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United States

Securities and Exchange Commission

Washington, DC 20549

 

 

FORM 10-Q

 

 

(Mark one)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2012

OR

 

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission file number: 001-35279

 

 

ASB BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

North Carolina		45-2463413
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
11 Church Street, Asheville, North Carolina		28801
(Address of principle executive offices)		(Zip code)

(828) 254-7411

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files)    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

There were 5,584,551 shares of Common Stock, par value $0.01 per share, issued and outstanding as of July 31, 2012.

 

 

 

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ASB BANCORP, INC.

FORM 10-Q

Table of Contents

 

		Begins on Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) At June 30, 2012 and December 31, 2011			1
Consolidated Statements Of Income (Loss) (Unaudited) For the Three and Six Months Ended June  30, 2012 and 2011			2
Consolidated Statements Of Comprehensive Income (Unaudited) For the Three and Six Months Ended June  30, 2012 and 2011			3
Consolidated Statement Of Changes In Stockholders’ Equity (Unaudited) For the Six Months Ended June 30, 2012			4
Consolidated Statements Of Cash Flows (Unaudited) For the Six Months Ended June 30, 2012 and 2011			5
Notes To Consolidated Financial Statements (Unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			43
Item 3. Quantitative and Qualitative Disclosures about Market Risk			62
Item 4. Controls and Procedures			63
Part II. Other Information
Item 1. Legal Proceedings			63
Item 1A. Risk Factors			63
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			63
Item 3. Defaults Upon Senior Securities			63
Item 4. Mine Safety Disclosures			63
Item 5. Other Information			63
Item 6. Exhibits			64
Signatures			65

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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, 2012				December 31, 2011*
Assets
Cash and due from banks		$	10,856			$	10,480
Interest-earning deposits with banks			62,619				61,847
Total cash and cash equivalents			73,475				72,327
Securities available for sale (amortized cost of $275,022 at June 30, 2012 and $239,364 at December 31, 2011)			279,762				243,863
Securities held to maturity (estimated fair value of $5,460 at June 30, 2012 and $5,753 at December 31, 2011)			4,909				5,218
Investment in Federal Home Loan Bank stock, at cost			3,880				3,870
Loans held for sale			5,044				6,590
Loans receivable (net of deferred loan fees of $369 at June 30, 2012 and $384 at December 31, 2011)			409,140				432,883
Allowance for loan losses			(11,563	)			(10,627	)
Loans receivable, net			397,577				422,256
Premises and equipment, net			13,804				14,053
Foreclosed real estate (net of loss reserves of $2,365 at June 30, 2012 and $2,091 at December 31, 2011)			8,615				8,125
Deferred income tax assets, net			4,542				4,605
Other assets			7,059				9,961
Total assets		$	798,667			$	790,868
Liabilities and Stockholder’s Equity
Liabilities
Noninterest-bearing deposits		$	63,392			$	54,102
Interest-bearing deposits			542,630				554,134
Total deposits			606,022				608,236
Overnight and short-term borrowings			511				758
Federal Home Loan Bank advances			60,000				60,000
Accounts payable and other liabilities			16,055				6,303
Total liabilities			682,588				675,297
Stockholders’ 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; 5,584,551 shares issued at June 30, 2012 and December 31, 2011			56				56
Additional paid-in capital			53,911				53,869
Retained earnings			67,878				67,708
Accumulated other comprehensive loss, net of tax			(1,186	)			(1,329	)
Unearned Employee Stock Ownership Plan (ESOP) shares			(4,238	)			(4,394	)
Stock-based deferral plan shares			(342	)			(339	)
Total equity			116,079				115,571
Total liabilities and equity		$	798,667			$	790,868

 

*	Derived from audited consolidated financial statements.

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited)

 

 

		Three Months Ended June 30,								Six Months Ended June 30,
(dollars in thousands, except per share data)		2012				2011				2012				2011
Interest and dividend income
Loans, including fees		$	4,913			$	6,132			$	10,013			$	12,358
Securities			1,414				1,387				2,782				2,557
Other earning assets			71				21				142				40
Total interest and dividend income			6,398				7,540				12,937				14,955
Interest expense
Deposits			1,139				1,601				2,456				3,307
Overnight and short-term borrowings			2				2				3				4
Federal Home Loan Bank advances			602				602				1,203				1,198
Total interest expense			1,743				2,205				3,662				4,509
Net interest income			4,655				5,335				9,275				10,446
Provision for loan losses			1,293				424				1,891				1,081
Net interest income after provision for loan losses			3,362				4,911				7,384				9,365
Noninterest income
Mortgage banking income			453				161				780				528
Deposit and other service charge income			748				875				1,495				1,721
Income from debit card services			331				318				634				613
Gain on sale of investment securities			328				223				830				223
Other noninterest income			139				313				218				452
Total noninterest income			1,999				1,890				3,957				3,537
Noninterest expenses
Salaries and employee benefits			2,735				2,526				5,603				5,056
Occupancy expense, net			727				775				1,470				1,528
Foreclosed property expenses			371				556				436				650
Data processing fees			408				401				838				819
Federal deposit insurance premiums			166				256				333				510
Advertising			165				259				327				398
Professional and outside services			205				175				463				413
Other noninterest expenses			811				682				1,684				1,488
Total noninterest expenses			5,588				5,630				11,154				10,862
Income (loss) before income tax provision (benefit)			(227	)			1,171				187				2,040
Income tax provision (benefit)			(113	)			429				17				713
Net income (loss)		$	(114	)		$	742			$	170			$	1,327
Net income (loss) per common share – Basic		$	(0.02	)			n/a			$	0.03				n/a
Net income (loss) per common share – Diluted		$	(0.02	)			n/a			$	0.03				n/a

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

 

		Three Months Ended June 30,								Six Months Ended June 30,
(in thousands)		2012				2011				2012				2011
Comprehensive Income
Net income (loss)		$	(114	)		$	742			$	170			$	1,327
Other comprehensive income
Unrealized holding gains on securities available for sale:
Reclassification of securities gains recognized in net income			(328	)			(223	)			(830	)			(223	)
Deferred income tax benefit			131				89				331				89
Gains arising during the period			1,545				2,741				1,071				2,456
Deferred income tax expense			(618	)			(1,097	)			(429	)			(983	)
Unrealized holding gains adjustment, net of tax			730				1,510				143				1,339
Defined Benefit Pension Plans:
Net periodic pension cost			(177	)			(149	)			(353	)			(299	)
Net pension gain			177				149				353				299
Deferred income tax benefit			—				—				—				—
Defined benefit pension plan adjustment, net of tax			—				—				—				—
Total other comprehensive income			730				1,510				143				1,339
Comprehensive income		$	616			$	2,252			$	313			$	2,666

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

 

 

(dollars in thousands)		Six Months Ended June 30, 2012
Common stock
December 31, 2011		$	56
June 30, 2012		$	56
Additional paid-in capital
December 31, 2011		$	53,869
ESOP shares allocated			42
June 30, 2012		$	53,911
Retained earnings
December 31, 2011		$	67,708
Net income			170
June 30, 2012		$	67,878
Accumulated other comprehensive income (loss), net of tax
December 31, 2011		$	(1,329	)
Other comprehensive income			143
June 30, 2012		$	(1,186	)
Unearned ESOP shares
December 31, 2011		$	(4,394	)
ESOP shares allocated			156
June 30, 2012		$	(4,238	)
Stock-based deferral plan shares
December 31, 2011		$	(339	)
Stock-based deferral plan shares purchased			(3	)
June 30, 2012		$	(342	)
Total stockholders’ equity
December 31, 2011		$	115,571
Net income			170
Other comprehensive income			143
ESOP shares allocated			198
Stock-based deferral plan shares purchased			(3	)
June 30, 2012		$	116,079

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

		Six Months Ended June 30,
(in thousands)		2012				2011
Operating Activities
Net income		$	170			$	1,327
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			1,891				1,081
Provision for loss on foreclosed properties			369				622
Depreciation			586				618
Gain on sale of fixed and other assets			(8	)			—
Loss (gain) on sale of foreclosed real estate			28				(17	)
Deferred income tax expense (benefit)			(35	)			702
Net amortization of premiums on securities			1,338				630
Gain on sale of securities			(830	)			(223	)
Net accretion of deferred fees on loans			(68	)			(68	)
Mortgage loans originated for sale			(43,485	)			(29,874	)
Proceeds from sale of mortgage loans			45,811				34,994
Gain on sale of mortgage loans			(780	)			(528	)
ESOP compensation expense			198				—
Decrease in income tax receivable			2,554				761
Decrease (increase) in interest receivable			114				(173	)
Net change in other assets and liabilities			1,265				933
Net cash provided by operating activities			9,118				10,785
Investing Activities
Purchases of securities available for sale			(113,477	)			(71,415	)
Proceeds from sales of securities available for sale			54,654				8,746
Proceeds from maturities and/or calls of securities available for sale			11,000				12,000
Principal repayments on mortgage-backed and asset-backed securities			20,687				13,360
Redemption (purchase) of FHLB stock			(10	)			49
Net decrease in loans receivable			23,383				30,258
Purchase of credit impaired loan			(2,895	)			—
Capitalized expenses of foreclosed real estate			—				(36	)
Net proceeds from sales of foreclosed real estate			1,481				1,373
Purchases of premises and equipment			(422	)			(267	)
Net proceeds from sales of fixed and other assets			93				—
Net cash used in investing activities			(5,506	)			(5,932	)

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited)

 

 

		Six Months Ended June 30,
(in thousands)		2012				2011
Financing Activities
Net decrease in deposits		$	(2,214	)		$	(3,294	)
Net proceeds from (repayments of) repurchase agreements			(247	)			32
Stock-based deferral plan shares purchased			(3	)			—
Net cash used in financing activities			(2,464	)			(3,262	)
Net increase in cash and cash equivalents			1,148				1,591
Cash and cash equivalents at beginning of period			72,327				24,234
Cash and cash equivalents at end of period		$	73,475			$	25,825
SUPPLEMENTAL DISCLOSURES:
Cash paid (received) for:
Interest on deposits, advances and other borrowings		$	3,657			$	4,521
Income taxes			(2,495	)			10
Non-cash investing and financing transactions:
Transfers from loans to foreclosed real estate		$	2,368			$	810
Security purchases in the process of settlement			8,721				5,273
Change in unrealized gain on securities available for sale			241				2,233
Change in deferred income taxes resulting from other comprehensive income			(98	)			(894	)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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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. filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2012. 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, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 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 conversion was completed on October 11, 2011 and the Parent contributed $28.0 million in capital to the Bank on that date from the conversion proceeds.

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.

 

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 engages in investment activities and 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 GAAP.

 

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 issues, (i) the length of time and the extent to 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.

 

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

 

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 customers. 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.

 

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Other commercial real estate loans consist primarily of loans secured by multifamily housing. The primary risk associated with multifamily loans is the ability of the income producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in the borrower having to provide rental rate concessions to achieve adequate occupancy rates.

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 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 1-4 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 result in residential mortgage loan borrowers having 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 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.

 

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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.

Substandard – A substandard asset is inadequately protected by the current net worth and paying capacity of the obligor or 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 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 loans 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.

 

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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 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.

Future material adjustments to the allowance for loan losses may be necessary due to changing economic conditions 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, and foreclosed real estate.

Loans Past Due 90 Days or More, Nonaccruing, Impaired, or Restructured – The Bank’s policies related to when loans 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.

 

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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.

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.

 

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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 – Foreclosed real estate consists of real estate and other assets acquired as a result of customers’ loan defaults. Foreclosed real estate is 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. Any write-downs subsequent to foreclosure are charged against operating earnings. To the extent recoverable, costs relating to the development and improvement of property are capitalized, whereas those costs relating to holding the property are charged to expense.

 

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. The items of other comprehensive income are included in the Consolidated Statements of Comprehensive Income (Loss). The accumulated balance of other comprehensive income is included in the equity section of the Consolidated Balance Sheets. The Company’s components of accumulated other comprehensive income 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 comprehensive income related to its retirement plans on an annual basis, consistent with the receipt of its annual actuarial studies.

 

The components of the Company’s accumulated other comprehensive loss, net of income taxes, are as follows:

 

(in thousands)		June 30, 2012				December 31, 2011
Unrealized gain on securities		$	2,843			$	2,700
Benefit plan liability			(4,029	)			(4,029	)
Accumulated other comprehensive loss, net of tax		$	(1,186	)		$	(1,329	)

 

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

 

Income Taxes – The establishment of provisions for federal and state income taxes is a complex area of accounting, which 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.

A significant portion of the recorded deferred tax assets relate to a loan loss allowance on which the realization of income tax benefits is dependent on the Bank’s ability to generate future taxable income. Because of this dependency, the Bank’s management considered the need for a valuation allowance, but determined there was sufficient positive evidence to support their conclusion not to record a valuation allowance. The positive evidence that led the Bank’s management to conclude that the income tax benefits of the Bank’s deferred tax assets would be realized included (1) the Bank has a sustained history of generating taxable income and realizing the income tax benefits of its deferred tax assets and income tax credits, (2) the Bank’s management believes that, based on certain credit quality indicators, the credit quality issues that resulted in the 2010 net loss and caused the net operating loss carry forward and deferred tax asset related to the loan loss allowance have improved somewhat, (3) the Bank generated pretax income in 2011, (4) the Bank’s management is aware of one or more strategies that, if implemented, could generate future taxable income, and (5) the net operating loss carry forward does not expire in the near term and the Bank has not experienced expiring loss carry forwards in its past. The Bank’s loss carry forward periods under applicable federal and North Carolina income tax laws are 20 years and 15 years, respectively.

The Bank includes interest and penalties related to income tax liabilities in noninterest expense. The Bank’s tax filings for the years ended December 31, 2007 through 2010 are currently open to audit under statutes of limitations by the Internal Revenue Service and the North Carolina Department of Revenue.

 

Pension Plan – The Bank has two noncontributory, defined benefit pension plans. The Bank recognizes the overfunded or underfunded status of the plans as an asset or liability in its consolidated statement of financial position and recognizes changes in the funded status in the year in which the change occurs 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 and to include 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.

 

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

 

Employee Stock Ownership Plan (“ESOP”) – In connection with the mutual-to-stock conversion discussed in note 2 below, 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 12-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 Company over a period of 15 years.

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 stockholders’ equity. Dividends on unallocated ESOP shares, if paid, will be considered to be compensation expense. The Company will recognize compensation cost equal to the fair value of the ESOP shares during the periods in which they become committed to be released. The fair value of the annual share allocations are 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 differential will be recognized in stockholders’ equity. The Company will recognize a tax deduction equal to the cost of the shares released. Because the ESOP is internally leveraged through a loan from the Company to the ESOP, the loan receivable by the Company 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.

 

Net Income Per Common Share – Where presented, basic net income per common share is the Company’s net income available to common stockholders, 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 allocated.

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, as well as any adjustment to income that would result from the assumed issuance. 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. At June 30, 2012, the Company had no stock options or restricted stock that would cause a dilutive effect on net income per common share.

 

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

 

The Company had no common shares outstanding prior to October 11, 2011. 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)		2012				2011				2012				2011
Numerator:
Net income (loss)		$	(114	)		$	742			$	170			$	1,327
Denominator:
Weighted average common shares issued			5,584,551				—				5,584,551				—
Less: Weighted average unallocated ESOP shares			427,708				—				431,610				—
Weighted average common shares used to compute net income (loss) per common share – basic			5,156,843				—				5,152,941				—
Weighted average common shares used to compute net income (loss) per common share – diluted			5,156,843				—				5,152,941				—
Net income (loss) per common share – Basic		$	(0.02	)			n/a			$	0.03				n/a
Net income (loss) per common share – Diluted		$	(0.02	)			n/a			$	0.03				n/a

Reclassifications – Certain amounts in the prior years’ financial statements have been reclassified to conform to the June 30, 2012 presentation. The reclassifications had no effect on net income or stockholder’s equity as previously reported.

 

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

 

Recent Accounting Pronouncements

Accounting Standards Update ASU 2011-04 – In May 2011, the FASB issued Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). The amendments improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and IFRS. The effective date is the first interim or annual period beginning on or after December 15, 2011. Early application was not permitted. The adoption of the new guidance did not have a significant impact on the Company’s financial statements.

Accounting Standards Update ASU 2011-05 – In June 2011, the FASB issued Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The amendments improve the comparability, consistency and transparency of financial reporting to increase the prominence of items reported on other comprehensive income. The effective date is the first interim or annual period beginning on or after December 15, 2011. Early application was permitted. The adoption of the new guidance did not have a significant impact on the Company’s financial statements.

Accounting Standards Update 2011-10 – In December, 2011, the FASB issued Accounting Standards Update (ASU) 2011-10, Derecognition of in Substance Real Estate – a Scope Clarification. This ASU clarifies previous guidance for situations in which a reporting entity would relinquish control of the assets of a subsidiary in order to satisfy the nonrecourse debt of the subsidiary. The ASU concludes that if control of the assets has been transferred to the lender, but not legal ownership of the assets; then the reporting entity must continue to include the assets of the subsidiary in its consolidated financial statements. The amendments in this ASU are effective for public entities for annual and interim periods beginning on or after June 15, 2012. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2013. Early adoption is permitted. The adoption of the new guidance is not expected to have an impact on the Company’s financial statements.

Accounting Standards Update ASU 2011-11 – In December, 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, in an effort to improve comparability between U.S. GAAP and IFRS financial statements with regard to the presentation of offsetting assets and liabilities on the statement of financial position arising from financial and derivative instruments, and repurchase agreements. The ASU establishes additional disclosures presenting the gross amounts of recognized assets and liabilities, offsetting amounts, and the net balance reflected in the statement of financial position. Descriptive information regarding the nature and rights of the offset must also be disclosed. The amendments are effective for annual reporting periods beginning on or after January 1, 2013. The adoption of the new guidance is not expected to have an impact on the Company’s financial statements.

Accounting Standards Update ASU 2011-12 – In December, 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update 2011-05. In response to stakeholder concerns regarding the operational ramifications of the presentation of these reclassifications for current and previous years, the FASB has deferred the implementation date of this provision to allow time for further consideration. The requirement in ASU 2011-05, Presentation of Comprehensive Income, for the presentation of a combined statement of comprehensive income or separate, but consecutive, statements of net income and other comprehensive income is still effective for fiscal years and interim periods beginning after December 15, 2011 for public companies, and fiscal years ending after December 15, 2011 for nonpublic companies. The adoption of the new guidance did not have a significant impact on the Company’s financial statements.

 

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2. STOCK CONVERSION AND CHANGE IN CORPORATE FORM

The Parent completed its initial public stock offering in connection with the Bank’s conversion from the mutual to the stock form of organization on October 11, 2011. The Parent sold a total of 5,584,551 shares of its common stock at an offering price of $10.00 per share. This included 446,764 shares purchased by the ESOP pursuant to a loan from the Parent in the amount of $4.5 million. Trading of the Parent’s common stock commenced on the Nasdaq Global Market on October 12, 2011 under the symbol “ASBB.” The conversion was accounted for as a change in corporate form and, as a result, the historic basis of the Bank’s assets, liabilities and equity remained unchanged. Including the additional $4.5 million in ESOP share purchases, gross proceeds were $55.8 million. After payment of conversion expenses of approximately $1.9 million, the net proceeds of $53.9 million received in the offering, as reduced for the unearned ESOP shares of $4.5 million, was reflected in the stockholders’ equity accounts of the Parent in its December 31, 2011 consolidated balance sheet.

On October 11, 2011, liquidation accounts were established by the Parent and the Bank for the benefit of eligible account holders and supplemental eligible account holders (collectively, “eligible depositors”) of the Bank as defined in the Bank’s Amended and Restated Plan of Conversion (the “Plan of Conversion”). Each eligible depositor will have a pro rata interest in the liquidation accounts for each of his or her deposit accounts based upon the proportion that the balance of each such account bears to the balance of all deposit accounts of the Bank as of the dates defined in the Plan of Conversion. The liquidation accounts will be maintained for the benefit of eligible depositors who continue to maintain their deposit accounts in the Bank after the conversion. The liquidation accounts will be reduced annually to the extent that eligible depositors have reduced their qualifying deposits. In the unlikely event of a complete liquidation of the Bank or the Parent or both, and only in such event, eligible depositors who continue to maintain accounts will be entitled to receive a distribution from the liquidation accounts before any liquidation may be made with respect to common stock. Neither the Parent nor the Bank may declare or pay a cash dividend if the effect thereof would cause its equity to be reduced below either the amount required for the liquidation accounts or the regulatory capital requirements imposed by the Parent’s or the Bank’s regulators.

 

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3. 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 (in thousands)		Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value
June 30, 2012
U.S. Government Sponsored Entity (GSE) and agency securities due –
After 1 year but within 5 years		$	40,819			$	443			$	(6	)		$	41,256
After 5 years but within 10 years			7,872				47				(4	)			7,915
After 10 years			2,000				2				—				2,002
Asset-backed securities issued by the Small Business Administration (SBA)			48,735				1,174				(85	)			49,824
Residential mortgage-backed securities issued by GSE’s (1)			154,622				2,677				(63	)			157,236
State and local government securities due –
After 5 years but within 10 years			4,735				197				(11	)			4,921
After 10 years			15,541				421				(83	)			15,879
Mutual funds			698				31				—				729
Total		$	275,022			$	4,992			$	(252	)		$	279,762
December 31, 2011
U.S. GSE and agency securities due –
After 1 year but within 5 years		$	33,174			$	895			$	(4	)		$	34,065
After 5 years but within 10 years			6,131				165				—				6,296
After 10 years			2,000				6				—				2,006
Asset-backed securities issued by the SBA			30,736				760				(4	)			31,492
Residential mortgage-backed securities issued by GSE’s (1)			155,275				2,207				(104	)			157,378
State and local government securities due –
After 5 years but within 10 years			2,831				175				—				3,006
After 10 years			8,528				389				(9	)			8,908
Mutual funds			689				23				—				712
Total		$	239,364			$	4,620			$	(121	)		$	243,863

 

(1)

Residential mortgage-backed securities were issued by United States government sponsored entities 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, 2012 and December 31, 2011 or during the periods then ended.

 

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3. 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 (in thousands)		Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value
June 30, 2012
U.S. GSE and agency securities due –
After 5 years but within 10 years		$	1,071			$	144			$	—			$	1,215
Residential mortgage-backed securities issued by GSE’s (1)			1,422				104				—				1,526
State and local government securities due –
After 10 years			2,416				303				—				2,719
Total		$	4,909			$	551			$	—			$	5,460
December 31, 2011
U.S. GSE and agency securities due –
After 5 years but within 10 years		$	1,078			$	140			$	—			$	1,218
Residential mortgage-backed securities issued by GSE’s (1)			1,726				121				—				1,847
State and local government securities due –
After 10 years			2,414				274				—				2,688
Total		$	5,218			$	535			$	—			$	5,753

 

(1)

Residential mortgage-backed securities were issued by United States government sponsored entities 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, 2012 and December 31, 2011 or during the periods then ended.

 

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3. 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, 2012 and December 31, 2011. The total number of securities with unrealized losses at June 30, 2012 and December 31, 2011 were 24 and 11, respectively. The unrealized losses relate to debt 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, therefore all impairment is considered to be temporary.

 

		June 30, 2012
		Less Than 12 Months								12 Months or More								Total
(in thousands)		Fair value				Unrealized losses				Fair value				Unrealized losses				Fair value				Unrealized losses
Securities Available for Sale
US GSE and agency		$	4,867			$	(10	)		$	—			$	—			$	4,867			$	(10	)
Asset-backed SBA			10,191				(83	)			498				(2	)			10,689				(85	)
Residential mortgage-backed GSE (1)			13,767				(63	)			—				—				13,767				(63	)
State and local government			6,668				(94	)			—				—				6,668				(94	)
Total temporarily impaired securities		$	35,493			$	(250	)		$	498			$	(2	)		$	35,991			$	(252	)

 

(1)

Residential mortgage-backed securities were issued by United States government sponsored entities 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, 2012 and December 31, 2011 or during the periods then ended.

 

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3. INVESTMENT SECURITIES (Continued)

 

		December 31, 2011
		Less Than 12 Months								12 Months or More								Total
(in thousands)		Fair value				Unrealized losses				Fair value				Unrealized losses				Fair value				Unrealized losses
Securities Available for Sale
US GSE and agency		$	3,996			$	(4	)		$	—			$	—			$	3,996			$	(4	)
Asset-backed SBA			2,254				(4	)			—				—				2,254				(4	)
Residential mortgage-backed GSE (1)			16,378				(104	)			—				—				16,378				(104	)
State and local government			581				(9	)			—				—				581				(9	)
Total temporarily impaired securities		$	23,209			$	(121	)		$	—			$	—			$	23,209			$	(121	)

 

(1)

Residential mortgage-backed securities were issued by United States government sponsored entities 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, 2012 and December 31, 2011 or during the periods then ended.

 

Investment securities pledged as collateral follow:

 

(in thousands)		June 30, 2012				December 31, 2011
Pledged to Federal Reserve Discount Window		$	7,938			$	10,835
Pledged to Federal funds purchased lines of credit			—				1,218
Pledged to repurchase agreements for commercial customers			1,916				758

 

Interest income from taxable and tax-exempt securities recognized in interest and dividend income follow:

 

		Three Months Ended June 30,								Six Months Ended June 30,
(in thousands)		2012				2011				2012				2011
Interest income from taxable securities		$	1,297			$	1,323			$	2,558			$	2,435
Interest income from tax-exempt securities			117				64				224				122
Total interest income from securities		$	1,414			$	1,387			$	2,782			$	2,557

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

3. INVESTMENT SECURITIES (Continued)

 

 

Gross proceeds and gross realized gains from sales of securities recognized in net income follow:

 

		Three Months Ended June 30,								Six Months Ended June 30,
(in thousands)		2012				2011				2012				2011
Gross proceeds from sales of securities		$	19,380			$	8,746			$	54,654			$	8,746
Gross realized gains from sales of securities			328				223				830				223

4. LOANS RECEIVABLE

Loans receivable by segment and class follow:

 

(in thousands)		June 30, 2012				December 31, 2011
Commercial:
Commercial construction and land development		$	21,060			$	22,375
Commercial mortgage			136,467				139,947
Commercial and industrial			14,020				17,540
Total commercial			171,547				179,862
Non-commercial:
Non-commercial construction and land development			4,888				3,907
Residential mortgage			165,480				175,866
Revolving mortgage			50,164				51,044
Consumer			17,430				22,588
Total non-commercial			237,962				253,405
Total loans receivable			409,509				433,267
Less: Deferred loan fees			(369	)			(384	)
Total loans receivable net of deferred loan fees			409,140				432,883
Less: Allowance for loan losses			(11,563	)			(10,627	)
Loans receivable, net		$	397,577			$	422,256

 

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4. LOANS RECEIVABLE (Continued)

 

 

Loans receivable by segment, class, and grade follow:

 

(in thousands)		Pass				Special Mention				Substandard				Doubtful				Loss*				Total Loans
June 30, 2012
Commercial:
Commercial construction and land development		$	5,215			$	603			$	14,757			$	—			$	485			$	21,060
Commercial mortgage			112,491				21,744				2,232				—				—				136,467
Commercial and industrial			11,256				2,231				533				—				—				14,020
Total commercial			128,962				24,578				17,522				—				485				171,547
Non-commercial:
Non-commercial construction and land development			4,888				—				—				—				—				4,888
Residential mortgage			153,435				9,709				2,334				—				2				165,480
Revolving mortgage			46,869				2,229				1,066				—				—				50,164
Consumer			16,328				983				119				—				—				17,430
Total non-commercial			221,520				12,921				3,519				—				2				237,962
Total loans receivable		$	350,482			$	37,499			$	21,041			$	—			$	487			$	409,509
December 31, 2011
Commercial:
Commercial construction and land development		$	6,394			$	1,002			$	14,410			$	—			$	569			$	22,375
Commercial mortgage			118,735				19,858				1,354				—				—				139,947
Commercial and industrial			12,834				2,058				2,647				1				—				17,540
Total commercial			137,963				22,918				18,411				1				569				179,862
Non-commercial:
Non-commercial construction and land development			3,797				—				109				1				—				3,907
Residential mortgage			163,134				8,417				4,315				—				—				175,866
Revolving mortgage			48,057				2,003				984				—				—				51,044
Consumer			21,189				1,246				153				—				—				22,588
Total non-commercial			236,177				11,666				5,561				1				—				253,405
Total loans receivable		$	374,140			$	34,584			$	23,972			$	2			$	569			$	433,267

 

*	Items included in the “Loss” column were fully reserved.

 

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4. LOANS RECEIVABLE (Continued)

 

 

Loans receivable by segment, class, and delinquency status follow:

 

		Past Due
(in thousands)		31-89 Days				90 Days or More				Total				Current				Total Loans
June 30, 2012
Commercial:
Commercial construction and land development		$	—			$	14,833			$	14,833			$	6,227			$	21,060
Commercial mortgage			337				1,711				2,048				134,419				136,467
Commercial and industrial			62				490				552				13,468				14,020
Total commercial			399				17,034				17,433				154,114				171,547
Non-commercial:
Non-commercial construction and land development			—				—				—				4,888				4,888
Residential mortgage			773				513				1,286				164,194				165,480
Revolving mortgage			315				399				714				49,450				50,164
Consumer			478				31				509				16,921				17,430
Total non-commercial			1,566				943				2,509				235,453				237,962
Total loans receivable		$	1,965			$	17,977			$	19,942			$	389,567			$	409,509
December 31, 2011
Commercial:
Commercial construction and land development		$	363			$	6,251			$	6,614			$	15,761			$	22,375
Commercial mortgage			—				833				833				139,114				139,947
Commercial and industrial			2,177				506				2,683				14,857				17,540
Total commercial			2,540				7,590				10,130				169,732				179,862
Non-commercial:
Non-commercial construction and land development			—				110				110				3,797				3,907
Residential mortgage			1,426				1,922				3,348				172,518				175,866
Revolving mortgage			751				407				1,158				49,886				51,044
Consumer			939				27				966				21,622				22,588
Total non-commercial			3,116				2,466				5,582				247,823				253,405
Total loans receivable		$	5,656			$	10,056			$	15,712			$	417,555			$	433,267

 

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4. 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, 2012								December 31, 2011
(in thousands)		Nonaccruing				Past Due 90 Days or More and Still Accruing				Nonaccruing				Past Due 90 Days or More and Still Accruing
Commercial:
Commercial construction and land development		$	15,087			$	—			$	14,695			$	—
Commercial mortgage			1,711				—				833				—
Commercial and industrial			490				—				2,595				—
Total commercial			17,288				—				18,123				—
Non-commercial:
Non-commercial construction and land development			—				—				110				—
Residential mortgage			514				—				1,922				—
Revolving mortgage			399				—				440				—
Consumer			31				—				27				—
Total non-commercial			944				—				2,499				—
Total loans receivable		$	18,232			$	—			$	20,622			$	—

 

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5. ALLOWANCE FOR LOAN LOSSES

 

An analysis of the allowance for loan losses by segment follows:

 

		Three Months Ended June 30, 2012												Six Months Ended June 30, 2012
(in thousands)		Commercial				Non- Commercial				Total				Commercial				Non- Commercial				Total
Balance at beginning of period		$	6,552			$	4,010			$	10,562			$	6,625			$	4,002			$	10,627
Provision for loan losses			1,337				(44	)			1,293				1,819				72				1,891
Charge-offs			(231	)			(151	)			(382	)			(802	)			(296	)			(1,098	)
Recoveries			2				88				90				18				125				143
Balance at end of period		$	7,660			$	3,903			$	11,563			$	7,660			$	3,903			$	11,563
		Three Months Ended June 30, 2011												Six Months Ended June 30, 2011
(in thousands)		Commercial				Non- Commercial				Total				Commercial				Non- Commercial				Total
Balance at beginning of period		$	7,695			$	4,937			$	12,632			$	7,658			$	5,018			$	12,676
Provision for loan losses			465				(41	)			424				636				445				1,081
Charge-offs			(569	)			(212	)			(781	)			(770	)			(815	)			(1,585	)
Recoveries			17				61				78				84				97				181
Balance at end of period		$	7,608			$	4,745			$	12,353			$	7,608			$	4,745			$	12,353

 

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5. 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
(in thousands)		Loans Individually Evaluated for Impairment				Loans Collectively Evaluated				Total				Loans Individually Evaluated for Impairment				Loans Collectively Evaluated				Total
June 30, 2012
Commercial:
Commercial construction and land development*		$	1,205			$	853			$	2,058			$	15,476			$	5,584			$	21,060
Commercial mortgage			757				4,239				4,996				5,500				130,967				136,467
Commercial and industrial			—				606				606				498				13,522				14,020
Total commercial			1,962				5,698				7,660				21,474				150,073				171,547
Non-commercial:
Non-commercial construction and land development			—				282				282				—				4,888				4,888
Residential mortgage			157				1,826				1,983				2,981				162,499				165,480
Revolving mortgage			106				1,085				1,191				504				49,660				50,164
Consumer			—				447				447				—				17,430				17,430
Total non-commercial			263				3,640				3,903				3,485				234,477				237,962
Total loans receivable		$	2,225			$	9,338			$	11,563			$	24,959			$	384,550			$	409,509
December 31, 2011
Commercial:
Commercial construction and land development		$	709			$	690			$	1,399			$	17,305			$	5,070			$	22,375
Commercial mortgage			70				4,426				4,496				1,426				138,521				139,947
Commercial and industrial			1				729				730				507				17,033				17,540
Total commercial			780				5,845				6,625				19,238				160,624				179,862
Non-commercial:
Non-commercial construction and land development			1				188				189				116				3,791				3,907
Residential mortgage			231				1,894				2,125				4,378				171,488				175,866
Revolving mortgage			—				1,092				1,092				300				50,744				51,044
Consumer			—				596				596				—				22,588				22,588
Total non-commercial			232				3,770				4,002				4,794				248,611				253,405
Total loans receivable		$	1,012			$	9,615			$	10,627			$	24,032			$	409,235			$	433,267

 

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5. ALLOWANCE FOR LOAN LOSSES (Continued)

 

 

Impaired loans and the related allowance, by segment and class, follow:

 

						Recorded Investment
(in thousands)		Unpaid Principal Balance				With a Recorded Allowance				With No Recorded Allowance				Total				Related Recorded Allowance
June 30, 2012
Commercial:
Commercial construction and land development*		$	15,842			$	14,942			$	534			$	15,476			$	1,205
Commercial mortgage			6,198				4,595				905				5,500				757
Commercial and industrial			1,505				—				498				498				—
Total commercial			23,545				19,537				1,937				21,474				1,962
Non-commercial:
Residential mortgage			3,184				1,890				1,091				2,981				157
Revolving mortgage			501				201				303				504				106
Total non-commercial			3,685				2,091				1,394				3,485				263
Total impaired loans		$	27,230			$	21,628			$	3,331			$	24,959			$	2,225
December 31, 2011
Commercial:
Commercial construction and land development		$	19,183			$	12,868			$	4,437			$	17,305			$	709
Commercial mortgage			2,124				521				905				1,426				70
Commercial and industrial			1,509				147				360				507				1
Total commercial			22,816				13,536				5,702				19,238				780
Non-commercial:
Non-commercial construction and land development			195				116				—				116				1
Residential mortgage			4,888				2,977				1,401				4,378				231
Revolving mortgage			300				—				300				300				—
Total non-commercial			5,383				3,093				1,701				4,794				232
Total impaired loans		$	28,199			$	16,629			$	7,403			$	24,032			$	1,012

 

*

Included in “Commercial construction and land development” balances as of June 30, 2012 set forth in the preceding “ending balances of loans and related allowance” and “impaired loans and related allowance” tables was a purchased credit impaired note in the amount of $2.9 million for which no related allowance for loan loss and no accretable yield was recorded. No payments are expected under the contractual terms of the note and repayment is expected to be determined by the value realized from the liquidation of the related collateral.

 

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5. 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, 2012								Three Months Ended June 30, 2011
(in thousands)		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
Commercial:
Commercial construction and land development		$	15,341			$	—			$	16,215			$	96
Commercial mortgage			5,509				26				5,010				26
Commercial and industrial			500				—				1,289				3
Total commercial			21,350				26				22,514				125
Non-commercial:
Non-commercial construction and land development			—				—				2,582				20
Residential mortgage			3,306				36				6,097				46
Revolving mortgage			471				4				17				—
Total non-commercial			3,777				40				8,696				66
Total loans receivable		$	25,127			$	66			$	31,210			$	191
		Six Months Ended June 30, 2012								Six Months Ended June 30, 2011
(in thousands)		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
Commercial:
Commercial construction and land development		$	15,748			$	2			$	16,406			$	192
Commercial mortgage			4,004				34				6,658				58
Commercial and industrial			502				—				1,299				11
Total commercial			20,254				36				24,363				261
Non-commercial:
Non-commercial construction and land development			39				—				2,589				39
Residential mortgage			3,834				65				6,263				78
Revolving mortgage			403				5				8				—
Total non-commercial			4,276				70				8,860				117
Total loans receivable		$	24,530			$	106			$	33,223			$	378

 

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5. ALLOWANCE FOR LOAN LOSSES (Continued)

 

 

The following table summarizes the Bank’s recorded investment in TDRs before and after their modifications during the period indicated. The Bank extended the payment terms on one loan during the three months ended June 30, 2012 and on two loans during the six months ended June 30, 2012 and reduced the interest rate below market levels on three loans during the six months ended June 30, 2012.

 

		Three Months Ended June 30, 2012												Six Months Ended June 30, 2012
(dollars in thousands)		Number of Loans				Pre- Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment				Number of Loans				Pre- Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment
Below market interest rate
Non-commercial:
Residential mortgage			—			$	—			$	—				3			$	897			$	897
Total non-commercial			—				—				—				3				897				897
Total			—			$	—			$	—				3			$	897			$	897
Extended payment terms
Commercial:
Commercial construction and land development			—			$	—			$	—				1			$	234			$	194
Commercial mortgage			1				3,196				3,196				1				3,196				3,196
Total commercial			1				3,196				3,196				2				3,430				3,390
Total			1			$	3,196			$	3,196				2			$	3,430			$	3,390
Total			1			$	3,196			$	3,196				5			$	4,327			$	4,287

 

The following table presents loans that were modified as TDRs within the preceding 12 months that stopped performing in accordance with their modified terms during the periods indicated. During the three month and six month periods ended June 30, 2012, one loan went into default that was modified as a TDR within the preceding 12 months.

 

		Three Months Ended June 30, 2012								Six Months Ended June 30, 2012
(dollars in thousands)		Number of Loans				Recorded Investment				Number of Loans				Recorded Investment
Extended payment terms
Commercial:
Commercial construction and land development			1			$	194				1			$	194
Total commercial			1				194				1				194
Total			1			$	194				1			$	194

 

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5. 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.

 

Loans that were considered to be TDRs follow:

 

(in thousands)		June 30, 2012				December 31, 2011
Nonperforming restructured loans		$	9,674			$	13,097
Performing restructured loans			5,191				1,142
Total		$	14,865			$	14,239

6. BENEFIT PLANS

 

Net periodic benefit cost related to defined benefit plans included the following components for the periods indicated:

 

		Three Months Ended June 30,								Six Months Ended June 30,
(in thousands)		2012				2011				2012				2011
Non-Qualified Defined Benefit Plan
Components of Net Periodic Benefit Costs
Service cost		$	1			$	2			$	3			$	3
Interest cost			15				16				30				32
Amortization of prior service credit			(3	)			(3	)			(6	)			(6	)
Amortization of net loss			6				5				11				11
Net periodic benefit cost		$	19			$	20			$	38			$	40
Qualified Defined Benefit Plan
Components of Net Periodic Benefit Costs
Service cost		$	55			$	49			$	109			$	98
Interest cost			298				237				595				477
Expected return on plan assets			(302	)			(240	)			(602	)			(482	)
Amortization of prior service credit			(21	)			(18	)			(43	)			(36	)
Amortization of net loss			128				101				256				202
Net periodic benefit cost		$	158			$	129			$	315			$	259

 

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6. BENEFIT PLANS (Continued)

 

Employee Stock Ownership Plan – In conjunction with the Parent’s initial public offering, 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.

 

At June 30, 2012, the remaining principal balance on the ESOP debt is payable as follows:

 

(in thousands)		Amount
Principal amounts due on December 31,
2012		$	253
2013			262
2014			270
2015			279
2016			288
Thereafter			3,055
Total		$	4,407

The Bank has 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 suspense account 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 such participant’s compensation, as defined in the ESOP, to the total compensation of all eligible plan participants. Forfeited shares shall be reallocated among other 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, 2012
Allocated ESOP shares			7,350
ESOP shares committed to be released			15,694
Unallocated ESOP shares			423,720
Total ESOP shares			446,764
Fair value of unallocated ESOP shares (in thousands)		$	6,038

 

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. Total expense recognized in connection with the ESOP was as follows:

 

		Three Months Ended June  30,								Six Months Ended June  30,
(in thousands)		2012				2011				2012				2011
ESOP expense		$	104			$	—			$	198			$	—

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

7. 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:

 

(in thousands)		June 30, 2012				December 31, 2011
Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit		$	125,516			$	117,446
Commitments under standby letters of credit			115				135
Total		$	125,631			$	117,581

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.

 

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7. 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 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 things, 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 currently the beneficiary of a stable rate environment and 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. The Bank is not a party to any pending legal proceedings that the Bank’s management believes would have a material adverse effect on the Bank's financial condition, results of operations, or cash flows.

Investment Commitments – During 2005, the Bank entered into an agreement to invest $1,000,000 as a limited partner in a Small Business Investment Company. The Bank made no additional investments during the six months ended June 30, 2012 or during the years ended December 31, 2011, 2010 or 2009, but invested $800,000 prior to 2009. The Bank has a remaining commitment of approximately $200,000. This investment is recognized at cost and is included in “other assets” on the balance sheet.

 

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

8. 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 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 that could be realized 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, 2012 and December 31, 2011. 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 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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

8. FAIR VALUE MEASUREMENTS (Continued)

 

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, mortgage loans held for sale, loans receivable held for investment, accrued interest receivable and payable, time deposits, repurchase agreements, and FHLB advances.

The methodologies for estimating fair values of financial assets and financial liabilities were 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. GSE’s, asset-backed securities issued by the SBA, residential mortgage-backed securities issued by U.S. GSE’s, 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.

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 were 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

 

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

8. FAIR VALUE MEASUREMENTS (Continued)

 

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 – By definition, the carrying values are equal to the fair values.

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.

Advances from Federal Home Loan Bank – 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 and debt 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 and debt security mutual funds are determined by quoted prices and are included as recurring Level 1 assets.

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.

 

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

8. FAIR VALUE MEASUREMENTS (Continued)

 

 

The estimated fair values and carrying amounts of financial instruments follow:

 

		Fair Value Measurement Using																Total Carrying Amount in Balance Sheet
(in thousands)		Level 1				Level 2				Level 3				Estimated Fair Value
June 30, 2012
Financial assets:
Cash and cash equivalents		$	73,475			$	—			$	—			$	73,475			$	73,475
Securities available for sale			729				279,033				—				279,762				279,762
Securities held to maturity			—				5,460				—				5,460				4,909
Investments in FHLB stock			—				—				3,880				3,880				3,880
Loans held for sale			—				5,120				—				5,120				5,044
Loans receivable, net			—				—				403,139				403,139				397,577
Accrued interest receivable			—				—				2,425				2,425				2,425
Deferred compensation assets			1,000				—				—				1,000				1,000
Financial liabilities:
Demand deposits			—				—				375,478				375,478				375,478
Time deposits			—				—				231,623				231,623				230,544
Repurchase agreements			—				—				509				509				511
Advances from FHLB			—				—				68,771				68,771				60,000
Deferred compensation liabilities			1,000				—				—				1,000				1,000
Accrued interest payable			—				—				148				148				148
Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit			—				—				—				—				—
Commitments under standby letters of credit			—				—				—				—				—

 

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

8. FAIR VALUE MEASUREMENTS (Continued)

 

 

		Fair Value Measurement Using																Total Carrying Amount in Balance Sheet
(in thousands)		Level 1				Level 2				Level 3				Estimated Fair Value
December 31, 2011
Financial assets:
Cash and cash equivalents		$	72,327			$	—			$	—			$	72,327			$	72,327
Securities available for sale			712				243,151				—				243,863				243,863
Securities held to maturity			—				5,753				—				5,753				5,218
Investments in FHLB stock			—				—				3,870				3,870				3,870
Loans held for sale			—				6,689				—				6,689				6,590
Loans receivable, net			—				—				428,876				428,876				422,256
Accrued interest receivable			—				—				2,539				2,539				2,539
Deferred compensation assets			972				—				—				972				972
Financial liabilities:
Demand deposits			—				—				349,695				349,695				349,695
Time deposits			—				—				260,466				260,466				258,541
Repurchase agreements			—				—				756				756				758
Advances from FHLB			—				—				68,641				68,641				60,000
Deferred compensation liabilities			972				—				—				972				972
Accrued interest payable			—				—				153				153				153
Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit			—				—				—				—				—
Commitments under standby letters of credit			—				—				—				—				—

 

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

8. FAIR VALUE MEASUREMENTS (Continued)

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

 

Below is a table that presents information about certain assets and liabilities measured at fair value on a recurring basis. There were no transfers to or from Levels 1 and 2 during the six months ended June 30, 2012.

 

(in thousands)		Fair Value Measurement Using												Total Carrying Amount in Balance Sheets				Assets/ Liabilities Measured at Fair Value
Description		Level 1				Level 2				Level 3
June 30, 2012
Securities available for sale:
U.S. GSE and agency securities		$	—			$	51,173			$	—			$	51,173			$	51,173
Asset-backed SBA securities			—				49,824				—				49,824				49,824
Residential mortgage-backed securities issued by GSE’s			—				157,236				—				157,236				157,236
State and local government securities			—				20,800				—				20,800				20,800
Mutual funds			729				—				—				729				729
Total		$	729			$	279,033			$	—			$	279,762			$	279,762
Defined benefit plan assets:
Cash and cash equivalents		$	699			$	—			$	—
Money market mutual funds			288				—				—
Debt security mutual funds			16,904				—				—
Total		$	17,891			$	—			$	—
December 31, 2011
Securities available for sale:
U.S. GSE and agency securities		$	—			$	42,367			$	—			$	42,367			$	42,367
Asset-backed SBA securities			—				31,492				—				31,492				31,492
Residential mortgage-backed securities issued by GSE’s			—				157,378				—				157,378				157,378
State and local government securities			—				11,914				—				11,914				11,914
Mutual funds			712				—				—				712				712
Total		$	712			$	243,151			$	—			$	243,863			$	243,863
Defined benefit plan assets:
Cash and cash equivalents		$	173			$	—			$	—
Money market mutual funds			264				—				—
Debt security mutual funds			16,760				—				—
Total		$	17,197			$	—			$	—

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

8. FAIR VALUE MEASUREMENTS (Continued)

 

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

 

As may be required from time to time, certain assets may be recorded at fair value on a nonrecurring basis in accordance with U.S. GAAP. Assets measured at fair value on a nonrecurring basis are included in the table below.

 

(in thousands)		Fair Value Measurement Using												Total Carrying Amount in Balance Sheets				Assets/ Liabilities Measured at Fair Value
Description		Level 1				Level 2				Level 3
June 30, 2012
Impaired loans		$	—			$	—			$	21,620			$	21,620			$	21,620
Foreclosed properties			—				—				8,615				8,615				8,615
December 31, 2011
Impaired loans		$	—			$	—			$	21,858			$	21,858			$	21,858
Foreclosed properties			—				—				8,125				8,125				8,125

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

A Caution About Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. Forward-looking statements include, but are not limited to:

 

•

statements of our goals, intentions and expectations;

 

•

statements regarding our business plans, prospects, growth and operating strategies;

 

•

statements regarding the quality of our loan and investment portfolios; and

 

•

estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

 

•

general economic conditions, either nationally or in our primary market area, that are worse than expected;

 

•

a continued decline in real estate values;

 

•

changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

 

•

increased competitive pressures among financial services companies;

 

•

changes in consumer spending, borrowing and savings habits;

 

•

legislative, regulatory or supervisory changes that adversely affect our business;

 

•

adverse changes in the securities markets; and

 

•

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board.

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.

Critical Accounting Policies

During the three- and six-month periods ended June 30, 2012, 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, 2011 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:

 

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Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to earnings. Management’s estimates of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impaired loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance monthly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect our earnings. See notes 1 and 5 of the notes to the consolidated financial statements included in this quarterly report.

Fair Value of Investments. Securities are characterized as available for sale or held to maturity based on management’s ability and intent regarding such investment at acquisition. On an ongoing basis, management estimates the fair value of its investment securities based on information and assumptions it deems reliable and reasonable, which may be quoted market prices or if quoted market prices are not available, fair values extrapolated from the quoted prices of similar instruments. Based on this information, an assessment must be made as to whether any decline in the fair value of an investment security should be considered as an other than temporary impairment and recorded in noninterest income as a loss on investments. The determination of such impairment is subject to a variety of factors, including management’s judgment and experience. See notes 3 and 8 of the notes to the consolidated financial statements included in this quarterly report.

Deferred Tax Assets. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. See note 1 of the notes to the consolidated financial statements included in this quarterly report.

Pension Plan. The Company has a noncontributory defined benefit pension plan. This plan is accounted for under the provisions of ASC Topic 715: Compensation-Retirement Benefits, which requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The funded status of a benefit plan is measured as the difference between plan assets at fair value and the benefit obligation. For a pension plan, the benefit obligation is the projected benefit obligation. ASC Topic 715 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. Management must make certain estimates and assumptions when determining the projected benefit obligation. These estimates and assumptions include the expected return on plan assets, the rate of compensation increases over time, and the appropriate discount rate to be used in determining the present value of the obligation. See notes 1 and 6 of the notes to the consolidated financial statements included in this quarterly report.

 

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Introduction

This Management’s Discussion and Analysis is provided to help readers understand how we evaluate our financial condition and results of operations. The following discussions are intended to provide a general overview of our financial condition at June 30, 2012 and our operating performance for the three- and six-month periods ended June 30, 2012. Readers seeking more in-depth information should read the more detailed discussions below as well as the consolidated financial statements and related notes included under Item 1 of this quarterly report.

All information presented is 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 June 30, 2012 and December 31, 2011

The following table provides the changes in our significant asset and liability categories at June 30, 2012 compared to December 31, 2011.

 

(dollars in thousands)		June 30, 2012				December 31, 2011				$ change				% change
Interest-earning assets
Interest-earning deposits with banks and overnight and short-term investments		$	62,619			$	61,847			$	772				1.2	%
Investment securities			284,671				249,081				35,590				14.3	%
Investments held at cost			3,880				3,870				10				0.3	%
Loans held for sale			5,044				6,590				(1,546	)			-23.5	%
Loans receivable, net of deferred fees			409,140				432,883				(23,743	)			-5.5	%
Total interest-earning assets			765,354				754,271				11,083				1.5	%
Non-interest-earning assets
Cash and due from banks			10,856				10,480				376				3.6	%
Allowance for loan losses			(11,563	)			(10,627	)			(936	)			-8.8	%
Premises and equipment, net of accumulated depreciation			13,804				14,053				(249	)			-1.8	%
Foreclosed real estate, net of reserves			8,615				8,125				490				6.0	%
Deferred income tax assets, net of deferred income tax liabilities			4,542				4,605				(63	)			-1.4	%
Other assets			7,059				9,961				(2,902	)			-29.1	%
Total non-interest-earning assets			33,313				36,597				(3,284	)			-9.0	%
Total assets		$	798,667			$	790,868			$	7,799				1.0	%
Interest-bearing liabilities
Interest-bearing deposits		$	542,630			$	554,134			$	(11,504	)			-2.1	%
Overnight and short-term borrowings			511				758				(247	)			-32.6	%
Federal Home Loan Bank advances			60,000				60,000				—				0.0	%
Total interest-bearing liabilities			603,141				614,892				(11,751	)			-1.9	%
Non-interest-bearing liabilities
Non-interest-bearing deposits			63,392				54,102				9,290				17.2	%
Accounts payable and other liabilities			16,055				6,303				9,752				154.7	%
Total non-interest-bearing liabilities			79,447				60,405				19,042				31.5	%
Total liabilities			682,588				675,297				7,291				1.1	%
Total equity			116,079				115,571				508				0.4	%
Total liabilities and equity		$	798,667			$	790,868			$	7,799				1.0	%

 

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(dollars in thousands)		June 30, 2012				December 31, 2011				$ change				% change
Memoranda:
Cash and cash equivalents		$	73,475			$	72,327			$	1,148				1.6	%
Total core deposits (excludes certificate accounts)			375,478				349,695				25,783				7.4	%
Total certificates of deposit			230,544				258,541				(27,997	)			-10.8	%
Total deposits			606,022				608,236				(2,214	)			-0.4	%
Total funding liabilities			666,533				668,994				(2,461	)			-0.4	%

Assets. Total assets increased $7.8 million, or 1.0%, to $798.7 million at June 30, 2012 from $790.9 million at December 31, 2011. Cash and cash equivalents increased $1.1 million, or 1.6%, to $73.5 million at June 30, 2012 from $72.3 million at December 31, 2011. Investment securities increased $35.6 million, or 14.3%, to $284.7 million at June 30, 2012 from $249.1 million at December 31, 2011, primarily due to the reinvestment into investment securities of proceeds from loan repayments and prepayments. Loans receivable, net of deferred fees, decreased $23.7 million, or 5.5%, to $409.1 million at June 30, 2012 from $432.9 million at December 31, 2011 as loan repayments, prepayments, and foreclosures exceeded new loan originations.

Loan originations totaled $91.1 million for the six months ended June 30, 2012 compared to $64.8 million for the six months ended June 30, 2011. Residential mortgage loan originations totaled $50.0 million and residential construction and land development loan originations totaled $6.3 million for the six months ended June 30, 2012 compared to $34.7 million and $7.6 million respectively, for the comparable period of 2011. Originations of commercial mortgage loans totaled $26.8 million for the six months ended June 30, 2012 compared to $14.1 million for the same period in 2011. Originations of commercial construction and land development loans totaled $1.1 million for the six-month period ended June 30, 2012, compared to $667,000 for the six-month period ending June 30, 2011. Commercial and industrial loan originations totaled $3.5 million for the six months ended June 30, 2012 compared to $4.8 million for the six months ended June 30, 2011. Origination activity was offset by $70.0 million in routine loan payments, prepayments, and payoffs and $45.8 million in loan sales for the six months ended June 30, 2012 compared to $64.7 million in routine payments, prepayments, and payoffs and $35.0 million in loan sales for the six months ended June 30, 2011.

Nonperforming assets. Nonperforming assets totaled $26.8 million, or 3.36% of total assets, at June 30, 2012, compared to $28.7 million, or 3.63% of total assets, at December 31, 2011. Nonperforming assets included $18.2 million in nonperforming loans and $8.6 million in foreclosed real estate at June 30, 2012, compared to $20.6 million and $8.1 million, respectively, at December 31, 2011.

Nonperforming loans decreased $2.4 million, or 11.6%, to $18.2 million at June 30, 2012 from $20.6 million at December 31, 2011. The decrease in nonperforming loans from December 31, 2011 to June 30, 2012 was primarily attributable to loans totaling $2.4 million moving to foreclosed real estate and loan payoffs, which were partially offset by the addition of new loans that stopped performing during the period. At June 30, 2012, nonperforming loans included four commercial land development loans that totaled $15.1 million, two commercial mortgages that totaled $1.7 million, three commercial and industrial loans that totaled $490,000, eight residential mortgages that totaled $514,000, and three home equity loans that totaled $399,000. As of June 30, 2012, the nonperforming loans had specific reserves of $2.2 million.

Troubled debt restructurings at June 30, 2012 totaled $14.9 million compared to $14.2 million at December 31, 2011. The increase in troubled debt restructurings during the six months ended June 30, 2012 was the result of one loan for $3.2 million being restructured during the three months ended June 30, 2012 and was offset by loans moving to foreclosed properties, charge-offs and payoffs. Repayment terms of loans reported as troubled debt restructurings were modified to provide financially distressed borrowers more favorable terms to service their debt obligations. At June 30, 2012, $10.2 million of the total $14.9 million of troubled debt restructurings were not current.

 

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Foreclosed real estate at June 30, 2012 included 20 properties with a total carrying value of $8.6 million compared to 18 properties with a total carrying value of $8.1 million as of December 31, 2011. During the six months ended June 30, 2012, in addition to an increase of $369,000 to the loss provision, there were eight new properties totaling $2.4 million added to foreclosed real estate, while six properties totaling $1.5 million were sold.

Liabilities. Total deposits decreased $2.2 million, or 0.4%, to $606.0 million at June 30, 2012 from $608.2 million at December 31, 2011. During the six months ended June 30, 2012, the Company continued its focus on core deposits, from which it excludes certificates of deposit. Core deposits increased $25.8 million, or 7.4%, to $375.5 million at June 30, 2012 from $349.7 million at December 31, 2011. Over the same period, certificates of deposit decreased $28.0 million, or 10.8%, to $230.5 million at June 30, 2012 compared to $258.5 million at December 31, 2011. Accounts payable and other liabilities increased $9.8 million, or 154.7%, to $16.1 million at June 30, 2012 from $6.3 million at December 31, 2011 primarily due to a $8.7 million increase in amounts due for the purchase of investment securities in the process of settlement.

Results of Operations for the Three Months Ended June 30, 2012 and 2011

Overview. A net loss of $114,000, or $0.02 per share, was incurred for the quarter ended June 30, 2012 compared to net income of $742,000 for the quarter ended June 30, 2011, primarily due to an increase of $869,000 in the provision for loan losses and a decrease of $680,000 in net interest income, which were partially offset by an increase in noninterest income of $109,000 and a slight reduction in noninterest expenses. The reduction in net interest income is a result of a $1.1 million decrease in total interest and dividend income, which was partially offset by a decrease of $462,000 in total interest expense.

 

		Three Months Ended June 30,
(dollars in thousands)		2012				2011				$ change				% change
Interest and dividend income		$	6,398			$	7,540			$	(1,142	)			-15.1	%
Interest expense			1,743				2,205				(462	)			-21.0	%
Net interest income			4,655				5,335				(680	)			-12.7	%
Provision for loan losses			1,293				424				869				205.0	%
Net interest income after provision for loan losses			3,362				4,911				(1,549	)			-31.5	%
Noninterest income			1,999				1,890				109				5.8	%
Noninterest expense			5,588				5,630				(42	)			-0.7	%
Income (loss) before income tax provision (benefit)			(227	)			1,171				(1,398	)			-119.4	%
Income tax provision (benefit)			(113	)			429				(542	)			-126.3	%
Net income (loss)			(114	)			742				(856	)			-115.4	%

Net Interest Income. Net interest income decreased by $680,000, or 12.7%, to $4.7 million for the three months ended June 30, 2012 as compared to $5.3 million for the three months ended June 30, 2011. Total interest and dividend income decreased by $1.1 million, or 15.1%, to $6.4 million for the three months ended June 30, 2012 as compared to $7.5 million for the three months ended June 30, 2011, primarily as a result of an 84 basis point decrease in yields on interest-earning assets and a $59.2 million decrease in average loans that partially offset a $105.6 million increase in the average balances of all other interest-earning assets, including investments. The decline in total interest and dividend income was partially offset by a $462,000, or 21.0%, decrease in interest expense to $1.7 million for the three months ended June 30, 2012 compared to $2.2 million for the three months ended June 30, 2011. The decrease in interest expense resulted from a 24 basis point reduction in the average rate paid on interest-bearing liabilities and a decline of $26.1 million in the average balances of interest-bearing liabilities during the three month periods.

 

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Interest income on loans decreased $1.2 million, or 19.9%, to $4.9 million during the three months ended June 30, 2012 primarily due to a decrease in average outstanding loans of $59.2 million, or 12.4%, to $420.1 million during the period, primarily as a result of loan repayments exceeding originations due to low loan demand. Loan originations increased $10.8 million for the three months ended June 30, 2012 compared to the three months ended June 30, 2011, while loan sales increased by $16.4 million, and loan principal repayments decreased $7.8 million to $28.0 million for the three months ended June 30, 2012 from $35.8 million for the three months ended June 30, 2011. The average balance of investment securities decreased $5.2 million, or 7.0%, to $68.8 million for the three months ended June 30, 2012, while the average balance of mortgage-backed securities increased $67.1 million, or 48.9%, to $204.1 million over the same comparable three-month periods. The increased average balances of investment securities and mortgage-backed securities were primarily due to the reinvestment into securities of proceeds from loan repayments and from the issuance of common stock in connection with the Bank's mutual to stock conversion.

Total interest expense decreased $462,000, or 21.0%, to $1.7 million for the three months ended June 30, 2012 from $2.2 million for the three months ended June 30, 2011, primarily due to a 24 basis point decrease in the cost of average interest-bearing liabilities to 1.15% in 2012 from 1.39% in 2011, which was attributable to a 28 basis point decrease in the cost of interest-bearing deposits. The average outstanding balance of borrowings remained relatively unchanged when comparing the two three-month periods.

Provision for Loan Losses. The provision for loan losses was $1.3 million for the three months ended June 30, 2012 compared to $424,000 for the three months ended June 30, 2011. The increase in the provision was due to an increase in the specific reserves for collateral dependent impaired loans that resulted from a decline in the value of the real estate collateral securing the impaired loans and an increase in the loss factors used to estimate the general allowance for loan losses, which were partially offset by the combination of fewer charge-offs in the loan portfolio, a decline in impaired loans, and lower loan balances. The allowance for loan losses totaled $11.6 million, or 2.83% of total loans, at June 30, 2012 compared to $10.6 million, or 2.45% of total loans, at December 31, 2011. We charged off $382,000 in loans during the three months ended June 30, 2012 compared to $781,000 during the three months ended June 30, 2011.

Noninterest Income. Noninterest income increased $109,000, or 5.8%, to $2.0 million for the three months ended June 30, 2012 from $1.9 million for the three months ended June 30, 2011. Factors that contributed to the increase in noninterest income during the 2012 period were increases of $105,000 in gains from the sale of investment securities and $292,000 in mortgage banking income, which were partially offset by decreases of $127,000 in fees from deposits and other services, $106,000 in loan fees, and $70,000 in other investment income. The increase in investment security gains resulted primarily from the Bank’s efforts to better position its portfolio for rising rates, while the increase in mortgage banking income was attributable to higher volumes of mortgage loans sold. The decrease in deposit and other service charge income was primarily the result of lower deposit overdraft fees.

Noninterest Expense. Noninterest expenses decreased $42,000 for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. The primary factors affecting the decrease were decreases of $185,000 in foreclosed property expenses, $94,000 in advertising expenses, $90,000 in FDIC insurance premiums, and $48,000 in occupancy expenses, which were partially offset by increases of $209,000 in salaries and benefits, $30,000 in professional services, and $129,000 in other noninterest expenses. The increase in salaries and benefits was primarily due to $104,000 in expenses related to the Bank’s new employee stock ownership plan, and increases of $65,000 in payroll taxes and other benefit plan expenses, and $40,000 in compensation expenses for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. The increase in other noninterest expenses was primarily attributable to increased expenses related to holding company and public company compliance and reporting.

Income Tax Expense (Benefit). Income tax expense decreased by $542,000 to a tax benefit of $113,000 for the three months ended June 30, 2012 as compared to the three month period ended June 30, 2011, primarily due to an decrease in pre-tax income. The effective tax rate was 49.78% for the three months ended June 30, 2012 compared to 36.64% for the three months ended June 30, 2011, primarily due to the combined effect of higher tax-exempt income relative to the before tax loss reported from operations.

 

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Results of Operations for the Six Months Ended June 30, 2012 and 2011

Overview. Net income was $170,000, or $0.03 per share, for the six months ended June 30, 2012 compared to net income of $1.3 million for the six months ended June 30, 2011. Income before income taxes decreased $1.9 million primarily due to a $1.2 million decrease in net interest income, an $810,000 increase in loan loss provisions and a $292,000 increase in total noninterest expenses, which were partially offset by an increase in total noninterest income of $420,000. The reduction in net interest income is a result of a $2.0 million decrease in interest and dividend income that was partially offset by a decrease of $847,000 in interest expense.

 

		Six Months Ended June 30,
(dollars in thousands)		2012				2011				$ change				% change
Interest and dividend income		$	12,937			$	14,955			$	(2,018	)			-13.5	%
Interest expense			3,662				4,509				(847	)			-18.8	%
Net interest income			9,275				10,446				(1,171	)			-11.2	%
Provision for loan losses			1,891				1,081				810				74.9	%
Net interest income after provision for loan losses			7,384				9,365				(1,981	)			-21.2	%
Noninterest income			3,957				3,537				420				11.9	%
Noninterest expense			11,154				10,862				292				2.7	%
Income before income tax provision			187				2,040				(1,853	)			-90.8	%
Income tax provision			17				713				(696	)			-97.6	%
Net income			170				1,327				(1,157	)			-87.2	%

Net Interest Income. Net interest income decreased by $1.2 million, or 11.2%, to $9.3 million for the six months ended June 30, 2012 as compared to $10.4 million for the six months ended June 30, 2011. Total interest and dividend income decreased by $2.0 million, or 13.5%, to $12.9 million for the six months ended June 30, 2012 as compared to $15.0 million for the six months ended June 30, 2011, primarily as a result of an 82 basis point decrease in yields on interest-earning assets and a $62.4 million decrease in average loans that partially offset a $113.1 million increase in the average balances of all other interest-earning assets, including investments. The decline in total interest and dividend income was partially offset by a $847,000, or 18.8%, decrease in interest expense to $3.7 million for the six months ended June 30, 2012 compared to $4.5 million for the six months ended June 30, 2011. The decrease in interest expense resulted from a 23 basis point reduction in the average rate paid on interest-bearing liabilities and a decline of $22.5 million in the average balances of interest-bearing liabilities during the six month periods.

Interest income on loans decreased $2.3 million, or 19.0%, to $10.0 million during the six months ended June 30, 2012, primarily due to a decrease in average outstanding loans of $62.4 million, or 12.8%, to $425.6 million during the period as a result of loan repayments exceeding originations due to low loan demand. Loan originations increased $26.3 million for the six months ended June 30, 2012 compared to the six months ended June 30, 2011. Loan sales increased $10.8 million, while loan principal repayments increased $5.3 million to $70.0 million for the six months ended June 30, 2012 from $64.7 million for the six months ended June 30, 2011. The average balance of investment and mortgage-backed securities increased $66.5 million, or 33.6%, to $264.5 million for the six months ended June 30, 2012 compared to $198.0 million for the six months ended June 30, 2011. The increased average balances of investment securities and mortgage-backed securities were primarily due to the reinvestment into securities of proceeds from loan repayments and from the issuance of common stock in the fourth quarter of 2011.

 

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The decrease in interest expense of $847,000 was attributable to a decrease in interest expense on interest-bearing deposits, which declined $851,000 to $2.5 million for the six months ended June 30, 2012 from $3.3 million for the comparable six months of 2011 as the average rate paid on interest-bearing deposits declined 27 basis points to 0.90% from 1.17% and average balances of interest-bearing deposits decreased $21.8 million to $549.0 million from $570.7 million for the respective periods. Our average outstanding balance of borrowings remained relatively unchanged when comparing the two six-month periods.

Provision for Loan Losses. The provision for loan losses was $1.9 million for the six months ended June 30, 2012 compared to $1.1 million for the six months ended June 30, 2011. As was the case for the quarterly periods, the increase in the provision was due to an increase in the specific reserves for collateral dependent impaired loans that resulted from a decline in the value of the real estate collateral securing the impaired loans and an increase in the loss factors used to estimate the general allowance for loan losses, which were partially offset by the combination of fewer charge-offs in the loan portfolio and lower loan balances. We charged off $1.1 million in loans during the first six months of 2012 compared to $1.6 million during the first six months of 2011.

Noninterest Income. Noninterest income increased $420,000 to $4.0 million for the six months ended June 30, 2012 from $3.5 million for the six months ended June 30, 2011. Factors that contributed to the increase in noninterest income during the 2012 period were increases of $607,000 in gains from the sale of investment securities and $252,000 in mortgage banking income, which were partially offset by decreases of $226,000 in fees from deposits and other services, $100,000 in loan fees, and $96,000 in other investment income. The increase in investment security gains resulted primarily from the Bank’s efforts to better position its portfolio for rising rates, while the increase in mortgage banking income was attributable to higher volumes of mortgage loans sold. The decrease in deposit and other service charge income was primarily the result of lower deposit overdraft fees.

Noninterest Expense. Noninterest expenses increased $292,000 for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. The primary factors affecting the increase were increases of $547,000 in salaries and benefits, $196,000 in other noninterest expenses, and $50,000 in professional services, which were partially offset by decreases of $214,000 in foreclosed property expenses, $177,000 in FDIC insurance premiums, $71,000 in advertising expenses, and $58,000 in occupancy expense. The increase in salaries and benefits was primarily due to a $228,000 increase in compensation expenses, $198,000 in expenses related to the Bank’s new employee stock ownership plan, and an increase of $121,000 in payroll taxes and other benefit plan expenses The increase in other noninterest expenses was primarily attributable to increased expenses related to holding company and public company compliance and reporting.

Income Tax Expense. Income tax expense decreased by $696,000 for the six months ended June 30, 2012 as compared to the six month period ended June 30, 2011, primarily due to a decrease in pre-tax income. The effective tax rate was 9.09% for the six months ended June 30, 2012 compared to 34.95% for the six months ended June 30, 2011, primarily due to the combined effect of higher tax-exempt income relative to substantially lower income before tax reported from operations.

Average Balances and Yields

The following tables present 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 calculated on a tax equivalent basis using a federal marginal tax rate of 34%.

 

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		For the Three Months Ended June 30,
		2012												2011
(dollars in thousands)		Average Balance				Interest and Dividends				Yield/ Cost				Average Balance				Interest and Dividends				Yield/ Cost
Assets
Interest-earning deposits with banks		$	62,491			$	56				0.36	%		$	18,662			$	12				0.26	%
Loans receivable			420,084				4,913				4.70	%			479,309				6,132				5.13	%
Investment securities			68,807				315				2.08	%			74,023				460				2.61	%
Mortgage-backed and similar securities			204,079				1,099				2.17	%			137,029				927				2.71	%
Other interest-earning assets			3,881				15				1.55	%			3,944				9				0.92	%
Total interest-earning assets			759,342				6,398				3.41	%			712,967				7,540				4.25	%
Allowance for loan losses			(10,591	)											(12,638	)
Noninterest-earning assets			42,188												50,041
Total assets		$	790,939											$	750,370
Liabilities and equity
NOW accounts		$	136,020				135				0.40	%		$	135,239				228				0.68	%
Money market accounts			141,797				115				0.33	%			134,002				191				0.57	%
Savings accounts			27,304				12				0.18	%			24,455				21				0.34	%
Certificates of deposit			242,126				877				1.46	%			279,185				1,161				1.67	%
Total interest-bearing
deposits			547,247				1,139				0.84	%			572,881				1,601				1.12	%
Overnight and short-term borrowings			799				2				1.01	%			1,305				2				0.61	%
Federal Home Loan Bank advances			60,000				602				4.04	%			60,000				602				4.02	%
Total interest-bearing liabilities			608,046				1,743				1.15	%			634,186				2,205				1.39	%
Noninterest-bearing deposits			57,114												43,927
Other noninterest-bearing liabilities			8,975												7,037
Total liabilities			674,135												685,150
Total equity			116,804												65,220
Total liabilities and equity		$	790,939											$	750,370
Net interest income						$	4,655											$	5,335
Interest rate spread											2.26	%											2.86	%
Net interest margin											2.49	%											3.01	%
Average interest-earning assets to average interest-bearing liabilities			124.88	%											112.42	%

 

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		For the Six Months Ended June 30,
		2012												2011
(dollars in thousands)		Average Balance				Interest and Dividends				Yield/ Cost				Average Balance				Interest and Dividends				Yield/ Cost
Assets
Interest-earning deposits with banks		$	65,192			$	111				0.34	%		$	18,571			$	23				0.25	%
Loans receivable			425,643				10,013				4.73	%			488,081				12,358				5.11	%
Investment securities			65,768				639				2.19	%			67,726				848				2.65	%
Mortgage-backed and similar securities			198,767				2,143				2.17	%			130,271				1,709				2.65	%
Other interest-earning assets			3,877				31				1.61	%			3,957				17				0.87	%
Total interest-earning assets			759,247				12,937				3.45	%			708,606				14,955				4.27	%
Allowance for loan losses			(10,464	)											(12,704	)
Noninterest-earning assets			42,805												51,131
Total assets		$	791,588											$	747,033
Liabilities and equity
NOW accounts		$	133,675				298				0.45	%		$	134,403				542				0.81	%
Money market accounts			140,299				267				0.38	%			133,134				369				0.56	%
Savings accounts			26,330				29				0.22	%			23,078				37				0.32	%
Certificates of deposit			248,664				1,862				1.51	%			280,126				2,359				1.70	%
Total interest-bearing deposits			548,968				2,456				0.90	%			570,741				3,307				1.17	%
Overnight and short-term borrowings			789				1				0.25	%			1,519				4				0.53	%
Federal Home Loan Bank advances			60,000				1,205				4.04	%			60,000				1,198				4.03	%
Total interest-bearing liabilities			609,757				3,662				1.21	%			632,260				4,509				1.44	%
Noninterest-bearing deposits			55,355												43,890
Other noninterest-bearing liabilities			9,863												6,460
Total liabilities			674,975												682,610
Total equity			116,613												64,423
Total liabilities and equity		$	791,588											$	747,033
Net interest income						$	9,275											$	10,446
Interest rate spread											2.24	%											2.83	%
Net interest margin											2.48	%											2.98	%
Average interest-earning assets to average interest-bearing liabilities			124.52	%											112.08	%

 

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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 volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior 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 June 30, 2012 Compared to Three Months Ended June 30, 2011												Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
		Increase (Decrease) Due to:												Increase (Decrease) Due to:
(in thousands)		Volume				Rate				Net				Volume				Rate				Net
Interest income:
Interest-earning deposits with banks		$	38			$	6			$	44			$	77			$	11			$	88
Loans receivable			(719	)			(500	)			(1,219	)			(1,509	)			(836	)			(2,345	)
Investment securities			(31	)			(114	)			(145	)			(24	)			(185	)			(209	)
Mortgage-backed and similar securities			388				(216	)			172				779				(345	)			434
Other interest-earning assets			—				6				6				—				14				14
Total interest-earning assets			(324	)			(818	)			(1,142	)			(677	)			(1,341	)			(2,018	)
Interest expense:
NOW accounts			1				(94	)			(93	)			(3	)			(241	)			(244	)
Money market accounts			11				(87	)			(76	)			19				(121	)			(102	)
Savings accounts			2				(11	)			(9	)			5				(13	)			(8	)
Certificates of deposit			(144	)			(140	)			(284	)			(250	)			(247	)			(497	)
Total interest-bearing deposits			(130	)			(332	)			(462	)			(229	)			(622	)			(851	)
Overnight and short-term borrowings			(1	)			1				—				(1	)			(2	)			(3	)
Federal Home Loan Bank advances			—				—				—				—				7				7
Total interest-bearing liabilities			(131	)			(331	)			(462	)			(230	)			(617	)			(847	)
Net decrease interest income		$	(193	)		$	(487	)		$	(680	)		$	(447	)		$	(724	)		$	(1,171	)

 

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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 risk, liquidity risks 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 Non-performing 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 non-performing 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.

 

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The following table provides information with respect to our non-performing assets at the dates indicated.

 

(dollars in thousands)		June 30, 2012				December 31, 2011				$ change				% change
Nonperforming Loans:
Nonaccruing Loans (1)
Commercial:
Commercial construction and land development		$	15,087			$	14,695			$	392				2.7	%
Commercial mortgage			1,711				833				878				105.4	%
Commercial and industrial			490				2,595				(2,105	)			-81.1	%
Total commercial			17,288				18,123				(835	)			-4.6	%
Non-commercial:
Non-commercial construction and land development			—				110				(110	)			100.0	%
Residential mortgage			514				1,922				(1,408	)			-73.3	%
Revolving mortgage			399				440				(41	)			-9.3	%
Consumer			31				27				4				14.8	%
Total non-commercial			944				2,499				(1,555	)			-62.2	%
Total nonaccruing loans (1)			18,232				20,622				(2,390	)			-11.6	%
Total loans past due 90 or more days and still accruing			—				—				—				0.0	%
Total nonperforming loans			18,232				20,622				(2,390	)			-11.6	%
Foreclosed real estate			8,615				8,125				490				6.0	%
Total nonperforming assets			26,847				28,747				(1,900	)			-6.6	%
Performing troubled debt restructurings (2)			5,191				1,142				4,049				354.6	%
Performing troubled debt restructurings and total nonperforming assets		$	32,038			$	29,889				2,149				7.2	%
Allowance for loan losses		$	11,563			$	10,627
Total loans		$	409,140			$	432,883
Asset Quality Ratios:
Allowance as a percentage of total loans			2.83	%			2.45	%
Allowance as a percentage of nonperforming loans			63.42	%			51.53	%
Total nonperforming loans to total loans			4.46	%			4.76	%
Total nonperforming loans to total assets			2.28	%			2.61	%
Total nonperforming assets to total assets			3.36	%			3.63	%
Performing troubled debt restructurings and total nonperforming assets to total assets			4.01	%			3.78	%

 

(1)	Nonaccruing loans include nonaccruing troubled debt restructurings.

(2)	Performing troubled debt restructurings exclude nonaccruing troubled debt restructurings.

 

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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 troubled debt restructurings totaled $14.9 million at June 30, 2012, compared to $14.2 million at December 31, 2011. The $700,000 increase in troubled debt restructurings during the six months ended June 30, 2012 was primarily the result of the modification of a $3.2 million commercial mortgage loan, which was partially offset by loan repayments loans for which the collateral was transferred to foreclosed properties, loans charged off, and loans meeting sustained performance and other criteria to no longer be disclosed as a troubled debt restructuring. At June 30, 2012, $9.7 million of the $14.9 million of troubled debt restructurings were not performing according to their restructured terms and were included in the nonperforming asset table above as nonaccruing loans.

Interest income that would have been recorded had nonaccruing loans been current according to their original terms amounted to $214,000 and $457,000 for the three- and six-month periods ended June 30, 2012, respectively, compared to $175,000 and $381,000 for the comparable periods of 2011. Interest income of $66,000 and $106,000 related to nonperforming loans was recognized in interest income for the three- and six-month periods ended June 30, 2012, respectively, compared to $191,000 and $378,000 for the same periods of 2011.

At June 30, 2012, our nonaccruing loans included the following:

• Commercial Construction and Land Development loans

 

•

One primary loan for the construction of a mixed-use retail, commercial office, and residential condominium project located in western North Carolina and one debtor in possession loan that the Bank purchased in the second quarter of 2012 in order to secure its senior lien position. The loans totaled $11.0 million as of June 30, 2012 and were considered impaired and nonaccruing. The Bank established a $948,000 specific reserve in the second quarter of 2012 based on an updated appraisal. The Bank plans to proceed with foreclosure. The project has eight retail condominiums of which four have been leased, 11 commercial office condominiums of which three have sold, and 29 residential condominiums of which one has sold.

 

•

One loan secured by multiple parcels of contiguous unimproved land located in western North Carolina totaling approximately 730 acres. As of June 30, 2012, the loan was considered impaired and nonaccruing with a balance of $3.7 million after a write-down of $114,000 in 2011. The loan currently has a specific reserve of $257,000 that was established in the second quarter of 2012 based on an updated appraisal. The Bank anticipates accepting a deed in lieu of foreclosure.

• Commercial Mortgage loans

 

•

One loan on a commercial condominium located in coastal South Carolina. The loan was considered impaired and nonaccruing with a remaining balance of $833,000 as of June 30, 2012 after write-downs of $770,000 in 2011 based on an updated appraisal. At June 30, 2012, the loan was in the process of foreclosure.

 

•

One loan on an office building located in Asheville, North Carolina. The loan was considered impaired and nonaccruing with a remaining balance of $878,000 as of June 30, 2012. The loan had a specific reserve of $4,000 that was established in the second quarter of 2012 based on available market information. The loan was in the process of foreclosure as of June 30, 2012.

 

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• Residential Mortgage loans

 

•

Eight loans to multiple borrowers on one- to four-family residential properties with an aggregate balance of $514,000 as of June 30, 2012.

At June 30, 2012, our performing troubled debt restructurings 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 second quarter of 2012, 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 June 30, 2012, the loan was a performing troubled debt restructuring with a balance of $3.2 million that matures in May of 2014. As of June 30, 2012, the loan had a specific reserve of $683,000, which was based on a recent appraisal.

• Residential Mortgage Loans

 

•

Nine loans to multiple borrowers on one- to four-family residential properties with an aggregate balance of $2.0 million as of June 30, 2012.

Foreclosed properties consisted of the following at the dates indicated.

 

		June 30, 2012								December 31, 2011
(dollars in thousands)		Number				Amount				Number				Amount
By foreclosed loan type:
Commercial mortgage			2			$	2,730				3			$	3,045
Commercial construction and land development			9				4,174				5				3,259
Residential mortgage			6				1,231				7				1,373
Residential construction and land development			3				480				3				448
Total			20			$	8,615				18			$	8,125

An analysis of foreclosed real estate follows:

 

(dollars in thousands)		Six Months Ended June 30, 2012
Beginning balance		$	8,125
Transfers from loans			2,368
Loss provisions			(369	)
Loss on sale of foreclosed properties			(28	)
Net proceeds from sales of foreclosed properties			(1,481	)
Ending balance		$	8,615

 

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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 establish a specific allowance for loan losses equal to 100% of the amount classified as loss.

The following table shows the aggregate amounts of our classified and special mention assets at the dates indicated.

 

(dollars in thousands)		June 30, 2012				December 31, 2011				$ change				% change
Adversely classified loans:
Substandard		$	21,041			$	23,972			$	(2,931	)			-12.2	%
Doubtful			—				2				(2	)			-100.0	%
Loss			487				569				(82	)			-14.4	%
Total adversely classified loans			21,528				24,543				(3,015	)			-12.3	%
Special mention loans			37,499				34,584				2,915				8.4	%
Total classified and special mention loans			59,027				59,127				(100	)			-0.2	%
Total classified and special mention assets		$	59,027			$	59,127			$	(100	)			-0.2	%

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 June 30, 2012, substandard loans totaling $21.0 million included $18.2 million in nonaccruing loans that were previously discussed as nonperforming loans. The remaining $2.8 million in performing substandard loans included the following:

• Commercial Construction and Land Development loans

 

•

One loan on a commercial lot located in western North Carolina. As of June 30, 2012 the loan was performing with a balance of $142,000.

• Commercial Mortgage loans

 

•

One loan on commercial retail property located in western North Carolina. As of June 30, 2012, the loan was performing with a balance of $521,000.

• Residential Mortgage loans

 

•

Thirteen loans to multiple unrelated borrowers for one- to four-family residential properties with an aggregate balance of $1.8 million as of June 30, 2012.

 

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Classified assets include loans that are classified due to factors other than payment delinquencies, such as lack of current financial statements and other required documentation, insufficient cash flows or other deficiencies, and therefore, are not included as non-performing assets.

At June 30, 2012, special mention loans included the following large impaired loan:

• 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 second quarter of 2012, 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 June 30, 2012, the loan was a performing troubled debt restructuring with a balance of $3.2 million that matures in May of 2014. As of June 30, 2012, the loan had a specific reserve of $683,000, which was based on a recent appraisal.

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 in other banks. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At June 30, 2012, cash and cash equivalents totaled $73.5 million, including $62.6 million in interest-bearing deposits in other banks, of which $42.8 million was on deposit with the Federal Reserve Bank. Securities totaling $279.8 million classified as available-for-sale provide an additional source of liquidity. In addition, at June 30, 2012, we had the ability to borrow a total of approximately $48.9 million from the Federal Home Loan Bank of Atlanta and approximately $7.9 million from the Federal Reserve Bank’s discount window. At June 30, 2012, we had $60.0 million in Federal Home Loan Bank advances outstanding and $2.0 million in letters of credit to secure public funds deposits.

A significant use of our liquidity is the funding of loan originations. At June 30, 2012, we had $125.5 million in commitments to extend credit outstanding. Certificates of deposit due within one year of June 30, 2012 totaled $160.0 million, or 69.4% of certificates of deposit. We believe the large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods due to the recent low interest rate environment and local competitive pressure. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due within one year of June 30, 2012. 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 offered.

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.

 

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The following tables present our contractual obligations as of the dates indicated.

 

						Payments due by period
(in thousands)		Total				Less than One Year				One to Three Years				Three to Five Years				More than Five Years
At June 30, 2012
Long-term debt obligations		$	60,000			$	—			$	—			$	40,000			$	20,000
Operating lease obligations			2,341				362				724				674				581
Total		$	62,341			$	362			$	724			$	40,674			$	20,581
At December 31, 2011
Long-term debt obligations		$	60,000			$	—			$	—			$	—			$	60,000
Operating lease obligations			2,421				355				710				710				646
Total		$	62,421			$	355			$	710			$	710			$	60,646

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 June 30, 2012, 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 stock offering significantly increased our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of lending activities. Our financial condition and results of operations will be 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 offering will, initially, have an adverse impact on our return on equity. To help us better manage our capital, we may consider the use of such tools as common share repurchases and cash dividends as regulations permit. However, under FDIC regulations, we will not be allowed to repurchase any shares during the first year following the offering, except to fund the restricted stock awards under the equity benefit plan, unless extraordinary circumstances exist and we receive regulatory approval.

 

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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.
June 30, 2012
Tier I leverage capital		$	114,794				14.49	%		$	31,700				4.00	%			n/a				n/a
Tier I risk-based capital			114,794				28.41	%			16,164				4.00	%			n/a				n/a
Total risk-based capital			119,940				29.68	%			32,328				8.00	%			n/a				n/a
December 31, 2011
Tier I leverage capital			114,757				14.30	%			32,098				4.00	%			n/a				n/a
Tier I risk-based capital			114,757				27.52	%			16,678				4.00	%			n/a				n/a
Total risk-based capital			120,050				28.79	%			33,356				8.00	%			n/a				n/a
Asheville Savings Bank, S.S.B.
June 30, 2012
Tier I leverage capital		$	89,018				11.54	%		$	30,851				4.00	%		$	38,563				5.00	%
Tier I risk-based capital			89,018				22.13	%			16,086				4.00	%			24,130				6.00	%
Total risk-based capital			94,139				23.41	%			32,173				8.00	%			40,216				10.00	%
NC Savings Bank capital			100,595				12.93	%			38,891				5.00	%			n/a				n/a
December 31, 2011
Tier I leverage capital			88,897				11.09	%			32,063				4.00	%			40,079				5.00	%
Tier I risk-based capital			88,897				21.35	%			16,658				4.00	%			24,988				6.00	%
Total risk-based capital			94,193				22.62	%			33,317				8.00	%			41,646				10.00	%
NC Savings Bank capital			99,538				12.67	%			39,292				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 six months ended June 30, 2012 and the year ended December 31, 2011, 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.

 

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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 Board Chair who is an independent director and members of 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 liabilities with the objective of managing assets and funding liabilities 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 primarily of long-term, fixed-rate mortgage loans, adjustable rate mortgage loans and investments that typically adjust more slowly to changes in interest rates than our interest-bearing liabilities, which are primarily term deposits. Accordingly, our earnings are generally adversely affected during periods of rising interest rates and positively impacted during periods of declining interest rates.

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 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, despite their near-historic lows. 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. Accordingly, we continue to carefully monitor, through our ALCO 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.

 

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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 the 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 (1) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) 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.

In addition, based on that evaluation, there has been no change in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that has materially affected, or is 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 incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A. Risk Factors

For information regarding ASB Bancorp’s risk factors, see “Risk Factors” in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 27, 2012. As of June 30, 2012, the risk factors of ASB Bancorp have not changed materially from those disclosed in the Company’s Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

 

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Item 6. Exhibits

 

3.1		Articles of Incorporation of ASB Bancorp, Inc. (1)
3.2		Bylaws of ASB Bancorp, Inc. (1)
4.1		Form of Common Stock Certificate of ASB Bancorp, Inc. (1)
10.1		Employment Agreement, dated as of October 18, 2011, by and between ASB Bancorp, Inc.,
		Asheville Savings Bank, S.S.B. and Suzanne S. DeFerie * (2)
10.2		Employment Agreement, dated as of October 18, 2011, by and between ASB Bancorp, Inc.,
		Asheville Savings Bank, S.S.B. and Kirby A. Tyndall * (2)
10.3		Employment Agreement, dated as of October 18, 2011, by and between ASB Bancorp, Inc.,
		Asheville Savings Bank, S.S.B. and David A. Kozak * (2)
10.4		Employment Agreement, dated as of October 18, 2011, by and between ASB Bancorp, Inc.,
		Asheville Savings Bank, S.S.B. and Fred A. Martin * (2)
10.5		Asheville Savings Bank, S.S.B. Change In Control Severance Plan * (3)
10.6		ASB Bancorp, Inc. Stock-Based Deferral Plan * (3)
10.7		ASB Bancorp, Inc. 2012 Equity Incentive Plan * (4)
31.1		Rule 13a-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a) Certification of Chief Financial Officer
32.0		Section 1350 Certifications
101.0**		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, 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 Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.

 

*	Management contract or compensatory plan, contract or arrangement.

**	To be furnished by amendment.

(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 October 21, 2011.

(3)	Incorporated herein by reference to the exhibits to ASB Bancorp, Inc.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 2011.

(4)	Incorporated herein by reference to Appendix A to ASB Bancorp, Inc.’s definitive proxy statement on Form DEF14A filed with the Securities and Exchange Commission on April 12, 2012.

 

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SIGNATURES

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
August 10, 2012						By:		/s/ SUZANNE S. DEFERIE
								Suzanne S. DeFerie President and Chief Executive Officer (Principal Executive Officer)
August 10, 2012						By:		/s/ KIRBY A. TYNDALL
								Kirby A. Tyndall Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

 

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