This Quarterly Report on Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. Forward-looking statements include, but are not limited to:
These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:
Any of the forward-looking statements that we make in this quarterly report and in other public statements we make may later prove incorrect because of inaccurate assumptions, the factors illustrated above or other factors that we cannot foresee. Consequently, no forward-looking statement can be guaranteed.
Except as required by applicable law or regulation, ASB Bancorp, Inc. does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
During the three-month period ended March 31, 2016, there were no significant changes in critical accounting policies or the application of critical accounting policies as disclosed in the our audited consolidated financial statements and related footnotes for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K.
We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. The following represent our critical accounting policies:
This Management’s Discussion and Analysis is provided to help readers understand how we evaluate our financial condition and results of operations. The following discussions are intended to provide a general overview of our financial condition at March 31, 2016 and our operating performance for the three-month period ended March 31, 2016. Readers seeking more in-depth information should read the more detailed discussions below as well as the consolidated financial statements and related notes included under Item 1 of this Quarterly Report on Form 10-Q.
All amounts presented are consolidated data unless otherwise specified. Uncertainty and future events could cause changes in accounting estimates that have material effects on the financial position and results of operations in future periods.
Comparison of Financial Condition at March 31, 2016 and December 31, 2015
The following table provides the changes in our significant asset and liability categories at March 31, 2016 compared to December 31, 2015.
(Dollars in thousands)
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits with banks and overnight and short-term investments
|
|
$
|
27,856
|
|
|
$
|
23,838
|
|
|
$
|
4,018
|
|
|
|
16.9
|
%
|
Investment securities
|
|
|
122,374
|
|
|
|
141,364
|
|
|
|
(18,990
|
)
|
|
|
-13.4
|
%
|
Investments held at cost
|
|
|
2,914
|
|
|
|
2,807
|
|
|
|
107
|
|
|
|
3.8
|
%
|
Loans held for sale
|
|
|
4,353
|
|
|
|
7,018
|
|
|
|
(2,665
|
)
|
|
|
-38.0
|
%
|
Loans receivable, net of deferred fees
|
|
|
595,832
|
|
|
|
576,087
|
|
|
|
19,745
|
|
|
|
3.4
|
%
|
Total interest-earning assets
|
|
|
753,329
|
|
|
|
751,114
|
|
|
|
2,215
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
9,235
|
|
|
|
9,563
|
|
|
|
(328
|
)
|
|
|
-3.4
|
%
|
Allowance for loan losses
|
|
|
(6,722
|
)
|
|
|
(6,289
|
)
|
|
|
(433
|
)
|
|
|
-6.9
|
%
|
Premises and equipment, net of accumulated depreciation
|
|
|
11,593
|
|
|
|
11,616
|
|
|
|
(23
|
)
|
|
|
-0.2
|
%
|
Foreclosed real estate
|
|
|
5,597
|
|
|
|
5,646
|
|
|
|
(49
|
)
|
|
|
-0.9
|
%
|
Deferred income tax assets, net of deferred income tax liabilities
|
|
|
4,338
|
|
|
|
4,716
|
|
|
|
(378
|
)
|
|
|
-8.0
|
%
|
Other assets
|
|
|
6,153
|
|
|
|
6,487
|
|
|
|
(334
|
)
|
|
|
-5.1
|
%
|
Total noninterest-earning assets
|
|
|
30,194
|
|
|
|
31,739
|
|
|
|
(1,545
|
)
|
|
|
-4.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
783,523
|
|
|
$
|
782,853
|
|
|
$
|
670
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
507,782
|
|
|
$
|
517,159
|
|
|
$
|
(9,377
|
)
|
|
|
-1.8
|
%
|
Overnight and short-term borrowings
|
|
|
699
|
|
|
|
327
|
|
|
|
372
|
|
|
|
113.8
|
%
|
Federal Home Loan Bank advances
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
0.0
|
%
|
Total interest-bearing liabilities
|
|
|
558,481
|
|
|
|
567,486
|
|
|
|
(9,005
|
)
|
|
|
-1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
120,633
|
|
|
|
113,745
|
|
|
|
6,888
|
|
|
|
6.1
|
%
|
Accounts payable and other liabilities
|
|
|
12,345
|
|
|
|
11,940
|
|
|
|
405
|
|
|
|
3.4
|
%
|
Total noninterest-bearing liabilities
|
|
|
132,978
|
|
|
|
125,685
|
|
|
|
7,293
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
691,459
|
|
|
|
693,171
|
|
|
|
(1,712
|
)
|
|
|
-0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
92,064
|
|
|
|
89,682
|
|
|
|
2,382
|
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
783,523
|
|
|
$
|
782,853
|
|
|
$
|
670
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37,091
|
|
|
$
|
33,401
|
|
|
$
|
3,690
|
|
|
|
11.0
|
%
|
Total core deposits (excludes certificate accounts)
|
|
|
500,330
|
|
|
|
495,628
|
|
|
|
4,702
|
|
|
|
0.9
|
%
|
Total certificates of deposit
|
|
|
128,085
|
|
|
|
135,276
|
|
|
|
(7,191
|
)
|
|
|
-5.3
|
%
|
Total deposits
|
|
|
628,415
|
|
|
|
630,904
|
|
|
|
(2,489
|
)
|
|
|
-0.4
|
%
|
Total funding liabilities
|
|
|
679,114
|
|
|
|
681,231
|
|
|
|
(2,117
|
)
|
|
|
-0.3
|
%
|
Assets.
Total assets increased $670,000, or 0.1%, to $783.5 million at March 31, 2016 from $782.9 million at December 31, 2015. Cash and cash equivalents increased $3.7 million, or 11.0%, to $37.1 million at March 31, 2016 from $33.4 million at December 31, 2015. Investment securities decreased $19.0 million, or 13.4%, to $122.4 million at March 31, 2016 from $141.4 million at December 31, 2015, primarily due to the sale of investment securities to fund loan growth. Loans receivable, net of deferred fees, increased $19.7 million, or 3.4%, to $595.8 million at March 31, 2016 from $576.1 million at December 31, 2015 as new loan originations, primarily commercial real estate loan originations, exceeded loan repayments, prepayments and foreclosures.
|
|
Three Months Ended
March 31,
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Loans originated:
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
Commercial mortgage
|
|
$
|
26,549
|
|
|
$
|
14,921
|
|
Construction and land development
|
|
|
4,778
|
|
|
|
10,228
|
|
Commercial and industrial
|
|
|
3,686
|
|
|
|
2,418
|
|
Non-commercial:
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
15,638
|
|
|
|
23,044
|
|
Construction and land development
|
|
|
10,046
|
|
|
|
9,963
|
|
Revolving mortgage
|
|
|
6,141
|
|
|
|
9,012
|
|
Consumer
|
|
|
85
|
|
|
|
10,107
|
|
Total loans originated
|
|
$
|
66,923
|
|
|
$
|
79,693
|
|
|
|
|
|
|
|
|
|
|
Loan principal payments, prepayments and payoffs
|
|
$
|
30,212
|
|
|
$
|
41,613
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans sold
|
|
$
|
13,062
|
|
|
$
|
16,010
|
|
Nonperforming Assets.
Nonperforming assets totaled $8.0 million, or 1.02% of total assets, at March 31, 2016 compared to $8.2 million, or 1.05% of total assets, at December 31, 2015. Nonperforming assets included $2.4 million in nonperforming loans and $5.6 million in foreclosed real estate at March 31, 2016 compared to $2.5 million and $5.6 million, respectively, at December 31, 2015.
Nonperforming loans decreased $186,000 to $2.4 million, or 0.40% of total loans, at March 31, 2016 from $2.5 million, or 0.44% of total loans, at December 31, 2015. Commercial mortgage and industrial nonperforming loans decreased $436,000 for the three months of 2016 and residential and revolving mortgage nonperforming loans decreased $128,000 for the same period. The decreases were partially offset by an increase of $378,000 in additional non-commercial construction and land development nonperforming loans. Performing troubled debt restructurings (“TDRs”) decreased $39,000, or 0.9%, when comparing the same periods. Total performing TDRs and nonperforming assets decreased $274,000, or 2.1%, to $12.5 million, or 1.59% of total assets, at March 31, 2016 compared to $12.7 million, or 1.63% of total assets, at December 31, 2015.
At March 31, 2016, nonperforming loans included three residential mortgage loans that totaled $1.2 million, two commercial mortgage loans that totaled $395,000, one commercial construction loan in the amount of $378,000, four commercial and industrial loans that totaled $214,000 and three revolving home equity loans that totaled $182,000. As of March 31, 2016, the nonperforming loans had specific reserves totaling $320,000. TDRs were $5.1 million at March 31, 2016 and $5.5 million at December 31, 2015. There were no additions to TDRs during the three months ended March 31, 2016. At March 31, 2016, $547,000 of the $5.1 million of TDRs were not performing.
Foreclosed real estate at March 31, 2016 included six properties with a total recorded amount of $5.6 million compared to six properties with a total recorded amount of $5.6 million at December 31, 2015. During the three months ended March 31, 2016, no new properties were added to foreclosed real estate, while the Bank sold one of its residential lots in a mixed-use lot subdivision for net proceeds of $49,000. The Bank recorded no loss provisions on foreclosed real estate during the first three months of 2016, and there were no capital additions during the period.
Liabilities.
Total deposits decreased $2.5 million, or 0.4%, to $628.4 million at March 31, 2016 from $630.9 million at December 31, 2015. During the three months ended March 31, 2016, we continued our focus on core deposit growth, from which we exclude certificates of deposit. Core deposits increased $4.7 million, or 0.9%, to $500.3 million at March 31, 2016 from $495.6 million at December 31, 2015.
Commercial checking and money market accounts increased $6.0 million, or 4.1%, to $153.0 million at March 31, 2016 from $147.0 million at December 31, 2015, reflecting expanded sources of lower cost funding. Our efforts to obtain new commercial deposit relationships in conjunction with making new commercial loans significantly contributed to this increase and reflects our commitment to establishing diversified relationships with business clients.
Since December 31, 2015, certificates of deposit decreased $7.2 million, or 5.3%, to $128.1 million at March 31, 2016 from $135.3 million at December 31, 2015 as we continued our focus on core deposit growth. Accounts payable and other liabilities increased $405,000, or 3.4%, to $12.3 million at March 31, 2016 from $11.9 million at December 31, 2015. The increase in accounts payable and other liabilities at March 31, 2016 was primarily attributable to increases in escrowed payments from mortgage borrowers and pension plan liabilities, that were partially offset by a decrease in payroll accruals.
Results of Operations for the Three Months Ended March 31, 2016 and 2015
Overview.
Net income was $1.1 million, or $0.30 per diluted common share, for the three months ended March 31, 2016, compared to $622,000, or $0.16 per diluted common share, for the three months ended March 31, 2015. Income before income taxes increased $785,000, primarily due to an increase of $540,000 in net interest income, an increase of $439,000 in noninterest income, and a decrease of $11,000 in noninterest expenses, which were partially offset by an increase of $205,000 in provision for loan losses.
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
$
|
6,677
|
|
|
$
|
6,154
|
|
|
$
|
523
|
|
|
|
8.5
|
%
|
Interest expense
|
|
|
844
|
|
|
|
861
|
|
|
|
(17
|
)
|
|
|
-2.0
|
%
|
Net interest income
|
|
|
5,833
|
|
|
|
5,293
|
|
|
|
540
|
|
|
|
10.2
|
%
|
Provision for loan losses
|
|
|
399
|
|
|
|
194
|
|
|
|
205
|
|
|
|
105.7
|
%
|
Net interest income after provision for loan losses
|
|
|
5,434
|
|
|
|
5,099
|
|
|
|
335
|
|
|
|
6.6
|
%
|
Noninterest income
|
|
|
2,049
|
|
|
|
1,610
|
|
|
|
439
|
|
|
|
27.3
|
%
|
Noninterest expenses
|
|
|
5,761
|
|
|
|
5,772
|
|
|
|
(11
|
)
|
|
|
-0.2
|
%
|
Income before income tax provision
|
|
|
1,722
|
|
|
|
937
|
|
|
|
785
|
|
|
|
83.8
|
%
|
Income tax provision
|
|
|
601
|
|
|
|
315
|
|
|
|
286
|
|
|
|
90.8
|
%
|
Net income
|
|
|
1,121
|
|
|
|
622
|
|
|
|
499
|
|
|
|
80.2
|
%
|
Net Interest Income.
Net interest income increased by $540,000, or 10.2%, to $5.8 million for the three months ended March 31, 2016 compared to $5.3 million for the three months ended March 31, 2015. Interest income on loans increased $502,000, primarily resulting from a $58.2 million increase in average loan balances, partially offset by a 10 basis point decrease in the average yield on loans. Interest on investment securities increased $20,000, attributable to a 35 basis point increase in the average yield earned on the investment portfolio, which was partially offset by a $12.0 million decrease in the average balance of investment securities. Interest expense decreased $17,000, or 2.0%, for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The lower interest expense was primarily attributable to lower average balances of certificates of deposit, as well as average rate reductions of 2 basis points on total interest-bearing deposits. The decrease in average balances of certificates of deposit was partially offset by higher average balances of NOW, money market and savings accounts. For the same comparable quarterly periods, average noninterest-bearing deposits grew $19.0 million, or 20.1%, which contributed to the reduction of deposit interest expense while deposit funding grew.
Provision for Loan Losses.
We recorded a provision for loan losses in the amount of $399,000 for the three months ended March 31, 2016 compared to $194,000 for the three months ended March 31, 2015. The Company charged off $8,000 in loans for the first quarter of 2016 compared to $252,000 for the first quarter of 2015. The increase in the three-month provision for loan losses was primarily due to the provision of a specific reserve on a loan determined to be impaired late in the first quarter of 2016.
Noninterest Income.
Noninterest income increased $439,000, or 27.3%, to $2.0 million for the three months ended March 31, 2016 from $1.6 million for the three months ended March 31, 2015. Factors that contributed to the increase in noninterest income during the 2016 period included increases of $400,000 in net gains from the sale of investment securities, $80,000 in deposit and other service charge income and $15,000 in fees from debit card services, which were partially offset by decreases of $42,000 in mortgage banking income and $21,000 in income from an investment in a Small Business Investment Company. Increased income on deposit and other fees primarily related to retail checking accounts, while increased transaction volume drove the rise in income from debit card services. The decrease in mortgage banking income was attributable to lower volumes of residential mortgage loans originated and sold.
Noninterest Expenses.
Noninterest expenses remained at $5.8 million for the three months ended March 31, 2016 and 2015. Decreases of $75,000 in loan expenses, $34,000 in occupancy expenses, $31,000 in salaries and employee benefits, $23,000 in foreclosed property expenses and $58,000 in other miscellaneous expenses were partially off set by increases of $120,000 in professional and outside services primarily due to revenue enhancement consulting fees and $90,000 in data processing fees.
Income Tax Provision
. Income tax expense increased by $286,000 for the three months ended March 31, 2016 compared to the three months ended March 31, 2015, primarily due to an increase in pre-tax income. The effective tax rate was 34.90% for the three months ended March 31, 2016 compared to 33.62% for the three months ended March 31, 2015, with the increase primarily resulting from a decrease in favorable permanent tax differences relative to the size of the pre-tax income in 2016 compared to 2015 and an increase in deferred state tax expenses resulting from a reduction in the state income tax rate which affected the recorded deferred tax asset.
Average Balances and Yields
The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs are derived by dividing annualized income or expense by the average balances of assets or liabilities for the periods presented. Average balances have been calculated using daily balances. Nonaccrual loans are included in average balances only. Loan fees are included in interest income on loans and are not material. The yields on tax exempt loans and municipal investment securities have been included on a tax-equivalent basis using a federal marginal tax rate of 34%.
|
|
For The Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
(Dollars in thousands)
|
|
Average
Balance
|
|
|
Interest
And
Dividends
|
|
|
Yield/
Cost
|
|
|
Average
Balance (1)
|
|
|
Interest
And
Dividends
|
|
|
Yield/
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits with banks
|
|
$
|
24,283
|
|
|
$
|
32
|
|
|
|
0.53
|
%
|
|
$
|
49,338
|
|
|
$
|
34
|
|
|
|
0.28
|
%
|
Loans receivable
|
|
|
593,341
|
|
|
|
6,023
|
|
|
|
4.08
|
%
|
|
|
535,130
|
|
|
|
5,521
|
|
|
|
4.18
|
%
|
Investment securities
|
|
|
58,214
|
|
|
|
388
|
|
|
|
3.54
|
%
|
|
|
49,242
|
|
|
|
283
|
|
|
|
3.06
|
%
|
Mortgage-backed and similar securities
|
|
|
67,539
|
|
|
|
200
|
|
|
|
1.19
|
%
|
|
|
88,499
|
|
|
|
285
|
|
|
|
1.31
|
%
|
Other interest-earning assets
|
|
|
2,886
|
|
|
|
34
|
|
|
|
4.74
|
%
|
|
|
2,889
|
|
|
|
31
|
|
|
|
4.35
|
%
|
Total interest-earning assets
|
|
|
746,263
|
|
|
|
6,677
|
|
|
|
3.67
|
%
|
|
|
725,098
|
|
|
|
6,154
|
|
|
|
3.49
|
%
|
Allowance for loan losses
|
|
|
(6,408
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,020
|
)
|
|
|
|
|
|
|
|
|
Noninterest-earning assets
|
|
|
36,768
|
|
|
|
|
|
|
|
|
|
|
|
41,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
776,623
|
|
|
|
|
|
|
|
|
|
|
$
|
760,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
156,491
|
|
|
|
52
|
|
|
|
0.13
|
%
|
|
$
|
151,480
|
|
|
|
50
|
|
|
|
0.13
|
%
|
Money market accounts
|
|
|
170,888
|
|
|
|
73
|
|
|
|
0.17
|
%
|
|
|
157,235
|
|
|
|
69
|
|
|
|
0.18
|
%
|
Savings accounts
|
|
|
49,603
|
|
|
|
12
|
|
|
|
0.10
|
%
|
|
|
43,340
|
|
|
|
10
|
|
|
|
0.09
|
%
|
Certificates of deposit
|
|
|
132,056
|
|
|
|
217
|
|
|
|
0.66
|
%
|
|
|
154,010
|
|
|
|
248
|
|
|
|
0.65
|
%
|
Total interest-bearing deposits
|
|
|
509,038
|
|
|
|
354
|
|
|
|
0.28
|
%
|
|
|
506,065
|
|
|
|
377
|
|
|
|
0.30
|
%
|
Overnight and short-term borrowings
|
|
|
719
|
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
954
|
|
|
|
-
|
|
|
|
0.00
|
%
|
Federal Home Loan Bank advances
|
|
|
50,000
|
|
|
|
490
|
|
|
|
3.94
|
%
|
|
|
50,000
|
|
|
|
484
|
|
|
|
3.93
|
%
|
Total interest-bearing liabilities
|
|
|
559,757
|
|
|
|
844
|
|
|
|
0.61
|
%
|
|
|
557,019
|
|
|
|
861
|
|
|
|
0.63
|
%
|
Noninterest-bearing deposits
|
|
|
113,592
|
|
|
|
|
|
|
|
|
|
|
|
94,547
|
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities
|
|
|
11,860
|
|
|
|
|
|
|
|
|
|
|
|
13,458
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
685,209
|
|
|
|
|
|
|
|
|
|
|
|
665,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
91,414
|
|
|
|
|
|
|
|
|
|
|
|
95,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
776,623
|
|
|
|
|
|
|
|
|
|
|
$
|
760,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
5,833
|
|
|
|
|
|
|
|
|
|
|
$
|
5,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.06
|
%
|
|
|
|
|
|
|
|
|
|
|
2.86
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.21
|
%
|
|
|
|
|
|
|
|
|
|
|
3.01
|
%
|
Average interest-earning assets to average interest-bearing liabilities
|
|
|
133.32
|
%
|
|
|
|
|
|
|
|
|
|
|
130.17
|
%
|
|
|
|
|
|
|
|
|
(1)
|
Certain amounts for prior periods were reclassified to conform to the March 31, 2016 presentation. The reclassifications had no effect on net income or equity as previously reported.
|
Rate/Volume Analysis
. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior period volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior period rate). The net column represents the sum of the volume and rate columns. Changes attributable to changes in both rate and volume have been allocated proportionally based on the absolute dollar amounts of change in each.
|
|
Three Months Ended March 31, 2016
Compared To The
Three Months Ended March 31, 2015
|
|
|
|
Increase (Decrease)
Due To:
|
|
|
|
|
(Dollars in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits with banks
|
|
$
|
(23
|
)
|
|
$
|
21
|
|
|
$
|
(2
|
)
|
Loans receivable
|
|
|
592
|
|
|
|
(90
|
)
|
|
|
502
|
|
Investment securities
|
|
|
56
|
|
|
|
49
|
|
|
|
105
|
|
Mortgage-backed and similar securities
|
|
|
(63
|
)
|
|
|
(22
|
)
|
|
|
(85
|
)
|
Other interest-earning assets
|
|
|
-
|
|
|
|
3
|
|
|
|
3
|
|
Total interest-earning assets
|
|
|
562
|
|
|
|
(39
|
)
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
Money market accounts
|
|
|
6
|
|
|
|
(2
|
)
|
|
|
4
|
|
Savings accounts
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
Certificates of deposit
|
|
|
(36
|
)
|
|
|
5
|
|
|
|
(31
|
)
|
Total interest-bearing deposits
|
|
|
(27
|
)
|
|
|
4
|
|
|
|
(23
|
)
|
Federal Home Loan Bank advances
|
|
|
-
|
|
|
|
6
|
|
|
|
6
|
|
Total interest-bearing liabilities
|
|
|
(27
|
)
|
|
|
10
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in interest income
|
|
$
|
589
|
|
|
$
|
(49
|
)
|
|
$
|
540
|
|
With the prolonged low interest rate environment, the interest rate component continues to reflect the pressures of net interest margin compression. The growth in loans has led to favorable changes in the volume component and overall net interest income levels in 2016 compared to 2015.
Risk Management
Overview
. Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for on a mark-to-market basis. Other risks that we face are operational risks, liquidity risk and reputation risk. Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.
Credit Risk Management
. Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. We do not offer Alt-A, sub-prime or no-documentation mortgage loans.
When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. When the loan becomes 15 days past due, a late notice is sent to the borrower. When the loan becomes 30 days past due, a more formal letter is sent. Between 15 and 30 days past due, telephone calls are also made to the borrower. After 30 days, we regard the borrower in default. At 60 days delinquent, the borrower may be sent a letter from our attorney and we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Generally, when a consumer loan becomes 60 days past due, we institute collection proceedings and attempt to repossess any personal property that secures the loan. Management informs the Board of Directors monthly of the amount of loans delinquent more than 30 days, all loans in foreclosure and repossessed property that we own.
Analysis of Nonperforming Assets and Classified Assets
. We consider repossessed assets and loans that are 90 days or more past due and certain loans that are less than 90 days past due, but that we will not be able to collect the full amount of, to be nonperforming assets. Loans are generally placed on nonaccrual status when they become 90 days delinquent, or sooner if the facts and circumstances indicate that we will not be able to collect the full amount of the loan, at which time the accrual of interest ceases and accrued interest is reversed and deducted from income. Typically, payments received on a nonaccrual loan are first applied to the outstanding principal balance to the extent that principal is due and then recognized as interest income.
Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. Property acquired through foreclosure is recorded at the lower of its cost or fair market value at the date of foreclosure. Any holding costs and declines in fair value after acquisition of the property result in charges against income.
The following table provides information with respect to our nonperforming assets at the dates indicated.
(Dollars in thousands)
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccruing loans (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage
|
|
$
|
395
|
|
|
$
|
818
|
|
|
$
|
(423
|
)
|
|
|
-51.7
|
%
|
Commercial and industrial
|
|
|
214
|
|
|
|
227
|
|
|
|
(13
|
)
|
|
|
-5.7
|
%
|
Total commercial
|
|
|
609
|
|
|
|
1,045
|
|
|
|
(436
|
)
|
|
|
-41.7
|
%
|
Non-commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-commercial construction and land development
|
|
|
378
|
|
|
|
-
|
|
|
|
378
|
|
|
|
n/a
|
|
Residential mortgage
|
|
|
1,193
|
|
|
|
1,309
|
|
|
|
(116
|
)
|
|
|
-8.9
|
%
|
Revolving mortgage
|
|
|
182
|
|
|
|
194
|
|
|
|
(12
|
)
|
|
|
-6.2
|
%
|
Total non-commercial
|
|
|
1,753
|
|
|
|
1,503
|
|
|
|
250
|
|
|
|
16.6
|
%
|
Total nonaccruing loans (1)
|
|
|
2,362
|
|
|
|
2,548
|
|
|
|
(186
|
)
|
|
|
-7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans past due 90 or more days and still accruing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
2,362
|
|
|
|
2,548
|
|
|
|
(186
|
)
|
|
|
-7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed real estate
|
|
|
5,597
|
|
|
|
5,646
|
|
|
|
(49
|
)
|
|
|
-0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
|
7,959
|
|
|
|
8,194
|
|
|
|
(235
|
)
|
|
|
-2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing troubled debt restructurings (2)
|
|
|
4,513
|
|
|
|
4,552
|
|
|
|
(39
|
)
|
|
|
-0.9
|
%
|
Performing troubled debt restructurings and total nonperforming assets
|
|
$
|
12,472
|
|
|
$
|
12,746
|
|
|
|
(274
|
)
|
|
|
-2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
6,722
|
|
|
$
|
6,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
595,832
|
|
|
$
|
576,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance as a percentage of total loans
|
|
|
1.13
|
%
|
|
|
1.09
|
%
|
|
|
|
|
|
|
|
|
Allowance as a percentage of nonperforming loans
|
|
|
284.59
|
%
|
|
|
246.82
|
%
|
|
|
|
|
|
|
|
|
Total nonperforming loans to total loans
|
|
|
0.40
|
%
|
|
|
0.44
|
%
|
|
|
|
|
|
|
|
|
Total nonperforming loans to total assets
|
|
|
0.30
|
%
|
|
|
0.33
|
%
|
|
|
|
|
|
|
|
|
Total nonperforming assets to total assets
|
|
|
1.02
|
%
|
|
|
1.05
|
%
|
|
|
|
|
|
|
|
|
Performing troubled debt restructurings and total nonperforming assets to total assets
|
|
|
1.59
|
%
|
|
|
1.63
|
%
|
|
|
|
|
|
|
|
|
(1)
|
Nonaccruing loans include nonaccruing troubled debt restructurings.
|
(2)
|
Performing troubled debt restructurings exclude nonaccruing troubled debt restructurings.
|
We periodically modify loans by extending loan terms or granting other concessions to help borrowers remain current and avoid foreclosure. These modified loans, also referred to as TDRs, totaled $5.1 million at March 31, 2016 and $5.5 million at December 31, 2015. During the three months ended March 31,2016, no loans were restructured during the period. At March 31, 2016, $547,000 of the total $5.1 million of TDRs were not performing according to their restructured terms and were included in the previous nonperforming assets table as nonaccruing loans.
Interest income that would have been recorded had nonaccruing loans been current according to their original terms amounted to $46,000 for the three-month period ended March 31, 2016 compared to $39,000 for the comparable period of 2015. Interest income of $46,000 and $58,000 related to impaired loans was recognized for the three-month periods ended March 31, 2016 and 2015, respectively.
At March 31, 2016, our nonaccruing loans of $2.4 million, including nonperforming TDRs, were primarily comprised of the following:
●
Commercial Construction and Land Development Loans
|
○
|
One loan for the purchase of land with a balance of $378,000. As of March 31, 2016, the loan was considered impaired and had a specific reserve of $224,000.
|
●
Commercial Mortgage Loans
|
○
|
Two loans to unrelated borrowers on commercial buildings located in Western North Carolina. As of March 31, 2016, the loans were considered impaired and nonaccruing with an aggregate balance of $395,000.
|
●
Residential Mortgage Loans
|
○
|
Six loans to multiple unrelated borrowers on one-to-four family residential properties with an aggregate balance of $1.4 million as of March 31, 2016.
|
At March 31, 2016, our performing TDRs of $4.5 million included the following:
●
Commercial Mortgage Loans
|
○
|
One loan for the purchase of an existing mobile home park to be used for future development secured by nonowner-occupied commercial real estate located in coastal South Carolina. The loan was modified in the fourth quarter of 2014, which extended the terms of the loan and required scheduled principal payments. The future performance of the loan is dependent upon the guarantor group’s willingness and ability to service the debt. Such willingness and ability was demonstrated by the fact that, as of March 31, 2016, the loan was a performing TDR with a balance of $3.0 million that matures in May of 2017. As of March 31, 2016, the loan was considered impaired and had a specific reserve of $23,000.
|
●
Residential Mortgage Loans
|
○
|
Eleven loans to multiple unrelated borrowers on one-to-four family residential properties with an aggregate balance of $1.5 million as of March 31, 2016.
|
Foreclosed properties consisted of the following at the dates indicated.
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
(Dollars in thousands)
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By foreclosed loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial construction and land development
|
|
|
5
|
|
|
$
|
4,892
|
|
|
|
5
|
|
|
$
|
4,941
|
|
Residential mortgage
|
|
|
1
|
|
|
|
705
|
|
|
|
1
|
|
|
|
705
|
|
Total
|
|
|
6
|
|
|
$
|
5,597
|
|
|
|
6
|
|
|
$
|
5,646
|
|
An analysis of foreclosed real estate follows:
(Dollars in thousands)
|
|
Three Months Ended
March 31, 2016
|
|
|
|
|
|
Beginning balance
|
|
$
|
5,646
|
|
Net proceeds from sales of foreclosed properties
|
|
|
(49
|
)
|
Ending balance
|
|
$
|
5,597
|
|
The Bank’s largest foreclosed property resulted from a loan relationship that had an original purpose of constructing a mixed-use retail, commercial office, and residential condominium project located in Western North Carolina. As a result of this foreclosure, the Bank acquired 44 of the 48 condominium units in the building. Following an additional write-down of approximately $630,000 on the loans secured by this collateral in the fourth quarter of 2012, the Bank recorded this foreclosed property in the amount of $9.8 million. During 2013, the Bank recorded additional write-downs totaling $1.6 million, which resulted in an adjusted recorded amount of $8.2 million at December 31, 2013. During 2014, the Bank recorded an additional write-down of $133,000 on the property and sold 28 residential condominium units and one office unit. During 2015, the Bank sold one retail unit and two office units. During the three months ended March 31, 2016, the Bank sold no units. As of March 31, 2016, the adjusted recorded amount was $4.0 million for the remaining seven retail units and five office units.
Federal regulations require us to review and classify our assets on a regular basis. In addition, the FDIC and the NCCoB have the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful, and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable on the basis of currently existing facts, conditions, and values, and there is a high possibility of loss. Assets classified “loss” are considered uncollectible and of such little value that continued recognition as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose an institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving close attention. When we classify an asset as substandard or doubtful, we may establish a specific allowance for loan losses. If we classify an asset as loss, we charge off an amount equal to 100% of the portion of the asset classified loss.
The following table shows the aggregate amounts of our classified and special mention assets at the dates indicated.
(Dollars in thousands)
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adversely classified loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard
|
|
$
|
3,688
|
|
|
$
|
3,976
|
|
|
$
|
(288
|
)
|
|
|
-7.2
|
%
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0
|
%
|
Loss
|
|
|
224
|
|
|
|
-
|
|
|
|
224
|
|
|
|
n/a
|
|
Total adversely classified loans
|
|
|
3,912
|
|
|
|
3,976
|
|
|
|
(64
|
)
|
|
|
-1.6
|
%
|
Special mention loans
|
|
|
23,714
|
|
|
|
23,400
|
|
|
|
314
|
|
|
|
1.3
|
%
|
Total classified and special mention loans
|
|
|
27,626
|
|
|
|
27,376
|
|
|
|
250
|
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other classified and special mention assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total classified and special mention assets
|
|
$
|
27,626
|
|
|
$
|
27,376
|
|
|
$
|
250
|
|
|
|
0.9
|
%
|
Other than as disclosed in the above tables and related discussions, there were no other loans where management had serious doubts about the ability of the borrowers to comply with the present loan repayment terms.
At March 31, 2016, substandard loans totaling $3.7 million included $2.1 million in nonaccruing loans that were previously discussed as nonperforming loans. The remaining $1.6 million in performing substandard loans included the following:
●
Commercial Mortgage Loans
|
○
|
Two loans to one borrower on two commercial properties located in western North Carolina. As of March 31, 2016, the loans were performing with a total balance of $612,000.
|
●
Residential Mortgage Loans
|
○
|
Twelve loans to multiple unrelated borrowers for one-to-four family residential properties with an aggregate balance of $900,000 as of March 31, 2016.
|
Adversely classified assets include loans that are classified due to factors other than payment delinquencies, such as the absence of current financial statements and other required documentation, insufficient cash flows or other deficiencies, and therefore, are not included as nonperforming assets.
At March 31, 2016, special mention loans included the Bank’s largest performing TDR commercial mortgage as previously discussed.
Liquidity Management.
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities and borrowings from the Federal Home Loan Bank of Atlanta. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on securities and interest-earning deposits we place with other banks, and (iv) the objectives of our asset-liability management policy.
Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At March 31, 2016, cash and cash equivalents totaled $37.1 million, including $27.9 million in interest-bearing deposits in other banks, of which $23.2 million was on deposit with the Federal Reserve Bank. Investment securities totaling $118.6 million at March 31, 2016 classified as available-for-sale provided an additional source of liquidity. In addition, at March 31, 2016, we had the ability to borrow a total of approximately $83.4 million from the Federal Home Loan Bank of Atlanta and approximately $13.2 million from the Federal Reserve Bank’s discount window. At March 31, 2016, we had $50.0 million in Federal Home Loan Bank advances outstanding and $6.5 million in letters of credit to secure public funds deposits.
A significant use of our liquidity is the funding of loan originations. At March 31, 2016, we had $179.3 million in commitments to extend credit outstanding, although we expect that significantly less will ultimately be funded. Certificates of deposit due within one year of March 31, 2016 totaled $71.9 million, or 56.1%, of total certificates of deposit. We believe the large percentage of certificates of deposit that mature within one year reflects customer hesitancy to invest funds for longer periods due to the continued low interest rate environment and local competitive pressure. If these maturing deposits do not remain with us, we may seek other sources of funds, including new certificates of deposit and borrowings. Depending on market conditions, we may pay higher rates on such deposits or other borrowings than we currently pay on the maturing certificates of deposit. However, based on past experience, we believe that a significant portion of our certificates of deposit will remain with us. We believe we have the ability to attract and retain deposits by adjusting the interest rates we offer.
In addition, we believe that our branch network, which is presently comprised of 13 full-service branch offices located throughout our primary market area, and the general cash flows from our existing lending and investment activities will afford us sufficient long-term liquidity.
The following tables present our contractual obligations as of the dates indicated.
|
|
|
|
|
Payments Due By Period
|
|
(Dollars in thousands)
|
|
Total
|
|
|
Less Than
One Year
|
|
|
One To
Three Years
|
|
|
Three To
Five Years
|
|
|
More Than
Five Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations
|
|
$
|
50,000
|
|
|
$
|
30,000
|
|
|
$
|
20,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Operating lease obligations
|
|
|
983
|
|
|
|
362
|
|
|
|
146
|
|
|
|
121
|
|
|
|
354
|
|
Total
|
|
$
|
50,983
|
|
|
$
|
30,362
|
|
|
$
|
20,146
|
|
|
$
|
121
|
|
|
$
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations
|
|
$
|
50,000
|
|
|
$
|
-
|
|
|
$
|
50,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Operating lease obligations
|
|
|
1,074
|
|
|
|
362
|
|
|
|
222
|
|
|
|
121
|
|
|
|
369
|
|
Total
|
|
$
|
51,074
|
|
|
$
|
362
|
|
|
$
|
50,222
|
|
|
$
|
121
|
|
|
$
|
369
|
|
Capital Management.
We are subject to various regulatory capital requirements administered by the FDIC and the NCCoB, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2016, we exceeded all of our regulatory capital requirements and were considered “well capitalized” under regulatory guidelines.
We strive to manage our capital for maximum shareholder benefit. The capital from our October 2011 stock offering significantly increased our liquidity and capital resources. Over time, the initial level of liquidity was reduced as net proceeds from the stock offering were used for general corporate purposes, including the funding of lending activities. Our financial condition and results of operations were enhanced by the capital from the offering, resulting over time in increased net interest-earning assets and net income. However, the large increase in equity resulting from the capital raised in the conversion offering had an adverse impact on our return on equity. To help us better manage our capital, we repurchased shares of our common stock and may consider other capital deployment measures as regulations permit.
Regulatory capital rules released by the federal bank regulatory agencies in July 2013 to implement capital standards, referred to as Basel III and developed by an international body known as the Basel Committee on Banking Supervision, impose higher minimum capital requirements for bank holding companies and banks. The rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies with $500 million or more in total consolidated assets. More stringent requirements are imposed on “advanced approaches” banking organizations ‒ which are organizations with $250 billion or more in total consolidated assets, with $10 billion or more in total foreign exposures, or that have opted in to the Basel II capital regime. The new regulatory capital rules became effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period for certain provisions), and all of the requirements in the rules will be fully phased in by January 1, 2019.
The final rule includes certain new and higher risk-based capital and leverage requirements than those previously in place. Specifically, the following minimum capital requirements apply to us:
•
|
a new Common Equity Tier 1 risk-based capital ratio of 4.5%;
|
•
|
a Tier 1 risk-based capital ratio of 6% (increased from the former 4% requirement);
|
•
|
a total risk-based capital ratio of 8% (unchanged from former requirements); and
|
•
|
a leverage ratio of 4% (also unchanged from the former requirement).
|
Under the rules, Tier 1 capital is redefined to include two components: Common Equity Tier 1 capital and additional Tier 1 capital. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as noncumulative perpetual preferred stock. The rules permit bank holding companies with less than $15 billion in total consolidated assets to continue to include trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 capital, but not in Common Equity Tier 1 capital, subject to certain restrictions. Tier 2 capital consists of instruments that currently qualify in Tier 2 capital plus instruments that the rules have disqualified from Tier 1 capital treatment. Cumulative perpetual preferred stock, formerly includable in Tier 1 capital, is now included only in Tier 2 capital. Accumulated other comprehensive income (“AOCI”) is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The rules provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. We elected to opt out from the inclusion of AOCI in Common Equity Tier 1 capital.
In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer will be phased in incrementally over time, becoming fully effective on January 1, 2019, and will consist of an additional amount of common equity equal to 2.5% of risk-weighted assets. As of January 1, 2016, we are required to hold a capital conservation buffer of 0.625%, increasing by that amount each successive year until 2019.
In general, the rules have had the effect of increasing capital requirements by increasing the risk weights on certain assets, including high volatility commercial real estate, certain loans past due 90 days or more or in nonaccrual status, mortgage servicing rights not includable in Common Equity Tier 1 capital, equity exposures, and claims on securities firms, that are used in the denominator of the three risk-based capital ratios.
It is management’s belief that, as of March 31, 2016, the Company and the Bank would have met all capital adequacy requirements under the new capital rules on a fully phased-in basis if such requirements were effective at that time.
The Company and the Bank had the following actual and required regulatory capital amounts as of the periods indicated:
|
|
|
|
|
|
|
|
Regulatory Requirements
|
|
|
|
Actual
|
|
|
Minimum For Capital
Adequacy Purposes
|
|
|
Minimum To Be
Well Capitalized
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASB Bancorp, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier I capital
|
|
$
|
96,459
|
|
|
|
16.65
|
%
|
|
$
|
26,071
|
|
|
|
4.50
|
%
|
|
$
|
37,658
|
|
|
|
6.50
|
%
|
Tier I leverage capital
|
|
|
96,459
|
|
|
|
12.33
|
%
|
|
|
31,299
|
|
|
|
4.00
|
%
|
|
|
39,123
|
|
|
|
5.00
|
%
|
Tier I risk-based capital
|
|
|
96,459
|
|
|
|
16.65
|
%
|
|
|
34,762
|
|
|
|
6.00
|
%
|
|
|
46,349
|
|
|
|
8.00
|
%
|
Total risk-based capital
|
|
|
103,181
|
|
|
|
17.81
|
%
|
|
|
46,349
|
|
|
|
8.00
|
%
|
|
|
57,936
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier I capital
|
|
|
94,743
|
|
|
|
16.66
|
%
|
|
|
25,587
|
|
|
|
4.50
|
%
|
|
|
36,960
|
|
|
|
6.50
|
%
|
Tier I leverage capital
|
|
|
94,743
|
|
|
|
11.87
|
%
|
|
|
31,935
|
|
|
|
4.00
|
%
|
|
|
39,919
|
|
|
|
5.00
|
%
|
Tier I risk-based capital
|
|
|
94,743
|
|
|
|
16.66
|
%
|
|
|
34,117
|
|
|
|
6.00
|
%
|
|
|
45,489
|
|
|
|
8.00
|
%
|
Total risk-based capital
|
|
|
101,032
|
|
|
|
17.77
|
%
|
|
|
45,489
|
|
|
|
8.00
|
%
|
|
|
56,861
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asheville Savings Bank, S.S.B.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier I capital
|
|
$
|
90,727
|
|
|
|
15.67
|
%
|
|
$
|
26,060
|
|
|
|
4.50
|
%
|
|
$
|
37,642
|
|
|
|
6.50
|
%
|
Tier I leverage capital
|
|
|
90,727
|
|
|
|
11.62
|
%
|
|
|
31,233
|
|
|
|
4.00
|
%
|
|
|
39,041
|
|
|
|
5.00
|
%
|
Tier I risk-based capital
|
|
|
90,727
|
|
|
|
15.67
|
%
|
|
|
34,746
|
|
|
|
6.00
|
%
|
|
|
46,328
|
|
|
|
8.00
|
%
|
Total risk-based capital
|
|
|
97,449
|
|
|
|
16.83
|
%
|
|
|
46,328
|
|
|
|
8.00
|
%
|
|
|
57,911
|
|
|
|
10.00
|
%
|
NC Savings Bank capital
|
|
|
97,449
|
|
|
|
12.45
|
%
|
|
|
39,123
|
|
|
|
5.00
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier I capital
|
|
|
89,183
|
|
|
|
15.70
|
%
|
|
|
25,563
|
|
|
|
4.50
|
%
|
|
|
36,925
|
|
|
|
6.50
|
%
|
Tier I leverage capital
|
|
|
89,183
|
|
|
|
11.20
|
%
|
|
|
31,848
|
|
|
|
4.00
|
%
|
|
|
39,810
|
|
|
|
5.00
|
%
|
Tier I risk-based capital
|
|
|
89,183
|
|
|
|
15.70
|
%
|
|
|
34,084
|
|
|
|
6.00
|
%
|
|
|
45,446
|
|
|
|
8.00
|
%
|
Total risk-based capital
|
|
|
95,472
|
|
|
|
16.81
|
%
|
|
|
45,446
|
|
|
|
8.00
|
%
|
|
|
56,807
|
|
|
|
10.00
|
%
|
NC Savings Bank capital
|
|
|
95,472
|
|
|
|
12.21
|
%
|
|
|
39,087
|
|
|
|
5.00
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
Off-Balance Sheet Arrangements
. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit and letters of credit.
For the three months ended March 31, 2016 and the year ended December 31, 2015, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk Management
. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk emphasizes: adjusting the maturities of borrowings; adjusting the investment portfolio mix and duration; and, generally selling in the secondary market substantially all newly originated fixed rate one-to-four family residential real estate loans. We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments.
We have an Asset/Liability Management Committee (“ALCO”) which includes our Chairman of the Board and an additional Director, both of whom are Independent Directors, and members of Senior Management, to communicate, coordinate and control all aspects involving asset-liability management. The Committee meets quarterly to establish and monitor the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.
Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest and net income.
Interest Rate Risk Analysis
. Our profitability depends to a large extent on our 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, our interest income and interest expense are significantly affected by changes in market interest rates and other economic factors beyond our control. Our interest-earning assets consist of fixed and floating rate loans and investment securities that generally adjust more slowly to changes in interest rates than our interest-bearing liabilities, which are primarily non-maturity deposits. Accordingly, our earnings are usually adversely affected during periods of rising interest rates and positively impacted during periods of declining interest rates. The recent periods of sustained historically low interest rates have also reduced our net interest margins as we could not lower our cost of interest-bearing liabilities commensurate with the reductions in the yields on our interest-earning assets.
We implement an interest rate risk simulation model to determine our possible adverse exposure to net interest income and economic value of equity due to changes in interest rates, repricing risk, yield curve risk and basis risk. Our internal simulation model evaluates our projected future net interest income and economic value of equity under various interest rate scenarios and applies certain contractual and behavioral assumptions to calculate results in an increasing rate scenario, in a decreasing rate scenario and in a constant rate scenario. The major assumptions applied to our internal simulation model include, but are not limited to, the present value discounting method, calculated and reported rate shock and rate ramp scenarios, key rates, curves and spreads, internal rate restrictions (such as rate floors and caps and teaser rates), prepay and decay tables and interest rate exposure limits.
Based on the results of our internal simulation model, which management believes accurately reflects the extraordinary stress currently existing in the financial markets with respect to potential margin compression resulting from our difficulty in reducing our costs of funds further in the current competitive pricing environment, our earnings may be adversely affected if interest rates were to further decline. Such a decline could result from, among other things, the Federal Reserve Board’s purchase of government securities and/or mortgage-backed securities in an effort to further stimulate the national economy. Although the current rate environment remains stable, we continue to carefully monitor, through our Asset/Liability Committee management process, the competitive landscape related to interest rates as well as various economic indicators in order to best position ourselves with respect to changing interest rates.
The following table reflects the estimated effects of changes in interest rates on the present value of our equity and on our projected net interest income over the next twelve months.
|
|
|
As Of March 31, 2016
|
|
|
Over The Next Twelve Months
Ending March 31, 2017
|
|
|
|
|
Present Value Of Equity
|
|
|
Projected Net Interest Income
|
|
(Dollars in thousands)
|
|
|
Market
Value
|
|
|
$ Change
|
|
|
% Change
|
|
|
Net Interest
Income
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Rates (in Basis Points “BP”):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300 BP
|
|
|
$
|
90,139
|
|
|
$
|
(25,832
|
)
|
|
|
-22.27
|
%
|
|
$
|
23,197
|
|
|
$
|
(522
|
)
|
|
|
-2.20
|
%
|
|
200
|
|
|
|
100,475
|
|
|
|
(15,496
|
)
|
|
|
-13.36
|
%
|
|
|
23,570
|
|
|
|
(149
|
)
|
|
|
-0.63
|
%
|
|
100
|
|
|
|
109,279
|
|
|
|
(6,692
|
)
|
|
|
-5.77
|
%
|
|
|
23,733
|
|
|
|
14
|
|
|
|
0.06
|
%
|
|
0
|
|
|
|
115,971
|
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
23,719
|
|
|
|
-
|
|
|
|
0.00
|
%
|
|
(100)
|
|
|
|
114,539
|
|
|
|
(1,432
|
)
|
|
|
-1.23
|
%
|
|
|
21,746
|
|
|
|
(1,973
|
)
|
|
|
-8.32
|
%
|
Item 4. Controls and Procedures
The Company’s management has carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of its “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act during the quarter ended March 31, 2016. In connection with the above evaluation of the effectiveness of the Company's disclosure controls and procedures, no changes in its internal control over financial reporting were identified as having occurred during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incidental to our business. We are not a party to any pending legal proceedings that, after consultation with legal counsel, we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
For information regarding ASB Bancorp’s risk factors, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 14, 2016. We do not believe that there have been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On March 31, 2015, the Company announced that the Company's Board of Directors approved a stock repurchase program whereby the Company may repurchase up to 5%, or 218,920 shares, of its outstanding common stock as and when deemed appropriate by management and under any plan that may be deployed in accordance with Rule 10b5-1 of the Exchange Act of 1934. The Rule 10b5-1 repurchase plan allows the Company to repurchase its shares during periods when it would normally not be active in the market due to its internal blackout period. As of the date of this report, the Company had not repurchased any shares of its common stock under this repurchase program.
The following table sets forth information as of March 31, 2016 regarding shares of our common stock that may be issued upon exercise of options previously granted and currently outstanding under our stock option plans, as well as the number of shares available for the grant of options that had not been granted as of that date.
|
|
Number Of Securities To
Be Issued Upon Exercise
Of Outstanding Options
Warrants And Rights
|
|
|
Weighted-Average
Exercise Price
Of Outstanding Options
Warrants And Rights
|
|
|
Number Of Securities
Remaining Available For
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected In
Column (a)
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders
|
|
|
450,500
|
|
|
$
|
16.03
|
|
|
|
60,355
|
|
Equity compensation plans not approved by security holders
|
|
|
–
|
|
|
|
n/a
|
|
|
|
–
|
|
Total
|
|
|
450,500
|
|
|
$
|
16.03
|
|
|
|
60,355
|
|
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
3.1
|
|
Articles of Incorporation of ASB Bancorp, Inc. (1)
|
3.2
|
|
Bylaws of ASB Bancorp, Inc. (1)
|
3.3
|
|
Amendment of the Bylaws of ASB Bancorp, Inc., adopted September 15, 2014 (2)
|
4.1
|
|
Form of Common Stock Certificate of ASB Bancorp, Inc. (1)
|
10.1
|
|
Agreement, dated January 20, 2016, by and among ASB Bancorp, Inc., Asheville Savings Bank, S.S.B., Seidman and Associates, L.L.C., Seidman Investment Partnership, L.P., Seidman Investment Partnership II, L.P., Seidman Investment Partnership III, L.P., LSBK06-08, L.L.C., Broad Park Investors, L.L.C., Chewy Gooey Cookies, L.P., 2514 Multi-Strategy Fund, L.P., CBPS, LLC, Veteri Place Corporation, JBRC I, LLC, Lawrence B. Seidman, and Kenneth J. Wrench (3)
|
|
|
Rule 13a-14(a) Certification of Chief Executive Officer
|
|
|
Rule 13a-14(a) Certification of Chief Financial Officer
|
|
|
Section 1350 Certifications
|
101.0
|
|
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.
|
|
(1)
|
Incorporated herein by reference to the exhibits to ASB Bancorp, Inc.’s Registration Statement on Form S-1 (File No. 333-174527), filed with the Securities and Exchange Commission on May 26, 2011.
|
|
(2)
|
Incorporated herein by reference to the exhibits to ASB Bancorp, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 19, 2014.
|
|
(3)
|
Incorporated herein by reference to the exhibits to ASB Bancorp, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 21, 2016.
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
ASB BANCORP, INC.
|
|
|
Registrant
|
|
|
|
May 9, 2016
|
By:
|
/s/ SUZANNE S. DEFERIE
|
|
|
Suzanne S. DeFerie
|
|
|
President and Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
|
|
|
May 9, 2016
|
By:
|
/s/ KIRBY A. TYNDALL
|
|
|
Kirby A. Tyndall
|
|
|
Executive Vice President and Chief Financial Officer
|
|
|
(Principal Financial and Accounting Officer)
|