|
ESOP shares committed to be released during the period
|
|
|
15,565
|
|
ESOP shares withdrawn during the period
|
|
|
(7,792
|
)
|
Unallocated ESOP shares
|
|
|
266,914
|
|
Total ESOP shares
|
|
|
416,397
|
|
|
|
|
|
|
Fair value of unallocated ESOP shares
(dollars in thousands)
|
|
$
|
11,731
|
|
As ESOP shares are earned by the participants, the Company recognizes compensation expense equal to the fair value of the earned ESOP shares during the periods in which they become committed to be released.
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
5. BENEFIT PLANS (Continued)
Coincident to the closing of the Merger, as described in more detail in note 8 to the consolidated financial statements, the ESOP requires that the ESOP loan be paid in full from the sale of unallocated Parent shares of stock held by the ESOP. The remaining unallocated Parent shares held by the ESOP, net of allocation of previously forfeited shares as required by the ESOP, are to be allocated among the accounts of all participants, as defined by the ESOP, who were employed by the Bank on the date immediately preceding the closing date of the Merger in proportion to the opening balances in their ESOP participant accounts as of the first day of the current Valuation Period, as defined by the ESOP.
Total expense recognized in connection with the ESOP follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP expense
|
|
$
|
372
|
|
|
$
|
194
|
|
|
$
|
640
|
|
|
$
|
387
|
|
2012 Equity Incentive Plan -
The Parent’s 2012 Equity Incentive Plan (the “2012 Equity Incentive Plan”) provides for awards of restricted stock and stock options to key officers and outside directors. Cost recognized under the 2012 Equity Incentive Plan is based on the fair value of restricted stock and stock option awards on their grant date. The maximum number of shares that may be awarded under the plan is 781,837 shares, including 223,382 for restricted stock shares and 558,455 shares for stock options.
Shares of common stock granted under the 2012 Equity Incentive Plan may be issued from authorized but unissued shares or, in the case of restricted stock awards, may be awarded with shares purchased on the open market. During 2012, the Parent purchased 223,382 shares of its common stock at a total cost of $3.6 million, or an average of $16.12 per share, through an independent trustee to fulfill anticipated restricted stock awards. The share-based awards granted under the 2012 Equity Incentive Plan have some similar characteristics, except some awards have been granted in restricted stock and other awards have been granted in stock options. Therefore, the following disclosures have been disaggregated for the restricted stock awards and the stock option grants under the plan due to their dissimilar characteristics.
Share-based compensation expenses related to restricted stock and stock options recognized for the three and six months ended June 30, 2017 were $263,000 and $527,000, respectively, and were $262,000 and $529,000, respectively, for the same periods of 2016.
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
5. BENEFIT PLANS (Continued)
The table below presents restricted stock award activity for the periods indicated:
|
|
Restricted
Stock
Awards
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
Unvested restricted shares at December 31, 2015
|
|
|
121,610
|
|
|
$
|
15.75
|
|
Vested and released to participants
|
|
|
(40,297
|
)
|
|
|
15.74
|
|
Unvested restricted shares at December 31, 2016
|
|
|
81,313
|
|
|
$
|
15.75
|
|
Vested and released to participants
|
|
|
(40,296
|
)
|
|
|
15.74
|
|
Unvested restricted shares at June 30, 2017
|
|
|
41,017
|
|
|
$
|
15.78
|
|
There were no restricted stock awards granted or forfeited during the six-month periods ended June 30, 2017 and 2016.
At June 30, 2017, unrecognized compensation expense, adjusted for expected forfeitures, was $380,000 related to restricted stock. The weighted-average period over which compensation cost related to unvested awards is expected to be recognized was 0.66 years at June 30, 2017.
The table below presents stock option activity for the periods indicated:
|
|
Stock
Options
Available For
Granting
|
|
|
Stock
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Remaining
Contractual
Life
(In Years)
|
|
|
Aggregate
Intrinsic
Value
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
60,355
|
|
|
|
450,500
|
|
|
$
|
16.03
|
|
|
|
7.24
|
|
|
$
|
4,473
|
|
Exercised
|
|
|
-
|
|
|
|
(6,600
|
)
|
|
|
15.71
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
60,355
|
|
|
|
443,900
|
|
|
$
|
16.04
|
|
|
|
6.24
|
|
|
$
|
6,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
60,355
|
|
|
|
443,900
|
|
|
$
|
16.04
|
|
|
|
5.75
|
|
|
$
|
12,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2017
|
|
|
|
|
|
|
339,400
|
|
|
$
|
15.92
|
|
|
|
5.70
|
|
|
$
|
9,514
|
|
The fair value of each option award is estimated on the date of the grant using the Black-Scholes option pricing model. There were no stock options granted, exercised or forfeited during the six-month period ended June 30, 2017. There were 5,000 stock options exercised during the six-month period ended June 30, 2016, and there were no stock options granted or forfeited during the same period.
At June 30, 2017, the Company had $331,000 of unrecognized compensation expense related to stock options. The weighted average period over which compensation cost related to unvested stock options is expected to be recognized was 1.06 years at June 30, 2017. There were 339,400 options vested and exercisable at June 30, 2017.
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
6. COMMITMENTS AND CONTINGENCIES
Loan Commitments
- The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recorded in the accompanying consolidated balance sheets. Such financial instruments are recorded when they are funded.
The Bank’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the balance sheet.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial real estate.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.
The Bank’s commitments to extend or originate credit and under standby letters of credit follow:
(Dollars in thousands)
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Financial instruments whose contract amounts represent credit risk:
|
|
|
|
|
|
|
Commitments to extend or originate credit
|
|
$
|
196,229
|
|
|
$
|
190,213
|
|
Commitments under standby letters of credit
|
|
|
163
|
|
|
|
604
|
|
Total
|
|
$
|
196,392
|
|
|
$
|
190,817
|
|
Concentrations of Credit Risk
- The Bank’s primary market area consists of Buncombe, Henderson, McDowell, Transylvania and Madison counties of North Carolina. The majority of the Bank’s loans are residential mortgage loans and commercial real estate loans. The Bank’s policy generally will allow residential mortgage loans up to 80% of the value of the real estate that is pledged as collateral or up to 95% with private mortgage insurance and commercial real estate loans up to 85% of the value of the real estate that serves as collateral to secure the loan.
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
6. COMMITMENTS AND CONTINGENCIES (Continued)
Interest Rate Risk
- The Bank’s profitability depends to a large extent on its net interest income, which is the difference between interest income from loans and investments and interest expense on deposits and borrowings. Like most financial institutions, the Bank’s interest income and interest expense are significantly affected by changes in market interest rates and other economic factors beyond its control. The Bank’s interest-earning assets consist primarily of long-term, fixed-rate mortgage loans, adjustable rate mortgage loans, commercial loans, and investments that typically adjust more slowly to changes in interest rates than its interest-bearing liabilities, which are primarily term deposits. Accordingly, the Bank’s earnings are usually adversely affected during periods of rising interest rates and positively impacted during periods of declining interest rates. However, based on the results of the Bank’s interest rate risk simulation model, which management believes accurately reflects the extraordinary stress currently existing in the financial markets with respect to potential margin compression resulting from the Bank’s difficulty in reducing its cost of funds further in this competitive pricing environment, the Bank’s earnings may well be adversely affected if interest rates decline further. Such a decline in rates could result from, among other factors, the Federal Reserve Board’s purchase of government securities and/or mortgage-backed securities in an effort to further stimulate the economy. Accordingly, the Bank is carefully monitoring, through its Asset/Liability management process, the competitive landscape related to interest rates as well as various economic indicators in order to optimally position the Bank in terms of changes in interest rates.
Litigation
- The Bank is periodically involved in legal actions in the normal course of business. Management believes that such routine legal proceedings taken together are immaterial to our financial condition or results of operations. Any non-routine legal proceedings are described in Item 3 of the Parent’s Annual Report on Form 10-K for the year ended December 31, 2016.
As previously described, on May 1, 2017, the Parent and First Bancorp entered into the Merger Agreement, pursuant to which, upon satisfaction of the conditions set forth in the Merger Agreement, the Parent will merge with and into First Bancorp, with First Bancorp being the surviving corporation and the Parent ceasing to be a separate entity. The announcement of the Merger has triggered two lawsuits filed by purported shareholders.
On July 14, 2017, a purported shareholder filed a lawsuit in the United States District Court, Western District of North Carolina, against the Parent and members of the Parent’s board of directors. The lawsuit alleges inadequate disclosures in the Parent’s proxy statement/prospectus and violations of the Securities Exchange Act of 1934. The lawsuit seeks, among other remedies, to enjoin the Merger or, in the event the Merger is completed, rescission of the Merger or rescissory damages; to direct defendants to account for unspecified damages; and costs of the lawsuit, including attorneys’ and experts’ fees.
On July 19, 2017, another purported shareholder filed a lawsuit in the United States District Court, Western District of North Carolina, against the Parent, members of the Parent’s board of directors, and First Bancorp. This lawsuit make nearly identical allegations as are made in the lawsuit described in the preceding paragraph and asks for identical remedies.
As of the date of this filing, the Parent cannot reasonably predict the outcome of either of the above-described lawsuits or, in the event of an adverse outcome, the potential loss or range of possible loss relating to either lawsuit.
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
6. COMMITMENTS AND CONTINGENCIES (Continued)
Investment Commitments
- During 2012, the Bank entered into an agreement to invest $2.0 million as a limited partner in a Small Business Investment Company. The Bank invested $350,000 of its investment commitment in 2013, $250,000 in 2014, $200,000 in 2015 and $300,000 in 2016. This investment is recognized using the cost method and is included in “other assets” on the balance sheet.
7. FAIR VALUE MEASUREMENTS
FASB
ASC Topic 820:
Fair Value Measurements and Disclosures
(“FASB ASC Topic 820”) requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed below. The estimated fair value amounts shown below have been determined by the Bank using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Bank could realize in a current market exchange. The use of different market assumptions and/or valuation methodologies could have a material effect on the estimated fair value amounts.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no highly liquid market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.
The fair value estimates presented below are based on pertinent information available to management as of June 30, 2017 and December 31, 2016. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since the dates presented herein and, therefore, current estimates of fair value may differ significantly from the amounts presented.
The fair value measurement and disclosure guidance contained in FASB ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.
Level 1
The fair values of Level 1 assets are determined by quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities that are traded in an active exchange market, as well as certain U.S. Treasury debt securities.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
7. FAIR VALUE MEASUREMENTS (Continued)
observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency mortgage-backed debt securities, SBA asset-backed securities, securities issued by state and local governments, corporate debt securities and loans held for sale.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments, loans receivable held for investment, accrued interest receivable and payable, time deposits, repurchase agreements, and Federal Home Loan Bank (“FHLB”) advances.
The methodologies for estimating fair values of financial assets and financial liabilities are determined as discussed below. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest, Federal Home Loan Bank Stock and demand deposits.
Investment Securities
– Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is primarily based upon quoted prices of like or similar securities, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. The fair values of investments in mutual funds are determined by quoted prices and are included as recurring Level 1 assets. The fair values of investments in securities issued by U.S. GSEs, asset-backed securities issued by the SBA, residential mortgage-backed securities issued by U.S. GSEs, and securities issued by state and local governments are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions and are included as recurring Level 2 assets.
Loans Held for Sale
– Loans held for sale are residential mortgages carried at the lower of cost or market value. The market values of loans held for sale are based on what mortgage buyers are currently offering on a “best efforts” basis to buy the loans. As such, mortgages held for sale are classified as nonrecurring Level 2 assets.
Loans Receivable
– For variable rate loans, carrying value is a reasonable estimate of fair value. For fixed rate loans, fair values are estimated based on discounted future cash flows using the current interest rates at which loans with similar terms would be made to borrowers of similar credit quality. Valuation adjustments are made for credit risk, which are represented by the allowance for loan losses, but do not include adjustments for illiquidity or other market risks.
ASB BANCORP, INC. AND SUBSIDIARY
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
7. FAIR VALUE MEASUREMENTS (Continued)
The Bank does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with the accounting guidance contained in FASB
ASC Topic 310: Receivables
(“FASB ASC Topic 310”). The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Substantially all of the total impaired loans are evaluated based on the fair value of the collateral. In accordance with the fair value measurement and disclosure guidance contained in FASB ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.
When the fair value of the collateral is based on an observable market price or a current appraised value, the impaired loan is recorded as nonrecurring Level 2 assets. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Bank records the impaired loan as nonrecurring Level 3 assets.
Accrued Interest Receivable and Payable
– The carrying amount is a reasonable estimate of fair value.
Deferred Compensation Assets
– Assets include debt and equity securities that are traded in an active exchange market. Fair values are obtained from quoted prices in active markets for identical assets.
Demand and Savings Deposits
– The fair values of demand and savings deposits approximate the carrying values of these liabilities because the balances may be withdrawn at any time without penalty.
Time Deposits and Repurchase Agreements
– Fair value of fixed maturity certificates of deposit is estimated using the FHLB Rate Curve for similar remaining maturities. Fair value of repurchase agreements is estimated using the borrowing rate for overnight borrowings.
Federal Home Loan Bank Advances
– The fair value of Federal Home Loan Bank advances is estimated using the rates currently offered for advances of similar remaining maturities.
Deferred Compensation Liabilities
– Fair values are measured based on the fair values of the related deferred compensation assets.
Defined Benefit Plan Assets
– The nonqualified defined benefit plan had no plan assets because it was not funded. The assets of the qualified defined benefit plan, which are invested in interest-bearing depository accounts and money market, debt and equity security mutual funds, are included at fair value in the qualified plan’s separate financial statements. Fair value measurement is based upon quoted prices of like or similar securities. The fair values of the plan’s investments in interest-bearing depository accounts and money market, debt and equity security mutual funds are determined by quoted prices and are included as recurring Level 1 assets. There were no assets or liabilities in the qualified defined benefit plan as of June 30, 2017 due to the termination and settlement of the plan during the fourth quarter of 2016.
Foreclosed Properties
– Foreclosed properties are measured and recorded at the lower of cost or estimated fair value. The fair value of foreclosed properties is measured using the current appraised value of the property less the estimated expenses necessary to sell the property. Foreclosed properties are classified as nonrecurring Level 3 assets.