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United States
Securities and Exchange Commission
Washington, DC 20549

FORM 10-Q
 
(Mark one)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2015
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  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   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
Smaller reporting company
 
(Do not check if a smaller reporting company)
   

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

There were 4,405,266 shares of Common Stock, par value $0.01 per share, issued and outstanding as of October 31, 2015.
 


ASB BANCORP, INC.
FORM 10-Q
Table Of Contents
 
   
Begins On
 Page
     
Part I.
Financial Information
 
     
Item 1.
Financial Statements
 
   
 
 1
     
 
 2
     
 
 3
     
 
 4
     
 
 5
     
 
 7
     
Item 2.
 46
 
Item 3.
 68
     
Item 4.
 70
     
Part II.
Other Information
 
     
Item 1.
 70
     
Item 1A.
 70
     
Item 2.
 71
     
Item 3.
 72
     
Item 4.
 72
     
Item 5.
 72
     
Item 6.
 72
     
 
 73
 
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
 
ASB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except par values)
 
September 30,
2015
   
December 31,
2014*
 
         
Assets
       
Cash and due from banks
 
$
9,395
   
$
9,045
 
Interest-earning deposits with banks
   
46,370
     
47,813
 
Total cash and cash equivalents
   
55,765
     
56,858
 
                 
Securities available for sale (amortized cost of $134,371 at September 30, 2015 and $141,266 at December 31, 2014)
   
134,608
     
141,462
 
Securities held to maturity (estimated fair value of $4,157 at September 30, 2015 and $4,363 at December 31, 2014)
   
3,851
     
3,999
 
Investment in Federal Home Loan Bank stock, at cost
   
2,807
     
2,902
 
Loans held for sale
   
5,437
     
5,237
 
Loans receivable (net of deferred loan fees of $609 at September 30, 2015 and $706 at December 31, 2014)
   
569,085
     
521,820
 
Allowance for loan losses
   
(6,297
)
   
(5,949
)
Loans receivable, net
   
562,788
     
515,871
 
                 
Premises and equipment, net
   
11,763
     
11,932
 
Foreclosed real estate
   
8,871
     
8,814
 
Deferred income tax assets, net
   
5,296
     
5,588
 
Other assets
   
6,670
     
7,387
 
                 
Total assets
 
$
797,856
   
$
760,050
 
                 
Liabilities
               
Noninterest-bearing deposits
 
$
122,703
   
$
97,450
 
Interest-bearing deposits
   
512,380
     
505,929
 
Total deposits
   
635,083
     
603,379
 
Overnight and short-term borrowings
   
126
     
660
 
Federal Home Loan Bank advances
   
50,000
     
50,000
 
Accounts payable and other liabilities
   
13,911
     
11,614
 
                 
Total liabilities
   
699,120
     
665,653
 
                 
Shareholders’ Equity
               
Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued
   
-
     
-
 
Common stock, $0.01 par value; 60,000,000 shares authorized; 4,405,266 shares issued at September 30, 2015 and 4,378,411 shares issued at December 31, 2014
   
44
     
44
 
Additional paid-in capital
   
34,847
     
34,047
 
Retained earnings
   
75,142
     
72,513
 
Accumulated other comprehensive loss, net of tax
   
(5,776
)
   
(5,802
)
Unearned Employee Stock Ownership Plan (ESOP) shares
   
(3,218
)
   
(3,452
)
Unearned equity incentive plan shares
   
(1,960
)
   
(2,610
)
Stock-based deferral plan shares
   
(343
)
   
(343
)
                 
Total shareholders’ equity
   
98,736
     
94,397
 
                 
Total liabilities and shareholders’ equity
 
$
797,856
   
$
760,050
 

*
Derived from audited consolidated financial statements.

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
ASB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(Dollars in thousands, except per share data)
 
2015
   
2014
   
2015
   
2014
 
                 
Interest and dividend income
               
Loans, including fees
 
$
5,762
   
$
5,168
   
$
16,947
   
$
15,114
 
Securities
   
632
     
628
     
1,757
     
2,017
 
Other earning assets
   
65
     
77
     
198
     
254
 
                                 
Total interest and dividend income
   
6,459
     
5,873
     
18,902
     
17,385
 
                                 
Interest expense
                               
Deposits
   
382
     
391
     
1,149
     
1,189
 
Overnight and short-term borrowings
   
-
     
-
     
-
     
1
 
Federal Home Loan Bank advances
   
495
     
495
     
1,469
     
1,469
 
                                 
Total interest expense
   
877
     
886
     
2,618
     
2,659
 
                                 
Net interest income
   
5,582
     
4,987
     
16,284
     
14,726
 
                                 
Provision for (recovery of) loan losses
   
191
     
240
     
450
     
(1,218
)
                                 
Net interest income after provision for (recovery of) loan losses
   
5,391
     
4,747
     
15,834
     
15,944
 
                                 
Noninterest income
                               
Mortgage banking income
   
529
     
260
     
1,382
     
696
 
Deposit and other service charge income
   
719
     
640
     
1,920
     
1,852
 
Income from debit card services
   
456
     
420
     
1,338
     
1,219
 
Gain on sale of investment securities, net
   
202
     
-
     
401
     
207
 
Other noninterest income
   
178
     
322
     
621
     
678
 
                                 
Total noninterest income
   
2,084
     
1,642
     
5,662
     
4,652
 
                                 
Noninterest expenses
                               
Salaries and employee benefits
   
3,383
     
3,057
     
10,071
     
9,876
 
Occupancy expense, net
   
435
     
460
     
1,347
     
1,429
 
Foreclosed property expenses
   
65
     
41
     
185
     
433
 
Data processing fees
   
621
     
547
     
1,821
     
1,869
 
Federal deposit insurance premiums
   
135
     
119
     
384
     
393
 
Advertising
   
125
     
199
     
385
     
461
 
Professional and outside services
   
258
     
335
     
734
     
790
 
Other noninterest expenses
   
815
     
866
     
2,692
     
2,583
 
                                 
Total noninterest expenses
   
5,837
     
5,624
     
17,619
     
17,834
 
                                 
Income before income tax provision
   
1,638
     
765
     
3,877
     
2,762
 
                                 
Income tax provision
   
496
     
263
     
1,248
     
915
 
                                 
Net income
 
$
1,142
   
$
502
   
$
2,629
   
$
1,847
 
                                 
Net income per common share – Basic
 
$
0.29
   
$
0.13
   
$
0.67
   
$
0.43
 
Net income per common share – Diluted
 
$
0.28
   
$
0.12
   
$
0.65
   
$
0.43
 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
ASB BANCORP, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(Dollars in thousands)
 
2015
   
2014
   
2015
   
2014
 
                 
Comprehensive Income
               
Net income
 
$
1,142
   
$
502
   
$
2,629
   
$
1,847
 
Other comprehensive income
                               
Unrealized holding gains on securities available for sale:                                
Reclassification of securities gains recognized in net income
   
(202
)
   
-
     
(401
)
   
(207
)
Deferred income tax benefit
   
75
     
-
     
150
     
78
 
Gains arising during the period
   
1,248
     
468
     
442
     
4,305
 
Deferred income tax expense
   
(464
)
   
(176
)
   
(165
)
   
(1,619
)
Unrealized holding gains adjustment, net of tax
   
657
     
292
     
26
     
2,557
 
                                 
Defined Benefit Pension Plans:
                               
Net periodic pension cost
   
194
     
144
     
583
     
429
 
Net pension loss
   
(194
)
   
(144
)
   
(583
)
   
(429
)
                                 
Total other comprehensive income
   
657
     
292
     
26
     
2,557
 
                                 
Comprehensive income
 
$
1,799
   
$
794
   
$
2,655
   
$
4,404
 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
ASB BANCORP, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(Dollars in thousands)
 
Nine Months Ended
September 30, 2015
 
     
Common stock
   
December 31, 2014
 
$
44
 
September 30, 2015
 
$
44
 
         
Additional paid-in capital
       
December 31, 2014
 
$
34,047
 
Repurchase of common stock
   
(320
)
Issuance of common stock
   
644
 
ESOP shares allocated
   
266
 
Stock-based compensation expense
   
860
 
Vesting of restricted stock
   
(650
)
September 30, 2015
 
$
34,847
 
         
Retained earnings
       
December 31, 2014
 
$
72,513
 
Net income
   
2,629
 
September 30, 2015
 
$
75,142
 
         
Accumulated other comprehensive income (loss), net of tax
       
December 31, 2014
 
$
(5,802
)
Other comprehensive income
   
26
 
September 30, 2015
 
$
(5,776
)
         
Unearned ESOP shares
       
December 31, 2014
 
$
(3,452
)
ESOP shares allocated
   
234
 
September 30, 2015
 
$
(3,218
)
         
Unearned equity incentive plan shares
       
December 31, 2014
 
$
(2,610
)
Vesting of restricted stock
   
650
 
September 30, 2015
 
$
(1,960
)
         
Stock-based deferral plan shares
       
December 31, 2014
 
$
(343
)
September 30, 2015
 
$
(343
)
         
Total shareholders’ equity
       
December 31, 2014
 
$
94,397
 
Repurchase of common stock
   
(320
)
Issuance of common stock
   
644
 
Net income
   
2,629
 
Other comprehensive income
   
26
 
ESOP shares allocated
   
500
 
Stock-based compensation expense
   
860
 
September 30, 2015
 
$
98,736
 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
ASB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
   
Nine Months Ended
September 30,
 
(Dollars in thousands)
 
2015
   
2014
 
         
Operating Activities
       
Net income
 
$
2,629
   
$
1,847
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for (recovery of) loan losses
   
450
     
(1,218
)
Provision for losses on foreclosed properties
   
6
     
154
 
Depreciation
   
618
     
691
 
Gain on sale of fixed and other assets
   
(20
)
   
(1
)
Loss (gain) on sale of foreclosed real estate
   
1
     
(25
)
Deferred income tax expense
   
277
     
1,147
 
Net amortization of premiums on securities
   
1,998
     
2,566
 
Gain on sale of investment securities
   
(401
)
   
(207
)
Net accretion of deferred fees on loans
   
(48
)
   
(84
)
Mortgage loans originated for sale
   
(59,321
)
   
(31,008
)
Proceeds from sale of mortgage loans
   
60,503
     
32,502
 
Gain on sale of mortgage loans
   
(1,382
)
   
(696
)
ESOP compensation expense
   
500
     
440
 
Stock-based compensation expense
   
801
     
1,204
 
Excess tax benefits from equity awards
   
(59
)
   
(26
)
Decrease (increase) in income tax receivable
   
174
     
(217
)
Decrease (increase) in interest receivable
   
(31
)
   
480
 
Net change in other assets and liabilities
   
2,930
     
1,625
 
                 
Net cash provided by operating activities
   
9,625
     
9,174
 
                 
Investing Activities
               
Purchases of securities available for sale
   
(65,842
)
   
(18,121
)
Proceeds from sales of securities available for sale
   
61,756
     
47,680
 
Proceeds from maturities and/or calls of securities available for sale
   
-
     
283
 
Principal repayments on mortgage-backed and asset-backed securities
   
9,532
     
11,937
 
Redemption of FHLB stock
   
95
     
229
 
Net increase in loans receivable
   
(48,131
)
   
(38,996
)
Additions to foreclosed real estate
   
-
     
(269
)
Net proceeds from sales of foreclosed real estate
   
748
     
5,377
 
Purchases of premises and equipment
   
(449
)
   
(202
)
Net proceeds from sales of fixed and other assets
   
20
     
-
 
                 
Net cash provided by (used in) investing activities
   
(42,271
)
   
7,918
 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
ASB BANCORP, INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited)
   
Nine Months Ended
September 30,
 
(Dollars in thousands)
 
2015
   
2014
 
         
Financing Activities
       
Net increase in deposits
 
$
31,704
   
$
22,012
 
Net repayments of overnight and short-term borrowings
   
(534
)
   
(632
)
Proceeds from the exercise of stock options
   
644
     
25
 
Excess tax benefits from equity awards
   
59
     
26
 
Common stock repurchased
   
(320
)
   
(12,902
)
                 
Net cash provided by financing activities
   
31,553
     
8,529
 
                 
Net increase (decrease) in cash and cash equivalents
   
(1,093
)
   
25,621
 
Cash and cash equivalents at beginning of period
   
56,858
     
52,791
 
                 
Cash and cash equivalents at end of period
 
$
55,765
   
$
78,412
 
                 
SUPPLEMENTAL DISCLOSURES:
               
                 
Cash paid for:
               
Interest on deposits, advances and other borrowings
 
$
2,612
   
$
2,662
 
Income taxes
   
281
     
-
 
                 
Non-cash investing and financing transactions:
               
Transfers from loans to foreclosed real estate
 
$
812
   
$
173
 
Increase  in unrealized gains and losses on securities available for sale
   
442
     
4,305
 
Decrease in deferred income taxes resulting from other comprehensive income
   
(15
)
   
(1,541
)
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These interim financial statements do not contain all necessary disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for a complete set of financial statements and, therefore, should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K of ASB Bancorp, Inc. for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC”) on March 13, 2015.  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 nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 or any other future period.

Organization – ASB Bancorp, Inc. (the “Parent”) was incorporated on May 12, 2011 to be the bank holding company for Asheville Savings Bank, S.S.B. (the “Bank”) upon completion of the Bank’s conversion from the mutual to stock form of organization.

The Bank is headquartered in Asheville, North Carolina and provides mortgage, consumer and commercial banking services primarily in Buncombe, Henderson, McDowell, Transylvania, and Madison counties in North Carolina and a loan production office in Mecklenburg County, 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 Parent 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 has on occasion managed the Bank’s real estate acquired through debt default but is currently inactive, and Wenoca, Inc., which serves as the Bank’s trustee regarding deeds of trust. Both subsidiaries are organized as North Carolina corporations. For purposes of the consolidated financial statements, all significant intercompany accounts and transactions have been eliminated. The accounting and reporting policies of the Company conform to 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 factors, (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.
 
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 borrowers. Prolonged deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for the Bank’s commercial borrowers.

Commercial Mortgage and Commercial and Industrial loans are primarily dependent on the ability of the Bank’s commercial loan customers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a borrower’s actual business results significantly underperform the original projections, the ability of that borrower to service the Bank’s loan on a basis consistent with the contractual terms may be at risk. While these loans are generally secured by real property, personal property, or business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation.

Non-Commercial Loan Segment

The Bank underwrites its non-commercial loans using automated credit scoring and analysis tools. These credit scoring tools take into account factors such as payment history, credit utilization, length of credit 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.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In addition to these common risks for the Bank’s non-commercial loans, various non-commercial loan classes may also have certain risks specific to them.

Residential Mortgage and Non-Commercial Construction and Land Development loans are to individuals and are typically secured by one-to-four family residential property, undeveloped land, and partially developed land in anticipation of pending construction of a personal residence. Significant and rapid declines in real estate values can cause residential mortgage loan borrowers to have debt levels in excess of the current market value of the collateral, which can result in increased levels of foreclosures. 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 open-end or revolving lines of credit that borrowers may repay and borrow multiple times during the life of the loan and 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. In addition, 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 in the value of collateral since origination.

Consumer loans are often closed-end whereby the loan is fully disbursed when the loan closes and is repaid according to agreed upon specified dates.  Consumer loans include loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination in excess of principal repayment.

Credit Quality Indicators

Loans are monitored for credit quality on a recurring basis and the composition of the loans outstanding by credit quality indicator is provided below.

Loan credit quality indicators are developed through review of individual borrowers on an ongoing basis, although certain non-commercial loans, including residential mortgage, revolving mortgage and consumer loans, are evaluated upon origination and are reevaluated upon a change in delinquency status. Most commercial loans are evaluated at least annually with more frequent evaluation of more severely criticized loans or leases. The indicators represent the rating for loans as of the date presented based on the most recent assessment performed. These credit quality indicators are defined as follows:

Pass – A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification.

Special Mention – A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Substandard – A substandard asset is inadequately protected by the current net worth and paying capacity of the obligor and/or the realizable value of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Doubtful – An asset classified as doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values.

Loss – Assets classified loss are considered uncollectible and of such little value that their continuing to be carried as an asset is not warranted. This classification is not necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full write-off even though partial recovery may be effected in the future.

Allowance for Loan Losses – The allowance for loan losses is management’s estimate of probable credit losses that are inherent in the Bank’s loan portfolios at the balance sheet date. The allowance increases when the Bank provides for loan losses through charges to operating earnings and when the Bank recovers amounts from loans previously written down or charged off. The allowance decreases when the Bank writes down or charges off loan amounts that are deemed uncollectible.

Management determines the allowance for loan losses based on periodic evaluations that are inherently subjective and require substantial judgment because the evaluations require the use of material estimates that are susceptible to significant change. The Bank generally uses two allowance methodologies that are primarily based on management’s determination as to whether or not a loan is considered to be impaired.

Commercial loans, as well as non-commercial loans that are classified as substandard and secured by real estate, are evaluated for impairment on a loan-by-loan basis and are considered impaired when it is probable, based on current information, that the borrower will be unable to pay contractual interest or principal as required by the loan agreement. Loans that experience insignificant payment delays and payment shortfalls are not necessarily considered impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment history, and the amount of the shortfall relative to the principal and interest owed. Loans that are deemed to be troubled debt restructurings, which are discussed below, are also included as impaired loans. Impaired loans are measured at their estimated fair value based on either the value of the loan’s expected future cash flows discounted at the loan’s effective interest rate or on the collateral value, net of the estimated costs of disposal, if the loan is collateral dependent. For loans considered impaired, an individual allowance for loan losses is recorded when the loan principal balance exceeds the estimated fair value.

For loans not considered impaired, management determines the allowance for loan losses based on estimated loss percentages that are determined by and applied to the various classes of loans that comprise the segments of the Bank’s loan portfolio. The estimated loss percentages by loan class are based on a number of factors that include by class (i) average historical losses over the past three years, (ii) levels and trends in delinquencies, impairments, and net charge-offs, (iii) trends in the volume and direction of loan balances within that class, terms, and concentrations, (iv) trends in interest rates, (v) effects of changes in the Bank’s risk tolerance, underwriting standards, lending policies, procedures, and practices, and (vi) national and local business and economic conditions.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Methodology Change – In the second quarter of 2014, the Bank assessed and modified its loan loss methodology for unimpaired commercial construction and land development, unimpaired residential construction and land development, and unimpaired commercial and industrial loans. This modification resulted in further sub-segmentation of these classes of loans and the related historical charge-off rates. The purpose was to allocate the substantial historical charge-off rates created by three sub-segments of these loan classes against the significantly diminished or nonexistent current balances within these same loan sub-segments reflecting no continued credit exposure to the Bank. Specifically, additional sub-segments were identified where the Bank made (i) loans in excess of $2.5 million to construct commercial mixed-use buildings in small communities with low population growth, (ii) speculative loans to construct one-to-four family residences for the greater of 80% of the appraised value of the completed residence or 100% of the actual costs of construction, and (iii) loans secured by equity securities that do not have a readily determinable fair value.  This change in methodology resulted in a nonrecurring reduction of approximately $1.3 million in the Bank’s reserves for loans not considered impaired in the second quarter of 2014.

Future material adjustments to the allowance for loan losses may be necessary due to improving or deteriorating economic conditions, delinquencies, charge-off levels or declining collateral values. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses and may require the Bank to make adjustments to the allowance for loan losses based upon judgments that differ significantly from those of management.

Nonperforming Assets – Nonperforming assets can include loans that are past due 90 days or more and continue to accrue interest, loans on which interest is not being accrued, and foreclosed real estate.

Loans Past Due 90 Days or More, Nonaccruing, Impaired, or Restructured – The Bank’s policies related to loans that are placed on nonaccruing status conform to guidelines prescribed by bank regulatory authorities. Generally, the Bank suspends the accrual of interest on loans (i) that are maintained on a cash basis because of the deterioration of the financial condition of the borrower, (ii) for which payment in full of principal or interest is not expected, or (iii) on which principal or interest has been in default for a period of 90 days or more, unless the loan is both well secured and in the process of collection. While a loan is on nonaccruing status, the Bank recognizes interest income only to the extent cash payments are received in excess of collection of the principal outstanding on the loan. Loans are returned to accruing status when all principal and interest amounts contractually due are brought current and concern no longer exists as to the future collectability of principal and interest, which is generally confirmed when the loan demonstrates performance for six consecutive months or payment cycles.

A troubled debt restructuring (“TDR”) occurs when a borrower is experiencing financial difficulty and the Bank grants a concession it would not otherwise consider to provide the borrower relief from one or more of the contractual loan conditions. Concessions that the Bank might consider include the allowance of interest-only payments on more than a temporary basis, the reduction of interest rates, the extension of the loan term, the forgiveness of principal, or a combination of these. The Bank might require additional collateral or additional guarantors as conditions to modifying loans as TDRs.

The Bank might consider modifying both accruing or nonaccruing loans as TDRs. When a modification includes a reduction of principal that resulted from a partial charge-off of the loan, the Bank typically accounts for the TDR as a nonaccruing loan.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 (“OCI”). 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 changes in the components of the Company’s accumulated other comprehensive loss, net of income taxes, are presented as follows:
 
(Dollars in thousands)
 
Beginning
Balance
   
OCI Before
Reclassification
   
Amount
Reclassified
   
Net
OCI
   
Ending
Balance
 
                     
Three Months Ended September 30, 2015
                 
                     
Unrealized gain (loss) on securities
 
$
(507
)
 
$
784
   
$
(127
)
 
$
657
   
$
150
 
Benefit plan liability
   
(5,926
)
   
(122
)
   
122
     
-
     
(5,926
)
Accumulated other comprehensive income (loss), net of tax
 
$
(6,433
)
 
$
662
   
$
(5
)
 
$
657
   
$
(5,776
)
                                         
Three Months Ended September 30, 2014
                                 
                                         
Unrealized loss on securities
 
$
(687
)
 
$
292
   
$
-
   
$
292
   
$
(395
)
Benefit plan liability
   
(4,421
)
   
(90
)
   
90
     
-
     
(4,421
)
Accumulated other comprehensive income (loss), net of tax
 
$
(5,108
)
 
$
202
   
$
90
   
$
292
   
$
(4,816
)
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
(Dollars in thousands)
 
Beginning
Balance
   
OCI Before
Reclassification
   
Amount
Reclassified
   
Net
OCI
   
Ending
Balance
 
                     
Nine Months Ended September 30, 2015
                   
                     
Unrealized gain on securities
 
$
124
   
$
277
   
$
(251
)
 
$
26
   
$
150
 
Benefit plan liability
   
(5,926
)
   
(366
)
   
366
     
-
     
(5,926
)
Accumulated other comprehensive income (loss), net of tax
 
$
(5,802
)
 
$
(89
)
 
$
115
   
$
26
   
$
(5,776
)
                                         
Nine Months Ended September 30, 2014
                                       
                                         
Unrealized loss on securities
 
$
(2,952
)
 
$
2,686
   
$
(129
)
 
$
2,557
   
$
(395
)
Benefit plan liability
   
(4,421
)
   
(269
)
   
269
     
-
     
(4,421
)
Accumulated other comprehensive income (loss), net of tax
 
$
(7,373
)
 
$
2,417
   
$
140
   
$
2,557
   
$
(4,816
)

The Company’s reclassifications out of accumulated other comprehensive income are as follows:
 
Details About Accumulated Other
Comprehensive Income Components
 
Amount Reclassified
From Accumulated Other
Comprehensive Income
 
Affected Line Item In The Statement
Where Net Income Is Presented
(Dollars in thousands)
 
Three
Months
Ended
September 30,
2015
   
Three
Months
Ended
September 30,
2014
   
                  
Reclassification of securities gains recognized in net income
 
$
(202
)
 
$
-
 
Gain on sale of investment securities
Deferred income tax expense
   
75
     
-
 
Income tax provision
Total reclassifications for the period
 
$
(127
)
 
$
-
 
Net of tax
                               
Net periodic pension benefit
 
$
194
   
$
144
 
Salaries and employee benefits
Deferred income tax expense
   
(72
)
   
(54
)
Income tax provision
Total reclassifications for the period
$
122
 
$
90
 
Net of tax
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Details About Accumulated Other
Comprehensive Income Components
 
Amount Reclassified
From Accumulated Other
Comprehensive Income
 
Affected Line Item In The Statement
Where Net Income Is Presented
CH OPEN
(Dollars in thousands)
 
Nine
Months
Ended
September 30,
2015
   
Nine
Months
Ended
September 30,
2014
   
              
Reclassification of securities gains recognized in net income
 
$
(401
)
 
$
(207
)
Gain on sale of investment securities
Deferred income tax expense
   
150
     
78
 
Income tax provision
Total reclassifications for the period
 
$
(251
)
 
$
(129
)
Net of tax
                      
Net periodic pension benefit
 
$
583
   
$
429
 
Salaries and employee benefits
Deferred income tax expense
   
(217
)
   
(160
)
Income tax provision
Total reclassifications for the period
 
$
366
   
$
269
 
Net of tax

Income Taxes – The establishment of provisions for federal and state income taxes is a complex area of accounting that involves the use of significant judgments and estimates in applying relevant tax statutes. The Company is subject to audit by federal and state tax authorities, the results of which may produce tax liabilities that differ from the Company’s tax estimates and provisions. The Company continually evaluates its exposure to possible tax assessments arising from audits and it records its estimate of possible exposure based on current facts and circumstances. The Parent and the Bank have entered into a formal agreement that will allow them, if so elected, to file consolidated federal and state income tax returns, where permitted, and each to pay its respective share of income taxes due.

Deferred tax assets and liabilities are recognized for the tax effects of differing carrying values of assets and liabilities for tax and financial statement purposes that will reverse in future periods. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. When uncertainty exists concerning the recoverability of a deferred tax asset, the carrying value of the asset may be reduced by a valuation allowance. The amount of any valuation allowance established is based upon an estimate of the deferred tax asset that is more likely than not to be recovered. Increases or decreases in the valuation allowance result in increases or decreases to the provision for income taxes.

The Bank’s loss carry forward period under applicable North Carolina income tax laws is 15 years with a remaining loss carry forward period of 12 years. The Bank includes interest and penalties related to income tax liabilities in noninterest expense. The Bank’s tax filings for the years 2012 and thereafter are currently open to audit under statutes of limitations by the Internal Revenue Service and the North Carolina Department of Revenue.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Pension Plan – 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.

Employee Stock Ownership Plan (“ESOP”) – In connection with the mutual-to-stock conversion on October 11, 2011, the Bank established an ESOP for the benefit of all of its eligible employees. Full-time employees of the Bank who have been credited with at least 1,000 hours of service during a twelve-month period and who have attained age 21 are eligible to participate in the ESOP.  Shares allocated under the ESOP vest at the rate of 20% per year of service beginning with the completion of two years of service and fully vest upon the completion of six years of service. The Bank anticipates it will make contributions to the ESOP in amounts necessary to amortize the ESOP loan payable to the Parent over a period of 15 years in accordance with the terms of the loan.

Unallocated ESOP shares are not considered outstanding (including for the calculation of net income per common share as discussed below) and are shown as a reduction of shareholders’ equity. Dividends on unallocated ESOP shares, if paid, are considered to be compensation expense. The Company recognizes compensation cost equal to the fair value of the ESOP shares during the periods in which they are committed to be released. The fair value of the annual share allocations is recorded on a monthly basis with fair value determined by calculating the average closing stock price for each day during the month. To the extent that the fair value of the Company’s ESOP shares differs from the cost of such shares, the difference is recognized in shareholders’ equity. The Company recognizes a tax deduction equal to the cost of the shares released. Because the ESOP is internally leveraged through a loan from the Parent to the ESOP, the loan receivable by the Parent from the ESOP is not reported as an asset nor is the debt of the ESOP shown as a liability in the consolidated financial statements.

Equity Incentive Plan – The Company issued restricted stock and stock options under the 2012 Equity Incentive Plan (the “2012 Equity Incentive Plan”) to key officers and outside directors during the first quarter of 2013 and to additional key officers and a newly appointed outside director during 2014.  There were no grants under the 2012 Equity Incentive Plan during the first nine months of 2015. The Company uses a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured based on the fair value of the award as of the grant date and recognized over the vesting period.

Net Income Per Common Share – Where presented, basic net income per common share is the Company’s net income available to common shareholders, which represents net income less dividends paid or payable to preferred stock shareholders, if any, divided by the weighted average number of common shares outstanding during the period. In calculating the weighted average number of common shares outstanding, shares held by the ESOP are not considered to be outstanding until they are committed to be released for allocation.  Also, the weighted average of unvested restricted shares are not considered outstanding until the shares vest.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.
 
Net income per common share has been computed based on the following:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(Dollars in thousands, except per share data)
 
2015
   
2014
   
2015
   
2014
 
                 
Numerator:
               
Net income
 
$
1,142
   
$
502
   
$
2,629
   
$
1,847
 
                                 
Denominator:
                               
Weighted average common shares outstanding
   
4,394,787
     
4,466,012
     
4,383,930
     
4,791,927
 
Less: Weighted average unvested restricted shares
   
(121,610
)
   
(168,664
)
   
(126,884
)
   
(180,812
)
Less: Weighted average unallocated ESOP shares
   
(325,732
)
   
(357,119
)
   
(333,515
)
   
(364,902
)
Weighted average common shares used to compute net income per common share – Basic
   
3,947,445
     
3,940,229
     
3,923,531
     
4,246,213
 
Add: Effect of dilutive securities
   
131,584
     
78,716
     
101,900
     
43,988
 
Weighted average common shares used to compute net income per common share – Diluted
   
4,079,029
     
4,018,945
     
4,025,431
     
4,290,201
 
                                 
Net income per common share – Basic
 
$
0.29
   
$
0.13
   
$
0.67
   
$
0.43
 
Net income per common share – Diluted
 
$
0.28
   
$
0.12
   
$
0.65
   
$
0.43
 

For the three and nine months ended September 30, 2015, options to purchase 1,178 and 3,916 shares of common stock, respectively, were excluded from the computation of net income per common share because their effect would be anti-dilutive.  For the three and nine months ended September 30, 2014, options to purchase 6,224 and 8,877 shares of common stock, respectively, were excluded from the computation of net income per common share because their effect would be anti-dilutive. For the three and nine months ended September 30, 2015, no restricted shares were excluded from the computation of net income per share because their effect would be anti-dilutive.  For the three and nine months ended September 30, 2014, no restricted shares and 647 restricted shares, respectively, were excluded from net income per share because their effect would be anti-dilutive.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements

Accounting Standards Update ASU 2015-02 – In February, 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis.  The amendments affect business entities that are required to evaluate whether they should consolidate certain legal entities.  For public entities, the amendments in ASU 2015-02 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption, including adoption in an interim period, is permitted.  The Company is currently evaluating this guidance to determine the impact on the Company’s consolidated financial statements.

Accounting Standards Update ASU 2015-03 – In April, 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs.  Under the ASU, an entity presents debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset.  Amortization of the costs is reported as interest expense. For public entities, the amendments in ASU 2015-03 are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  Early adoption is permitted for financial statements that have not been previously issued.  The Company currently does not have debt issuance costs, and this guidance would not have an impact on the Company’s consolidated financial statements.

Accounting Standards Update ASU 2015-15 – In August, 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements:  Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, to clarify the SEC staff's position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements given the lack of guidance on this topic in ASU 2015-03.  The SEC staff has announced that it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. ASU 2015-15 is effective upon issuance for all entities.  The Company currently does not have debt issuance costs, and this guidance would not have an impact on the Company’s consolidated financial statements.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
2. INVESTMENT SECURITIES
 
Securities Available for Sale – The maturities, amortized cost, unrealized gains, unrealized losses and fair values of securities available for sale are as follows:
 
Type And Maturity Group
(Dollars in thousands)
 
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
                 
September 30, 2015
               
                 
U.S. Government Sponsored Enterprise (GSE) and agency securities due -
               
After 1 year but within 5 years
 
$
2,144
   
$
2
   
$
(1
)
 
$
2,145
 
Asset-backed securities issued by the Small Business Administration (SBA)
   
17,746
     
269
     
(14
)
   
18,001
 
Residential mortgage-backed securities issued by GSEs (1)
   
54,149
     
108
     
(341
)
   
53,916
 
State and local government securities due -
                               
After 1 year but within 5 years
   
687
     
3
     
-
     
690
 
After 5 years but within 10 years
   
7,166
     
73
     
(1
)
   
7,238
 
After 10 years
   
51,723
     
315
     
(183
)
   
51,855
 
Mutual funds
   
756
     
7
     
-
     
763
 
Total
 
$
134,371
   
$
777
   
$
(540
)
 
$
134,608
 
                                 
December 31, 2014
                               
                                 
U.S. Government Sponsored Enterprise (GSE) and agency securities due -
                               
After 1 year but within 5 years
 
$
1,037
   
$
-
   
$
(11
)
 
$
1,026
 
After 5 years but within 10 years
   
1,136
     
-
     
(24
)
   
1,112
 
Asset-backed securities issued by the Small Business Administration (SBA)
   
28,139
     
354
     
(28
)
   
28,465
 
Residential mortgage-backed securities issued by GSEs (1)
   
67,675
     
189
     
(443
)
   
67,421
 
State and local government securities due -
                               
After 5 years but within 10 years
   
9,850
     
98
     
(31
)
   
9,917
 
After 10 years
   
32,685
     
278
     
(188
)
   
32,775
 
Mutual funds
   
744
     
2
     
-
     
746
 
Total
 
$
141,266
   
$
921
   
$
(725
)
 
$
141,462
 
 

(1) Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at September 30, 2015 and December 31, 2014 or during the nine- and twelve-month periods, respectively, then ended.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
2. INVESTMENT SECURITIES (Continued)
 
Securities Held to Maturity – The maturities, amortized cost, unrealized gains, unrealized losses and fair values of securities classified as held to maturity are as follows:
 
Type And Maturity Group
(Dollars in thousands)
 
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
                 
September 30, 2015
               
                 
U.S. GSE  and agency securities due -                
After 1 year but within 5 years
 
$
1,027
   
$
60
   
$
-
   
$
1,087
 
Residential mortgage-backed securities issued by GSEs (1)
   
391
     
27
     
-
     
418
 
State and local government securities due -                                
After 5 years but within 10 years
   
964
     
90
     
-
     
1,054
 
After 10 years
   
1,469
     
129
     
-
     
1,598
 
Total
 
$
3,851
   
$
306
   
$
-
   
$
4,157
 
                                 
December 31, 2014
                               
                                 
U.S. GSE  and agency securities due -                                
After 1 year but within 5 years
 
$
1,038
   
$
73
   
$
-
   
$
1,111
 
Residential mortgage-backed securities issued by GSEs (1)
   
532
     
40
     
-
     
572
 
State and local government securities due -                                
After 5 years but within 10 years
   
961
     
98
     
-
     
1,059
 
After 10 years
   
1,468
     
153
     
-
     
1,621
 
Total
 
$
3,999
   
$
364
   
$
-
   
$
4,363
 


(1) Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at September 30, 2015 and December 31, 2014 or during the nine- and twelve-month periods, respectively, then ended.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
2. INVESTMENT SECURITIES (Continued)

The following tables show investment gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2015 and December 31, 2014. The total number of securities with unrealized losses at  September 30, 2015 and December 31, 2014 were 40 and 46, respectively. The unrealized losses relate to debt and equity securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased. The unrealized losses are not likely to reverse unless and until market interest rates decline to the levels that existed when the securities were purchased. Management has the intent to hold securities with unrealized losses until a recovery of the market value occurs. Management has determined that it is more likely than not that the Company will not be required to sell any of the securities with unrealized losses prior to a recovery of market value sufficient to negate the unrealized loss. Management has analyzed the creditworthiness of the underlying issuers and determined that the Company will collect all contractual cash flows and, therefore, all impairment is considered to be temporary.
 
  September 30, 2015  
  Less Than 12 Months     12 Months Or More     Total  
(Dollars in thousands)
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
             
Securities Available For Sale
           
             
US GSE and agency
 
$
-
   
$
-
   
$
1,116
   
$
(1
)
 
$
1,116
   
$
(1
)
Asset-backed SBA
   
-
     
-
     
1,915
     
(14
)
   
1,915
     
(14
)
Residential mortgage-backed GSE (1)
   
30,492
     
(295
)
   
8,681
     
(46
)
   
39,173
     
(341
)
State and local government
   
27,603
     
(152
)
   
1,496
     
(32
)
   
29,099
     
(184
)
Total temporarily impaired securities
 
$
58,095
   
$
(447
)
 
$
13,208
   
$
(93
)
 
$
71,303
   
$
(540
)


(1) Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at September 30, 2015 or during the nine-month period then ended.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
2. INVESTMENT SECURITIES (Continued)
 
 
December 31, 2014
 
 
Less Than 12 Months
   
12 Months Or More
   
Total
 
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
(Dollars in thousands)
                         
Securities Available For Sale
                                   
                         
US GSE and agency
 
$
-
   
$
-
   
$
2,138
   
$
(35
)
 
$
2,138
   
$
(35
)
Asset-backed SBA
   
1,006
     
(1
)
   
2,158
     
(27
)
   
3,164
     
(28
)
Residential mortgage-backed GSE (1)
   
5,579
     
(13
)
   
27,089
     
(430
)
   
32,668
     
(443
)
State and local government
   
1,867
     
(16
)
   
13,541
     
(203
)
   
15,408
     
(219
)
Total temporarily impaired securities
 
$
8,452
   
$
(30
)
 
$
44,926
   
$
(695
)
 
$
53,378
   
$
(725
)
 

(1) Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at December 31, 2014 or during the twelve-month period then ended.

Investment securities pledged as collateral follows:
 
(Dollars in thousands)
 
September 30,
2015
   
December 31,
2014
 
         
Pledged to Federal Reserve Discount Window
 
$
15,482
   
$
3,745
 
Pledged to repurchase agreements for commercial customers
   
1,224
     
1,137
 
 
Interest income from taxable and tax-exempt securities recognized in interest and dividend income follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(Dollars in thousands)
 
2015
   
2014
   
2015
   
2014
 
                 
Interest income from taxable securities
 
$
231
   
$
358
   
$
780
   
$
1,074
 
Interest income from tax-exempt securities
   
401
     
270
     
977
     
943
 
Total interest income from securities
 
$
632
   
$
628
   
$
1,757
   
$
2,017
 
 
ASB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

2. INVESTMENT SECURITIES (Continued)

Proceeds and gross realized gains from sales of securities recognized in net income follow:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(Dollars in thousands)
 
2015
   
2014
   
2015
   
2014
 
                 
Proceeds from sales of securities
 
$
11,132
   
$
-
   
$
61,756
   
$
47,680
 
Gross realized gains from sales of securities
   
202
     
-
     
667
     
554
 
Gross realized losses from sales of securities
   
-
     
-
     
(266
)
   
(347
)

3. LOANS RECEIVABLE

Loans receivable by segment and class follow:

(Dollars in thousands)
 
September 30,
2015
   
December 31,
2014
 
         
Commercial:
       
Commercial construction and land development
 
$
32,715
   
$
21,661
 
Commercial mortgage
   
214,218
     
201,316
 
Commercial and industrial
   
23,051
     
15,872
 
Total commercial
   
269,984
     
238,849
 
Non-commercial:
               
Non-commercial construction and land development
   
16,851
     
14,781
 
Residential mortgage
   
178,123
     
172,163
 
Revolving mortgage
   
64,546
     
56,370
 
Consumer
   
40,190
     
40,363
 
Total non-commercial
   
299,710
     
283,677
 
Total loans receivable
   
569,694
     
522,526
 
Less: Deferred loan fees
   
(609
)
   
(706
)
Total loans receivable net of deferred loan fees
   
569,085
     
521,820
 
Less: Allowance for loan losses
   
(6,297
)
   
(5,949
)
Loans receivable, net
 
$
562,788
   
$
515,871
 
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
3. LOANS RECEIVABLE (Continued)

Loans receivable by segment, class, and grade follow:
 
(Dollars in thousands)
 
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Loss
   
Total
Loans
 
                         
September 30, 2015
                       
                         
Commercial:
                       
Commercial construction and land development
 
$
32,567
   
$
148
   
$
-
   
$
-
   
$
-
   
$
32,715
 
Commercial mortgage
   
198,434
     
14,338
     
1,446
     
-
     
-
     
214,218
 
Commercial and industrial
   
21,699
     
1,107
     
245
     
-
     
-
     
23,051
 
Total commercial
   
252,700
     
15,593
     
1,691
     
-
     
-
     
269,984
 
Non-commercial:
                                               
Non-commercial construction and land development
   
16,851
     
-
     
-
     
-
     
-
     
16,851
 
Residential mortgage
   
169,707
     
6,669
     
1,747
     
-
     
-
     
178,123
 
Revolving mortgage
   
61,269
     
2,764
     
513
     
-
     
-
     
64,546
 
Consumer
   
39,787
     
357
     
46
     
-
     
-
     
40,190
 
Total non-commercial
   
287,614
     
9,790
     
2,306
     
-
     
-
     
299,710
 
Total loans receivable
 
$
540,314
   
$
25,383
   
$
3,997
   
$
-
   
$
-
   
$
569,694
 
                                                 
December 31, 2014
                                               
                                                 
Commercial:
                                               
Commercial construction and land development
 
$
21,336
   
$
323
   
$
2
   
$
-
   
$
-
   
$
21,661
 
Commercial mortgage
   
184,992
     
14,809
     
1,515
     
-
     
-
     
201,316
 
Commercial and industrial
   
14,628
     
873
     
371
     
-
     
-
     
15,872
 
Total commercial
   
220,956
     
16,005
     
1,888
     
-
     
-
     
238,849
 
Non-commercial:
                                               
Non-commercial construction and land development
   
14,781
     
-
     
-
     
-
     
-
     
14,781
 
Residential mortgage
   
161,859
     
8,544
     
1,760
     
-
     
-
     
172,163
 
Revolving mortgage
   
52,700
     
3,119
     
551
     
-
     
-
     
56,370
 
Consumer
   
39,965
     
294
     
104
     
-
     
-
     
40,363
 
Total non-commercial
   
269,305
     
11,957
     
2,415
     
-
     
-
     
283,677
 
Total loans receivable
 
$
490,261
   
$
27,962
   
$
4,303
   
$
-
   
$
-
   
$
522,526
 
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
3. LOANS RECEIVABLE (Continued)

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

   
Past Due
         
(Dollars in thousands)
 
31-89 Days
   
90 Days
Or More
   
Total
   
Current
   
Total
Loans
 
                     
September 30, 2015
                   
                     
Commercial:
                   
Commercial construction and land development
 
$
-
   
$
-
   
$
-
   
$
32,715
   
$
32,715
 
Commercial mortgage
   
496
     
-
     
496
     
213,722
     
214,218
 
Commercial and industrial
   
2
     
102
     
104
     
22,947
     
23,051
 
Total commercial
   
498
     
102
     
600
     
269,384
     
269,984
 
Non-commercial:
                                       
Non-commercial construction and land development
   
-
     
-
     
-
     
16,851
     
16,851
 
Residential mortgage
   
268
     
1,381
     
1,649
     
176,474
     
178,123
 
Revolving mortgage
   
29
     
117
     
146
     
64,400
     
64,546
 
Consumer
   
184
     
1
     
185
     
40,005
     
40,190
 
Total non-commercial
   
481
     
1,499
     
1,980
     
297,730
     
299,710
 
Total loans receivable
 
$
979
   
$
1,601
   
$
2,580
   
$
567,114
   
$
569,694
 
                                         
December 31, 2014
                                       
                                         
Commercial:
                                       
Commercial construction and land development
 
$
-
   
$
-
   
$
-
   
$
21,661
   
$
21,661
 
Commercial mortgage
   
532
     
-
     
532
     
200,784
     
201,316
 
Commercial and industrial
   
-
     
43
     
43
     
15,829
     
15,872
 
Total commercial
   
532
     
43
     
575
     
238,274
     
238,849
 
Non-commercial:
                                       
Non-commercial construction and land development
   
-
     
-
     
-
     
14,781
     
14,781
 
Residential mortgage
   
576
     
1,226
     
1,802
     
170,361
     
172,163
 
Revolving mortgage
   
396
     
141
     
537
     
55,833
     
56,370
 
Consumer
   
227
     
1
     
228
     
40,135
     
40,363
 
Total non-commercial
   
1,199
     
1,368
     
2,567
     
281,110
     
283,677
 
Total loans receivable
 
$
1,731
   
$
1,411
   
$
3,142
   
$
519,384
   
$
522,526
 
 
 ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
3. LOANS RECEIVABLE (Continued)

The recorded investment in loans, by segment and class, that are not accruing interest or are 90 days or more past due and still accruing interest follows:

   
September 30, 2015
   
December 31, 2014
 
(Dollars in thousands)
 
Nonaccruing
   
Past Due
90 Days
Or More
And Still
Accruing
   
Nonaccruing
   
Past Due
90 Days
Or More
And Still
Accruing
 
                 
Commercial:
               
Commercial mortgage
 
$
824
   
$
-
   
$
881
   
$
-
 
Commercial and industrial
   
245
     
-
     
221
     
-
 
Total commercial
   
1,069
     
-
     
1,102
     
-
 
Non-commercial:
                               
Residential mortgage
   
1,541
     
-
     
1,354
     
-
 
Revolving mortgage
   
204
     
-
     
230
     
-
 
Consumer
   
1
     
-
     
2
     
-
 
Total non-commercial
   
1,746
     
-
     
1,586
     
-
 
Total loans receivable
 
$
2,815
   
$
-
   
$
2,688
   
$
-
 
 
The Bank services loans for Habitat for Humanity of Western North Carolina as an in-kind donation.  The balances of these loans were $15.8 million at September 30, 2015 and $14.9 million at December 31, 2014.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
4. ALLOWANCE FOR LOAN LOSSES

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

   
Three Months Ended September 30, 2015
   
Nine Months Ended September 30, 2015
 
(Dollars in thousands)
 
Commercial
   
Non-
Commercial
   
Total
   
Commercial
   
Non-
Commercial
   
Total
 
                         
Balance at beginning of period
 
$
3,528
   
$
2,596
   
$
6,124
   
$
3,409
   
$
2,540
   
$
5,949
 
Provision for (recovery of) loan losses
   
204
     
(13
)
   
191
     
296
     
154
     
450
 
Charge-offs
   
-
     
(46
)
   
(46
)
   
(79
)
   
(356
)
   
(435
)
Recoveries
   
4
     
24
     
28
     
110
     
223
     
333
 
Balance at end of period
 
$
3,736
   
$
2,561
   
$
6,297
   
$
3,736
   
$
2,561
   
$
6,297
 
                                                 
   
Three Months Ended September 30, 2014
   
Nine Months Ended September 30, 2014
 
(Dollars in thousands)
 
Commercial
   
Non-
Commercial
   
Total
   
Commercial
   
Non-
Commercial
   
Total
 
                                                 
Balance at beginning of period
 
$
3,441
   
$
2,329
   
$
5,770
   
$
4,560
   
$
2,747
   
$
7,307
 
Provision for (recovery of) loan losses
   
67
     
173
     
240
     
(1,070
)
   
(148
)
   
(1,218
)
Charge-offs
   
(95
)
   
(77
)
   
(172
)
   
(95
)
   
(227
)
   
(322
)
Recoveries
   
2
     
12
     
14
     
20
     
65
     
85
 
Balance at end of period
 
$
3,415
   
$
2,437
   
$
5,852
   
$
3,415
   
$
2,437
   
$
5,852
 
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
4. ALLOWANCE FOR LOAN LOSSES (Continued)

Ending balances of loans and the related allowance, by segment and class, follow:

   
Allowance For Loan Losses
   
Total Loans Receivable
 
(Dollars in thousands)
 
Loans
Individually
Evaluated
For
Impairment
   
Loans
Collectively
Evaluated
   
Total
   
Loans
Individually
Evaluated
For
Impairment
   
Loans
Collectively
Evaluated
   
Total
 
                         
September 30, 2015
                       
                         
Commercial:
                       
Commercial construction and land development
 
$
-
   
$
329
   
$
329
   
$
-
   
$
32,715
   
$
32,715
 
Commercial mortgage
   
44
     
3,049
     
3,093
     
3,843
     
210,375
     
214,218
 
Commercial and industrial
   
15
     
299
     
314
     
268
     
22,783
     
23,051
 
Total commercial
   
59
     
3,677
     
3,736
     
4,111
     
265,873
     
269,984
 
Non-commercial:
                                               
Non-commercial construction and land development
   
-
     
141
     
141
     
-
     
16,851
     
16,851
 
Residential mortgage
   
48
     
1,087
     
1,135
     
3,061
     
175,062
     
178,123
 
Revolving mortgage
   
87
     
747
     
834
     
87
     
64,459
     
64,546
 
Consumer
   
-
     
451
     
451
     
-
     
40,190
     
40,190
 
Total non-commercial
   
135
     
2,426
     
2,561
     
3,148
     
296,562
     
299,710
 
Total loans receivable
 
$
194
   
$
6,103
   
$
6,297
   
$
7,259
   
$
562,435
   
$
569,694
 
                                                 
December 31, 2014
                                               
                                                 
Commercial:
                                               
Commercial construction and land development
 
$
-
   
$
303
   
$
303
   
$
-
   
$
21,661
   
$
21,661
 
Commercial mortgage
   
67
     
2,796
     
2,863
     
3,976
     
197,340
     
201,316
 
Commercial and industrial
   
98
     
145
     
243
     
394
     
15,478
     
15,872
 
Total commercial
   
165
     
3,244
     
3,409
     
4,370
     
234,479
     
238,849
 
Non-commercial:
                                               
Non-commercial construction and land development
   
-
     
116
     
116
     
-
     
14,781
     
14,781
 
Residential mortgage
   
160
     
969
     
1,129
     
3,023
     
169,140
     
172,163
 
Revolving mortgage
   
135
     
675
     
810
     
370
     
56,000
     
56,370
 
Consumer
   
-
     
485
     
485
     
-
     
40,363
     
40,363
 
Total non-commercial
   
295
     
2,245
     
2,540
     
3,393
     
280,284
     
283,677
 
Total loans receivable
 
$
460
   
$
5,489
   
$
5,949
   
$
7,763
   
$
514,763
   
$
522,526
 
 
ASB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
4. ALLOWANCE FOR LOAN LOSSES (Continued)

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

       
Recorded Investment
     
  
(Dollars in thousands)
 
Unpaid
Principal
Balance
   
With A
Recorded
Allowance
   
With No
Recorded
Allowance
   
Total
   
Related
Recorded
Allowance
 
                     
September 30, 2015
                   
                     
Commercial:
                   
Commercial mortgage
 
$
3,960
   
$
3,347
   
$
496
   
$
3,843
   
$
44
 
Commercial and industrial
   
737
     
143
     
125
     
268
     
15
 
Total commercial
   
4,697
     
3,490
     
621
     
4,111
     
59
 
Non-commercial:
                                       
Residential mortgage
   
3,137
     
1,475
     
1,586
     
3,061
     
48
 
Revolving mortgage
   
96
     
87
     
-
     
87
     
87
 
Total non-commercial
   
3,233
     
1,562
     
1,586
     
3,148
     
135
 
Total impaired loans
 
$
7,930
   
$
5,052
   
$
2,207
   
$
7,259
   
$
194
 
                                         
December 31, 2014
                                       
                                         
Commercial:
                                       
Commercial mortgage
 
$
4,050
   
$
3,444
   
$
532
   
$
3,976
   
$
67
 
Commercial and industrial
   
779
     
328
     
66
     
394
     
98
 
Total commercial
   
4,829
     
3,772
     
598
     
4,370
     
165
 
Non-commercial:
                                       
Residential mortgage
   
3,062
     
2,298
     
725
     
3,023
     
160
 
Revolving mortgage
   
414
     
267
     
103
     
370
     
135
 
Total non-commercial
   
3,476
     
2,565
     
828
     
3,393
     
295
 
Total impaired loans
 
$
8,305
   
$
6,337
   
$
1,426
   
$
7,763
   
$
460
 
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
4. ALLOWANCE FOR LOAN LOSSES (Continued)

The average recorded investment in impaired loans and interest income recognized on impaired loans follows:

   
Three Months Ended
September 30, 2015
   
Three Months Ended
September 30, 2014
 
(Dollars in thousands)
 
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
                 
Commercial:
               
Commercial mortgage
 
$
3,847
   
$
33
   
$
4,058
   
$
36
 
Commercial and industrial
   
274
     
-
     
288
     
2
 
Total commercial
   
4,121
     
33
     
4,346
     
38
 
Non-commercial:
                               
Residential mortgage
   
3,304
     
19
     
3,139
     
14
 
Revolving mortgage
   
155
     
1
     
320
     
1
 
Total non-commercial
   
3,459
     
20
     
3,459
     
15
 
Total loans receivable
 
$
7,580
   
$
53
   
$
7,805
   
$
53
 
                                 
   
Nine Months Ended
September 30, 2015
   
Nine Months Ended
September 30, 2014
 
         
(Dollars in thousands)
 
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
                                 
Commercial:
                               
Commercial construction and land development
 
$
-
   
$
-
   
$
30
   
$
1
 
Commercial mortgage
   
3,898
     
99
     
4,081
     
114
 
Commercial and industrial
   
306
     
1
     
286
     
5
 
Total commercial
   
4,204
     
100
     
4,397
     
120
 
Non-commercial:
                               
Residential mortgage
   
3,195
     
61
     
2,958
     
61
 
Revolving mortgage
   
271
     
1
     
301
     
3
 
Total non-commercial
   
3,466
     
62
     
3,259
     
64
 
Total loans receivable
 
$
7,670
   
$
162
   
$
7,656
   
$
184
 
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
4. ALLOWANCE FOR LOAN LOSSES (Continued)

The following table summarizes the Bank’s recorded investment in TDRs before and after their modifications during the periods indicated. The Bank reduced the interest rate below market levels on one loan during the three months ended September 30, 2015.  No loans were restructured during the three months ended September 30, 2014.  The Bank reduced the interest rate below market levels on two loans and extended the payment terms on one loan during the nine months ended September 30, 2015.  The Bank reduced the interest rate below market level on one loan and extended payment terms on two loans during the nine months ended September 30, 2014.

   
Three Months Ended September 30, 2015
   
Three Months Ended September 30, 2014
 
(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
   
1
   
$
45
   
$
45
     
-
   
$
-
   
$
-
 
Total non-commercial
   
1
     
45
     
45
     
-
     
-
     
-
 
Total loans modified with below market interest rate
   
1
     
45
     
45
     
-
     
-
     
-
 
                                                 
Total loans modified
   
1
   
$
45
   
$
45
     
-
   
$
-
   
$
-
 
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
4. ALLOWANCE FOR LOAN LOSSES (Continued)

   
Nine Months Ended September 30, 2015
   
Nine Months Ended September 30, 2014
 
(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
                       
                         
Commercial:
                       
Commercial mortgage
   
-
   
$
-
   
$
-
     
1
   
$
562
   
$
562
 
Commercial and industrial
   
1
     
153
     
153
     
-
     
-
     
-
 
Total commercial
   
1
     
153
     
153
     
1
     
562
     
562
 
Non-commercial:
                                               
Residential mortgage
   
1
     
45
     
45
     
-
     
-
     
-
 
Total non-commercial
   
1
     
45
     
45
     
-
     
-
     
-
 
Total loans modified with below market interest rate
   
2
     
198
     
198
     
1
     
562
     
562
 
                                                 
Extended payment terms
                                               
                                                 
Non-commercial:
                                               
Residential mortgage
   
1
     
29
     
42
     
2
     
67
     
93
 
Total non-commercial
   
1
     
29
     
42
     
2
     
67
     
93
 
Total loans modified with extended payment terms
   
1
     
29
     
42
     
2
     
67
     
93
 
                                                 
Total loans modified
   
3
   
$
227
   
$
240
     
3
   
$
629
   
$
655
 
 
There were no loans modified as TDRs within the preceding 12 months that stopped performing during the three months or nine months ended September 30, 2015 and September 30, 2014.

In the determination of the allowance for loan losses, management considers TDRs on loans and the subsequent nonperformance in accordance with their modified terms, by measuring impairment loan-by-loan based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

The Bank’s loans that were considered to be TDRs follow:

(Dollars in thousands)
 
September 30,
2015
   
December 31,
2014
 
         
Nonperforming restructured loans
 
$
1,039
   
$
1,018
 
Performing restructured loans
   
4,730
     
4,804
 
Total
 
$
5,769
   
$
5,822
 
 
As of September 30, 2015, the Bank had $1.3 million of residential real estate loans in the process of foreclosure and $769,000 of foreclosed residential real estate property included in foreclosed real estate.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. BENEFIT PLANS

Defined Benefit Plans – In January 2013, the Board of Directors amended the Bank’s Qualified and Non-Qualified pension plans, effective March 31, 2013, to curtail or eliminate benefits under the plans for services to be performed in future periods.  During 2013, pension expense was decreased by a $499,000 one-time credit that resulted from the curtailment of benefits for future service.

In June 2014, the Board of Directors further amended the Bank’s Qualified and Non-Qualified pension plans, effective September 16, 2014, to offer immediate lump sum payments to inactive participants having an actuarial equivalent of vested accrued benefits below $60,000, determined as of November, 1, 2014, as available.  The election deadline for the inactive participant to make the lump sum selection was October 17, 2014.  The total of immediate aggregate lump sum payments to all inactive participants making this selection was approximately $544,000 for 2014.

In June 2015, the Board of Directors further amended the Bank’s Qualified and Non-Qualified pension plans, effective September 1, 2015, to offer immediate lump sum payments to inactive participants, determined as of October 31, 2015, as available.  The election deadline for the inactive participant to make the lump sum selection was October 19, 2015.  The total of immediate aggregate lump sum payments to all inactive participants making this selection will be limited to approximately $975,000 for 2015.

Net periodic cost (benefit) related to defined benefit plans include the following components for the periods indicated:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(Dollars in thousands)
 
2015
   
2014
   
2015
   
2014
 
                 
Non-Qualified Defined Benefit Plan
               
                 
Components of Net Periodic Benefit Costs
               
Interest cost
 
$
14
   
$
12
   
$
41
   
$
38
 
Amortization of net loss
   
14
     
7
     
43
     
20
 
Net periodic pension cost
 
$
28
   
$
19
   
$
84
   
$
58
 
                                 
Qualified Defined Benefit Plan
                               
                                 
Components of Net Periodic Benefit Costs
                               
Interest cost
 
$
247
   
$
250
   
$
742
   
$
751
 
Expected return on plan assets
   
(236
)
   
(248
)
   
(708
)
   
(743
)
Amortization of net loss
   
180
     
137
     
540
     
409
 
Net periodic pension cost
 
$
191
   
$
139
   
$
574
   
$
417
 
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. BENEFIT PLANS (Continued)

Employee Stock Ownership Plan – In conjunction with the Parent’s initial public offering in 2011, the Bank established an ESOP to provide eligible employees the opportunity to own Parent stock. The Parent provided a loan to the ESOP in the amount of $4,468,000, which was used to purchase 446,764 shares of the Parent’s common stock at a price of $10.00 per share in the Parent’s initial public offering. The loan bears a fixed interest rate of 3.25% and provides for annual payments of interest and principal over the 15 year term of the loan.

The Bank committed to make contributions to the ESOP sufficient to support the debt service of the loan. The loan is secured by the shares purchased, which are held in a 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 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:

   
September 30,
2015
 
     
Allocated ESOP shares, December 31, 2014
   
98,624
 
ESOP shares committed to be released during the period
   
23,476
 
ESOP shares withdrawn during the period
   
(11,317
)
Unallocated ESOP shares
   
321,777
 
Total ESOP shares
   
432,560
 
         
Fair value of unallocated ESOP shares (dollars in thousands)
 
$
8,061
 

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 follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(Dollars in thousands)
 
2015
   
2014
   
2015
   
2014
 
                 
ESOP expense
 
$
177
   
$
157
   
$
500
   
$
440
 
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. BENEFIT PLANS (Continued)

2012 Equity Incentive Plan - The Company’s 2012 Equity Incentive Plan (the “2012 Equity Incentive Plan”) provides for awards of restricted stock and stock options to key officers and outside directors. Cost recognized under the 2012 Equity Incentive Plan is based on the fair value of restricted stock and stock option awards on their grant date.  The maximum number of shares that may be awarded under the plan is 781,837 shares, including 223,382 for restricted stock shares and 558,455 shares for stock options.

Shares of common stock granted under the 2012 Equity Incentive Plan may be issued from authorized but unissued shares or, in the case of restricted stock awards, may be awarded with shares purchased on the open market.  During 2012, the Company purchased the 223,382 shares of its common stock in the open market at a total cost of $3.6 million, or an average of $16.12 per share, through an independent trustee to fulfill anticipated restricted stock awards.  The share-based awards granted under the 2012 Equity Incentive Plan have some similar characteristics, except some awards have been granted in restricted stock and other awards have been granted in stock options.  Therefore, the following disclosures have been disaggregated for the restricted stock awards and the stock option grants under the plan due to their dissimilar characteristics.

Share-based compensation expenses related to restricted stock and stock options recognized for the three and nine months ended September 30, 2015 were $273,000 and $801,000, respectively, and were $267,000 and $1,204,000, respectively, for the same periods of 2014.  Compensation expense for the nine months ended September 30, 2014 included $380,000 that was recognized for accelerated vesting of restricted stock and stock options due to the medical disability of an executive officer.

The table below presents restricted stock award activity for the periods indicated:

   
Restricted
Stock
Awards
   
Weighted
Average
Grant Date
Fair Value
 
         
Unvested restricted shares at December 31, 2014
   
161,906
   
$
15.75
 
Vested and released to participants
   
(40,296
)
   
15.74
 
Unvested restricted shares at September 30, 2015
   
121,610
   
$
15.75
 

There were no restricted stock awards granted or forfeited during the nine-month period ended September 30, 2015.

At September 30, 2015, unrecognized compensation expense, adjusted for expected forfeitures, was $1.4 million related to restricted stock.  The weighted-average period over which compensation cost related to unvested awards is expected to be recognized was 2.38 years at September 30, 2015.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. BENEFIT PLANS (Continued)

The table below presents stock option activity for the periods indicated:

   
Stock
Options
Available For
Granting
   
Stock
Options
Outstanding
   
Weighted
Average
Exercise
Price
   
Remaining
Contractual
Life
(In Years)
   
Aggregate
Intrinsic
Value
(In Thousands)
 
                     
Outstanding at December 31, 2014
   
60,355
     
496,500
   
$
16.00
     
7.61
   
$
2,731
 
                                         
Exercised
   
-
     
(41,000
)
   
15.71
                 
Outstanding at September 30, 2015
   
60,355
     
455,500
   
$
16.03
     
7.49
   
$
4,111
 
                                         
Options exercisable at September 30, 2015
           
171,500
   
$
15.84
     
7.41
   
$
1,580
 

There were 41,000 stock options exercised during the nine-month period ended September 30,2015. There were no stock options granted or forfeited during the nine-month period ended September 30,2015.

The fair value of each option award is estimated on the date of the grant using the Black-Scholes option pricing model. The following table illustrates the weighted-average assumptions for the Black-Scholes model used in determining the fair value of options granted to directors and officers in the nine months ended September 30, 2014.

   
Nine Months Ended
September 30, 2014
 
     
Fair value per option award
 
$5.93
 
Expected life in years
 
6.5 years
 
Expected stock price volatility
 
27.03%
 
Expected dividend yield
 
0.00%
 
Risk-free interest rate
 
2.07%
 
Expected forfeiture rate
 
4.87%
 

At September 30, 2015, the Company had $1.0 million of unrecognized compensation expense related to stock options.  The weighted average period over which compensation cost related to unvested stock options is expected to be recognized was 2.61 years at September 30, 2015. There were 171,500 options vested and exercisable at September 30, 2015.
 
 ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
6. COMMITMENTS AND CONTINGENCIES

Loan Commitments - The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recorded in the accompanying consolidated balance sheets. Such financial instruments are recorded when they are funded.

The Bank’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the balance sheet.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial real estate.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
6. COMMITMENTS AND CONTINGENCIES (Continued)

The Bank’s commitments to extend or originate credit and under standby letters of credit follow:

(Dollars in thousands)
 
September 30,
2015
   
December 31,
2014
 
         
Financial instruments whose contract amounts represent credit risk:
       
Commitments to extend or originate credit
 
$
170,499
   
$
149,590
 
Commitments under standby letters of credit
   
494
     
36
 
Total
 
$
170,993
   
$
149,626
 

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.

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 factors, the Federal Reserve Board's purchase of government securities and/or mortgage-backed securities in an effort to further stimulate the economy. Accordingly, the Bank is carefully monitoring, through its Asset/Liability management process, the competitive landscape related to interest rates as well as various economic indicators in order to optimally position the Bank in terms of changes in interest rates.

Litigation - The Bank is periodically involved in legal actions in the normal course of business. The Bank is  not a party to any pending legal proceedings that, after consultation with its legal counsel, 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 2012, the Bank entered into an agreement to invest $2.0 million as a limited partner in a Small Business Investment Company. The Bank invested $350,000 of its investment commitment in 2013, $250,000 in 2014 and $200,000 in 2015.  This investment is recognized using the cost method and is included in “other assets” on the balance sheet.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
7. FAIR VALUE MEASUREMENTS

FASB ASC Topic 820: Fair Value Measurements and Disclosures (“FASB ASC Topic 820”) requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed below.  The estimated fair value amounts shown below have been determined by the Bank using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Bank could realize in a current market exchange. The use of different market assumptions and/or valuation methodologies could have a material effect on the estimated fair value amounts.

Fair value estimates are made at a specific point in time, based on relevant market information and  information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no highly liquid market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.

The fair value estimates presented below are based on pertinent information available to management as of  September 30, 2015 and December 31, 2014. 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, and corporate debt securities.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
7. 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, 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 are determined as discussed below. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest, Federal Home Loan Bank Stock and demand deposits.

Investment Securities – Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is primarily based upon quoted prices of like or similar securities, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. The fair values of investments in mutual funds are determined by quoted prices and are included as recurring Level 1 assets. The fair values of investments in securities issued by U.S. GSEs, asset-backed securities issued by the SBA, residential mortgage-backed securities issued by U.S. GSEs, and securities issued by state and local governments are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions and are included as recurring Level 2 assets.

Loans Held for Sale –Loans held for sale are residential mortgages carried at the lower of cost or market value. The market values of loans held for sale are based on what mortgage buyers are currently offering on a “best efforts” basis to buy the loans. As such, mortgages held for sale are classified as nonrecurring Level 2 assets.

Loans Receivable – For variable rate loans, carrying value is a reasonable estimate of fair value. For fixed rate loans, fair values are estimated based on discounted future cash flows using the current interest rates at which loans with similar terms would be made to borrowers of similar credit quality. Valuation adjustments are made for credit risk, which are represented by the allowance for loan losses, but do not include adjustments for illiquidity or other market risks.

The Bank does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with the accounting guidance contained in FASB ASC Topic 310: Receivables (“FASB ASC Topic 310”). The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Substantially all of the total impaired loans are evaluated based on the fair value of the collateral. In accordance with the fair value measurement and disclosure guidance contained in FASB ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
7. FAIR VALUE MEASUREMENTS (Continued)

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.

Federal Home Loan Bank Advances – The fair value of Federal Home Loan Bank advances is estimated using the rates currently offered for advances of similar remaining maturities.

Deferred Compensation Liabilities – Fair values are measured based on the fair values of the related deferred compensation assets.

Defined Benefit Plan Assets – The Nonqualified Defined Benefit Plan had no plan assets because it was not funded. The assets of the Qualified Defined Benefit Plan, which are invested in interest-bearing depository accounts and money market, debt and equity security mutual funds, are included at fair value in the Qualified Plan’s separate financial statements. Fair value measurement is based upon quoted prices of like or similar securities. The fair values of the Plan’s investments in interest-bearing depository accounts and money market, debt and equity security mutual funds are determined by quoted prices and are included as recurring Level 1 assets.

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.
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
7. FAIR VALUE MEASUREMENTS (Continued)

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

   
Fair Value Measurement Using
   
Total
 
(Dollars in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Estimated
Fair Value
   
Carrying
Amount In
Balance
Sheet
 
                     
September 30, 2015
                   
                     
Financial assets:
                   
Cash and cash equivalents
 
$
55,765
   
$
-
   
$
-
   
$
55,765
   
$
55,765
 
Securities available for sale
   
763
     
133,845
     
-
     
134,608
     
134,608
 
Securities held to maturity
   
-
     
4,157
     
-
     
4,157
     
3,851
 
Investments in FHLB stock
   
-
     
-
     
2,807
     
2,807
     
2,807
 
Loans held for sale
   
-
     
5,554
     
-
     
5,554
     
5,437
 
Loans receivable, net
   
-
     
-
     
564,633
     
564,633
     
562,788
 
Accrued interest receivable
   
-
     
-
     
2,261
     
2,261
     
2,261
 
Deferred compensation assets
   
1,299
     
-
     
-
     
1,299
     
1,299
 
                                         
Financial liabilities:
                                       
Demand deposits
   
-
     
-
     
489,519
     
489,519
     
489,519
 
Time deposits
   
-
     
-
     
145,561
     
145,561
     
145,564
 
Repurchase agreements
   
-
     
-
     
125
     
125
     
126
 
Federal Home Loan Bank Advances
   
-
     
-
     
52,912
     
52,912
     
50,000
 
Deferred compensation liabilities
   
1,303
     
-
     
-
     
1,303
     
1,303
 
Accrued interest payable
   
-
     
-
     
121
     
121
     
121
 
                                         
Financial instruments whose contract amounts represent credit risk:
                                       
Commitments to extend or originate credit
   
-
     
-
     
-
     
-
     
-
 
Commitments under standby letters of credit
   
-
     
-
     
-
     
-
     
-
 
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
7. FAIR VALUE MEASUREMENTS (Continued)

   
Fair Value Measurement Using
   
Total
 
(Dollars in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Estimated
Fair Value
   
Carrying
Amount In
Balance
Sheet
 
                     
December 31, 2014
                   
                     
Financial assets:
                   
Cash and cash equivalents
 
$
56,858
   
$
-
   
$
-
   
$
56,858
   
$
56,858
 
Securities available for sale
   
746
     
140,716
     
-
     
141,462
     
141,462
 
Securities held to maturity
   
-
     
4,363
     
-
     
4,363
     
3,999
 
Investments in FHLB stock
   
-
     
-
     
2,902
     
2,902
     
2,902
 
Loans held for sale
   
-
     
5,350
     
-
     
5,350
     
5,237
 
Loans receivable, net
   
-
     
-
     
516,752
     
516,752
     
515,871
 
Accrued interest receivable
   
-
     
-
     
2,230
     
2,230
     
2,230
 
Deferred compensation assets
   
1,418
     
-
     
-
     
1,418
     
1,418
 
                                         
Financial liabilities:
                                       
Demand deposits
   
-
     
-
     
449,286
     
449,286
     
449,286
 
Time deposits
   
-
     
-
     
153,994
     
153,994
     
154,093
 
Repurchase agreements
   
-
     
-
     
653
     
653
     
660
 
Federal Home Loan Bank Advances
   
-
     
-
     
53,382
     
53,382
     
50,000
 
Deferred compensation liabilities
   
1,418
     
-
     
-
     
1,418
     
1,418
 
Accrued interest payable
   
-
     
-
     
115
     
115
     
115
 
                                         
                                       
Financial instruments whose contract amounts represent credit risk:
                                       
Commitments to extend or originate credit
   
-
     
-
     
-
     
-
     
-
 
Commitments under standby letters of credit
   
-
     
-
     
-
     
-
     
-
 
 
ASB BANCORP, INC. AND SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
7. 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 nine months ended September 30, 2015.

(Dollars in thousands)
 
Fair Value Measurement Using
   
Total
     
Description
 
Level 1
   
Level 2
   
Level 3
   
Carrying
Amount In
Balance
Sheets
   
Assets/
Liabilities
Measured At
Fair Value
 
                     
September 30, 2015
                   
                     
Securities available for sale:
                   
U.S. GSE and agency securities
 
$
-
   
$
2,145
   
$
-
   
$
2,145
   
$
2,145
 
Asset-backed SBA securities
   
-
     
18,001
     
-
     
18,001
     
18,001
 
Residential mortgage-backed securities issued by GSEs
   
-
     
53,916
     
-
     
53,916
     
53,916
 
State and local government securities
   
-
     
59,783
     
-
     
59,783
     
59,783
 
Mutual funds
   
763
     
-
     
-
     
763
     
763
 
Total
 
$
763
   
$
133,845
   
$
-
   
$
134,608
   
$
134,608
 
                                         
Defined benefit plan assets:
                                       
Cash and cash equivalents
 
$
326
   
$
-
   
$
-
                 
Money market mutual funds
   
145
     
-
     
-
                 
Debt security mutual funds
   
13,295
     
-
     
-
                 
Equity security mutual funds
   
3,473
     
-
     
-
                 
Total
 
$
17,239
   
$
-
   
$
-
                 
                                         
December 31, 2014
                                       
                                         
Securities available for sale:
                                       
U.S. GSE and agency securities
 
$
-
   
$
2,138
   
$
-
   
$
2,138
   
$
2,138
 
Asset-backed SBA securities
   
-
     
28,465
     
-
     
28,465
     
28,465
 
Residential mortgage-backed securities issued by GSEs
   
-
     
67,421
     
-
     
67,421
     
67,421
 
State and local government securities
   
-
     
42,692
     
-
     
42,692
     
42,692
 
Mutual funds
   
746
     
-
     
-
     
746
     
746
 
Total
 
$
746
   
$
140,716
   
$
-
   
$
141,462
   
$
141,462
 
                                         
Defined benefit plan assets:
                                       
Cash and cash equivalents
 
$
489
   
$
-
   
$
-
                 
Money market mutual funds
   
145
     
-
     
-
                 
Debt security mutual funds
   
14,166
     
-
     
-
                 
Equity security mutual funds
   
3,553
     
-
     
-
                 
Total
 
$
18,353
   
$
-
   
$
-
                 
 
ASB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
7. 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 certain circumstances such as evidence of impairment in accordance with U.S. GAAP. Assets measured at fair value on a nonrecurring basis segregated by the level of the valuation inputs within the fair value hierarchy that were held for the periods indicated are in the table below.
 
(Dollars in thousands)
 
Fair Value Measurement Using
   
Total
     
0
Description
 
Level 1
   
Level 2
   
Level 3
   
Carrying
Amount In
Balance
Sheets (1)
   
Assets/
Liabilities
Measured At
Fair Value (1)
 
                     
September 30, 2015
                   
                     
Impaired loans
 
$
-
   
$
-
   
$
1,877
   
$
1,877
   
$
1,877
 
Foreclosed properties
   
-
     
-
     
4,906
     
4,906
     
4,906
 
                                         
December 31, 2014
                                       
                                         
Impaired loans
 
$
-
   
$
-
   
$
1,847
   
$
1,847
   
$
1,847
 
Foreclosed properties
   
-
     
-
     
4,341
     
4,341
     
4,341
 
 

(1)
Properties recorded at cost and not market are excluded.

There were no transfers between valuation levels for any asset during the nine-month period ended September 30, 2015.  If valuation techniques are deemed necessary, the Company considers those transfers  to occur at the end of the period when the assets are valued.

Quantitative Information About Level 3 Fair Value Measurements

The following table presents quantitative information about financial and nonfinancial assets measured at fair value on a nonrecurring basis using Level 3 valuation inputs:

(Dollars in thousands)
 
Fair
Value (1)
 
Valuation Technique
 
Unobservable Input
 
Discount
Range
(Weighted
Average)
 
               
September 30, 2015
             
               
Impaired loans
 
$
1,877
 
 Discounted appraisals (2)
 
 Collateral discounts (3)
   
0%-36% (22
%)
Foreclosed properties
   
4,906
 
 Discounted appraisals (2)
 
 Collateral discounts (3)
   
0%-40% (9
%)
                       
December 31, 2014
                     
                       
Impaired loans
 
$
1,847
 
 Discounted appraisals (2)
 
 Collateral discounts (3)
   
6%-35% (13
%)
Foreclosed properties
   
4,341
 
 Discounted appraisals (2)
 
 Collateral discounts (3)
   
0%-40% (9
%)
 

(1) Properties recorded at cost and not market are excluded.
(2) Fair value is generally based on appraisals of the underlying collateral.
(3) Appraisals of collateral may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.
 
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, growth and performance targets, 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;
increased cybersecurity risk, including potential business disruptions or financial losses;
changes in technology;
our ability to attract and retain key personnel;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board; and
the risks outlined in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2014.

Any of the forward-looking statements that we make in this quarterly report and in other public statements we make may later prove incorrect because of inaccurate assumptions, the factors illustrated above or other factors that we cannot foresee. Consequently, no forward-looking statement can be guaranteed.

Except as required by applicable law or regulation, ASB Bancorp, Inc. does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
 
Critical Accounting Policies

During the three- and nine-month periods ended September 30, 2015, 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, 2014 included in the Company’s Annual Report on Form 10-K.

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. The following represent our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to earnings. Management’s estimates of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impaired loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance monthly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the FDIC and the NCCoB, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect our earnings. See notes 1 and 4 included in the consolidated financial statements.

Fair Value of Investments. Securities are characterized as available for sale or held to maturity based on management’s ability and intent regarding such investment at acquisition. On an ongoing basis, management estimates the fair value of its investment securities based on information and assumptions it deems reliable and reasonable, which may be quoted market prices or if quoted market prices are not available, fair values extrapolated from the quoted prices of similar instruments. Based on this information, an assessment must be made as to whether any decline in the fair value of an investment security should be considered as an other than temporary impairment and recorded in noninterest income as a loss on investments. The determination of such impairment is subject to a variety of factors, including management’s judgment and experience. See notes 2 and 7 included in the consolidated financial statements.
 
Pension Plan. The Company has a noncontributory defined benefit pension plan. This plan is accounted for under the provisions of FASB ASC Topic 715: Compensation-Retirement Benefits (“FASB ASC Topic 715”), which requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The funded status of a benefit plan is measured as the difference between plan assets at fair value and the benefit obligation. For a pension plan, the benefit obligation is the projected benefit obligation. FASB ASC Topic 715 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. Management must make certain estimates and assumptions when determining the projected benefit obligation. These estimates and assumptions include the expected return on plan assets and the appropriate discount rate to be used in determining the present value of the obligation.  See notes 1 and 5 included in the consolidated financial statements.

Foreclosed Real Estate.  The Company's valuations of its foreclosed real estate involve significant judgments and assumptions by management, which have a material impact on the reported values of foreclosed real estate assets and noninterest expense recorded in the financial statements. The judgments and assumptions used by management are described in “Foreclosed Real Estate” under note 1 included in the consolidated financial statements.

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 September 30, 2015 and our operating performance for the three- and nine-month periods ended September 30, 2015. Readers seeking more in-depth information should read the more detailed discussions below as well as the consolidated financial statements and related notes included under Item 1 of this Quarterly Report on Form 10-Q.

All amounts presented are consolidated data unless otherwise specified. Uncertainty and future events could cause changes in accounting estimates that have material effects on the financial position and results of operations in future periods.
 
Comparison of Financial Condition at September 30, 2015 and December 31, 2014

The following table provides the changes in our significant asset and liability categories at September 30, 2015 compared to December 31, 2014.
 
(Dollars in thousands)
 
September 30,
2015
   
December 31,
2014
   
$ Change
   
% Change
 
                 
Interest-earning assets
               
Interest-earning deposits with banks and overnight and short-term investments
 
$
46,370
   
$
47,813
   
$
(1,443
)
   
-3.0
%
Investment securities
   
138,459
     
145,461
     
(7,002
)
   
-4.8
%
Investments held at cost
   
2,807
     
2,902
     
(95
)
   
-3.3
%
Loans held for sale
   
5,437
     
5,237
     
200
     
3.8
%
Loans receivable, net of deferred fees
   
569,085
     
521,820
     
47,265
     
9.1
%
Total interest-earning assets
   
762,158
     
723,233
     
38,925
     
5.4
%
                                 
Noninterest-earning assets
                               
Cash and due from banks
   
9,395
     
9,045
     
350
     
3.9
%
Allowance for loan losses
   
(6,297
)
   
(5,949
)
   
(348
)
   
-5.8
%
Premises and equipment, net of accumulated depreciation
   
11,763
     
11,932
     
(169
)
   
-1.4
%
Foreclosed real estate
   
8,871
     
8,814
     
57
     
0.6
%
Deferred income tax assets, net of deferred income tax liabilities
   
5,296
     
5,588
     
(292
)
   
-5.2
%
Other assets
   
6,670
     
7,387
     
(717
)
   
-9.7
%
Total noninterest-earning assets
   
35,698
     
36,817
     
(1,119
)
   
-3.0
%
                                 
Total assets
 
$
797,856
   
$
760,050
   
$
37,806
     
5.0
%
                                 
Interest-bearing liabilities
                               
Interest-bearing deposits
 
$
512,380
   
$
505,929
   
$
6,451
     
1.3
%
Overnight and short-term borrowings
   
126
     
660
     
(534
)
   
-80.9
%
Federal Home Loan Bank advances
   
50,000
     
50,000
     
-
     
0.0
%
Total interest-bearing liabilities
   
562,506
     
556,589
     
5,917
     
1.1
%
                                 
Noninterest-bearing liabilities
                               
Noninterest-bearing deposits
   
122,703
     
97,450
     
25,253
     
25.9
%
Accounts payable and other liabilities
   
13,911
     
11,614
     
2,297
     
19.8
%
Total noninterest-bearing liabilities
   
136,614
     
109,064
     
27,550
     
25.3
%
                                 
Total liabilities
   
699,120
     
665,653
     
33,467
     
5.0
%
                                 
Total equity
   
98,736
     
94,397
     
4,339
     
4.6
%
                                 
Total liabilities and equity
 
$
797,856
   
$
760,050
   
$
37,806
     
5.0
%
                                 
Cash and cash equivalents
 
$
55,765
   
$
56,858
   
$
(1,093
)
   
-1.9
%
Total core deposits (excludes certificate accounts)
   
489,519
     
449,286
     
40,233
     
9.0
%
Total certificates of deposit
   
145,564
     
154,093
     
(8,529
)
   
-5.5
%
Total deposits
   
635,083
     
603,379
     
31,704
     
5.3
%
Total funding liabilities
   
685,209
     
654,039
     
31,170
     
4.8
%
 
Assets. Total assets increased $37.8 million, or 5.0%, to $797.9 million at September 30, 2015 from $760.1 million at December 31, 2014. Cash and cash equivalents decreased $1.1 million, or 1.9%, to $55.8 million at September 30, 2015 from $56.9 million at December 31, 2014. Investment securities decreased $7.0 million, or 4.8%, to $138.5 million at September 30, 2015 from $145.5 million at December 31, 2014, primarily due to the sale of investment securities to fund loan growth. Loans receivable, net of deferred fees, increased $47.3 million, or 9.1%, to $569.1 million at September 30, 2015 from $521.8 million at December 31, 2014 as new loan originations exceeded loan repayments, prepayments and foreclosures.
 
   
Nine Months Ended
September 30,
 
(Dollars in thousands)
 
2015
   
2014
 
         
Loans originated:
       
Commercial:
       
Commercial mortgage
 
$
62,412
   
$
50,931
 
Construction and land development
   
18,361
     
11,328
 
Commercial and industrial
   
15,019
     
11,563
 
Non-commercial:
               
Residential mortgage
   
71,250
     
45,901
 
Construction and land development
   
26,721
     
17,839
 
Revolving mortgage
   
27,307
     
16,469
 
Consumer
   
15,112
     
17,618
 
Total loans originated
 
$
236,182
   
$
171,649
 
                 
Loan principal payments, prepayments and payoffs
 
$
127,693
   
$
100,800
 
                 
Residential mortgage loans sold
 
$
60,503
   
$
32,502
 
 
Nonperforming Assets. Nonperforming assets totaled $11.7 million, or 1.46% of total assets, at September 30, 2015 compared to $11.5 million, or 1.51% of total assets, at December 31, 2014. Nonperforming assets included $2.8 million in nonperforming loans and $8.9 million in foreclosed real estate at September 30, 2015 compared to $2.7 million and $8.8 million, respectively, at December 31, 2014.

Nonperforming loans increased $127,000 to $2.8 million, or 0.49% of total loans, at September 30, 2015 from $2.7 million, or 0.52% of total loans, at December 31, 2014.  Of the $127,000 increase in nonperforming loans for the nine months, $187,000 related to additional nonperforming residential mortgage loans and $24,000 related to commercial and industrial loans, which were partially offset by decreases in commercial mortgages, revolving mortgages and consumer loans. Collateral on nonperforming loans in the amount of $812,000 was moved into foreclosed real estate, while performing troubled debt restructurings (“TDRs”) decreased $74,000, or 1.5%, when comparing the same periods. Total performing TDRs and nonperforming assets increased $110,000, or 0.7%, to $16.4 million, or 2.06% of total assets, at September 30, 2015 compared to $16.3 million, or 2.15% of total assets, at December 31, 2014.

At September 30, 2015, nonperforming loans included eight residential mortgage loans that totaled $1.5 million, two commercial mortgage loans that totaled $824,000, four commercial and industrial loans that totaled $245,000 and three revolving home equity loans that totaled $204,000.  As of September 30, 2015, the nonperforming loans had specific reserves totaling $111,000.

TDRs were $5.7 million at September 30, 2015 and $5.8 million at December 31, 2014.  There were three additions to TDRs during the nine months ended September 30, 2015. At September 30, 2015, $1.0 million of the total $5.8 million of TDRs were not performing.
 
Foreclosed real estate at September 30, 2015 included nine properties with a total recorded amount of $8.9 million compared to ten properties with a total recorded amount of $8.8 million at December 31, 2014. During the nine months ended September 30, 2015, two new properties that totaled $812,000 were added to foreclosed real estate, while three properties that totaled $119,000 were sold. In addition, the Bank sold three of its 15 units in a mixed-use condominium complex for net proceeds of $508,000 along with two residential lots in a mixed-use lot subdivision and one parcel of land which was a portion of a residential property for net proceeds of $121,000.  We recorded $6,000 in loss provisions on foreclosed real estate during the first nine months of 2015, and there were no capital additions during the period.

Liabilities. Total deposits increased $31.7 million, or 5.3%, to $635.1 million at September 30, 2015 from $603.4 million at December 31, 2014.  During the nine months ended September 30, 2015, we continued our focus on core deposit growth, from which we exclude certificates of deposit.  Core deposits increased $40.2 million, or 9.0%, to $489.5 million at September 30, 2015 from $449.3 million at December 31, 2014.

Commercial checking and money market accounts increased $31.9 million, or 26.2%, to $153.5 million at September 30, 2015 from $121.6 million at December 31, 2014, reflecting expanded sources of lower cost funding that included a $25.2 million increase in commercial noninterest-bearing demand deposits. Our efforts to obtain new commercial deposit relationships in conjunction with making new commercial loans significantly contributed to this increase and reflects our commitment to establishing diversified relationships with business clients.

Since December 31, 2014, certificates of deposit decreased $8.5 million, or 5.5%, to $145.6 million at September 30, 2015 from $154.1 million at December 31, 2014 as we continued our focus on core deposit growth.  Accounts payable and other liabilities increased $2.3 million, or 19.8%, to $13.9 million at September 30, 2015 from $11.6 million at December 31, 2014.  The increase in accounts payable and other liabilities at September 30, 2015 was primarily attributable to a $1.0 million increase in escrowed payments from mortgage borrowers, a $605,000 increase in pension plan liabilities and a $513,000 increase in accrued income taxes.
 
Results of Operations for the Three Months Ended September 30, 2015 and 2014

Overview.  Net income was $1.1 million, or $0.28 per diluted share, for the quarter ended September 30, 2015 compared to $502,000, or $0.12 per diluted share, for the quarter ended September 30, 2014. Net interest income increased $595,000, which was the result of a $586,000 increase in total interest and dividend income and a $9,000 decrease in interest expense.  The provision for loan losses was $191,000 for the third quarter of 2015 compared to $240,000 for the same period of 2014.  Noninterest income increased $442,000 and noninterest expenses increased $213,000 during the third quarter of 2015 compared to the third quarter of 2014. Noninterest expenses for the third quarter increased primarily in compensation and employee benefits and data processing fees. The income tax provision increased $233,000 for the quarter ended September 30, 2015 compared to the same quarter of 2014.
 
   
Three Months Ended
September 30,
         
(Dollars in thousands)
 
2015
   
2014
   
$ Change
   
% Change
 
                 
Interest and dividend income
 
$
6,459
   
$
5,873
   
$
586
     
10.0
%
Interest expense
   
877
     
886
     
(9
)
   
-1.0
%
Net interest income
   
5,582
     
4,987
     
595
     
11.9
%
Provision for loan losses
   
191
     
240
     
(49
)
   
-20.4
%
Net interest income after provision for loan losses
   
5,391
     
4,747
     
644
     
13.6
%
Noninterest income
   
2,084
     
1,642
     
442
     
26.9
%
Noninterest expenses
   
5,837
     
5,624
     
213
     
3.8
%
Income before income tax provision
   
1,638
     
765
     
873
     
114.1
%
Income tax provision
   
496
     
263
     
233
     
88.6
%
Net income
   
1,142
     
502
     
640
     
127.5
%

Net Interest Income.  Net interest income increased by $595,000, or 11.9%, to $5.6 million for the three months ended September 30, 2015 compared to $5.0 million for the three months ended September 30, 2014. Total interest and dividend income increased $586,000, or 10.0%, to $6.5 million for the three months ended September 30, 2015 from $5.9 million for the three months ended September 30, 2014, primarily as a result of an increase of $84.5 million in average loan balances, partially offset by a 22 basis point decrease in the average yield on loans.  The average yield on mortgage-backed and other investment securities increased 31 basis points for the three months ended September 30, 2015 compared to the same period of 2014, which was partially offset by a decrease of $13.2 million in average mortgage-backed and other investment security balances. Interest expense decreased $9,000, or 1.0%, to $877,000 for the three months ended September 30, 2015 from $886,000 for the three months ended September 30, 2014, primarily due to a $12.0 million decrease in the average balances of certificates of deposit.  When comparing these same three-month periods, average noninterest-bearing deposits grew $27.0 million, or 29.9%, which contributed to minimizing deposit interest expense while deposit funding grew.
 
Interest income on loans increased $594,000, or 11.5%, to $5.8 million during the three months ended September 30, 2015, primarily due to an increase in average outstanding loans of $84.5 million, or 17.6%. Loan originations decreased $1.7 million for the three months ended September 30, 2015 compared to the three months ended September 30, 2014, while residential mortgage loan sales increased by $11.5 million. Loan principal repayments decreased $9.6 million to $40.7 million for the three months ended September 30, 2015 from $50.3 million for the three months ended September 30, 2014. The average balance of the investment portfolio decreased $13.2 million, or 8.7%, to $138.9 million for the three months ended September 30, 2015 as securities were sold in part to fund new loan originations.

Provision for Loan Losses. The provision for loan losses was $191,000 for the three months ended September 30, 2015 compared to $240,000 for the three months ended September 30, 2014.  The decrease in the provision for loan losses for the third quarter of 2015 was due to improvement in loan delinquencies and the credit quality of the loan portfolio, in addition to fewer charge-offs. The allowance for loan losses totaled $6.3 million, or 1.11% of total loans, at September 30, 2015 compared to $5.9 million, or 1.14% of total loans, at December 31, 2014. We charged off $46,000 in loans during the three months ended September 30, 2015 compared to $172,000 during the three months ended September 30, 2014.

Noninterest Income. Noninterest income increased $442,000, or 26.9%, to $2.1 million for the three months ended September 30, 2015 from $1.6 million for the three months ended September 30, 2014. Factors that contributed to the increase in noninterest income during the 2015 period included increases of $269,000 in mortgage banking income, $202,000 in net gains from the sale of investment securities, $79,000 in deposit and other service charge income and $36,000 from debit card services, which were partially offset by a decrease of $98,000 in loan fees. The increase in mortgage banking income was attributable to higher volumes of residential mortgage loans originated and sold. Increased transaction volume drove the rise in income from debit card services.

Noninterest Expenses.  Noninterest expenses increased $213,000, or 3.8%, to $5.8 million for the three months ended September 30, 2015 from $5.6 million for the three months ended September 30, 2014. The increase for the third quarter of 2015 was primarily attributable to increases of $326,000 in compensation and employee benefits and $74,000 in data processing fees, which were partially offset by decreases of $77,000 in professional and outside services and $74,000 in advertising. The increase in compensation and employee benefits included increases of $174,000 for employee incentives and $61,000 in pension plan expenses.

Income Tax Provision. Income tax provision increased $233,000 to $496,000 for the three months ended September 30, 2015 from $263,000 for the three months ended September 30, 2014, primarily due to an increase in pre-tax income. The effective tax rate was 30.28% for the three months ended September 30, 2015 compared to 34.38% for the three months ended September 30, 2014, with the decrease primarily resulting from the effects of favorable permanent tax differences relative to the size of the pre-tax income in 2015 compared to 2014 that was partially offset by a $34,000 increase in deferred state income taxes due to a reduction in the state income tax rate to 4% from 5%.
 
Results of Operations for the Nine Months Ended September 30, 2015 and 2014

Overview. Net income was $2.6 million or $0.65 per diluted common share, for the nine months ended September 30, 2015, compared to $1.8 million, or $0.43 per diluted common share, for the nine months ended September 30, 2014.  Income before income taxes increased $1.1 million, primarily due to an increase of $1.6 million in net interest income, an increase of $1.0 million in noninterest income, and a decrease of $215,000 in noninterest expenses, which were partially offset by an increase of $1.7 million in provision for loan losses.
 
   
Nine Months Ended
September 30,
         
(Dollars in thousands)
 
2015
   
2014
   
$ Change
   
% Change
 
                 
Interest and dividend income
 
$
18,902
   
$
17,385
   
$
1,517
     
8.7
%
Interest expense
   
2,618
     
2,659
     
(41
)
   
-1.5
%
Net interest income
   
16,284
     
14,726
     
1,558
     
10.6
%
Provision for (recovery of) loan losses
   
450
     
(1,218
)
   
1,668
     
136.9
%
Net interest income after provision for (recovery of) loan losses
   
15,834
     
15,944
     
(110
)
   
-0.7
%
Noninterest income
   
5,662
     
4,652
     
1,010
     
21.7
%
Noninterest expenses
   
17,619
     
17,834
     
(215
)
   
-1.2
%
Income before income tax provision
   
3,877
     
2,762
     
1,115
     
40.4
%
Income tax provision
   
1,248
     
915
     
333
     
36.4
%
Net income
   
2,629
     
1,847
     
782
     
42.3
%

Net Interest Income. Net interest income increased by $1.6 million, or 10.6%, to $16.3 million for the nine months ended September 30, 2015 compared to $14.7 million for the nine months ended September 30, 2014.  Interest income on loans increased $1.8 million, primarily resulting from an $85.1 million increase in the average loan balances, partially offset by a 23 basis point decrease in the average yield on loans.  Interest on securities decreased $260,000, attributable to a $22.5 million decrease in the average balance in mortgage-backed and other investment securities, partially offset by an 8 basis point increase in the average yield earned on the investment portfolio. Interest expense decreased $41,000, or 1.5%, for the nine months ended September 30, 2015. The lower interest expense was primarily attributable to lower average balances of certificates of deposit, as well as average rate reductions of 1 basis point each on certificates of deposit and savings accounts.  The decreases in interest expense were partially offset by higher average balances of NOW, money market and savings accounts. For the same nine-month periods, as was the case for the comparable quarterly periods, average noninterest-bearing deposits grew $4.8 million, or 19.1%, which contributed to minimizing deposit interest expense while deposit funding grew.

Provision for Loan Losses. We recorded a provision for loan losses in the amount of $450,000 for the nine months ended September 30, 2015 compared to a recovery of loan losses of $(1.2) million for the nine months ended September 30, 2014.  Net charge-offs were $102,000 for the first nine months of 2015 compared to $237,000 for the first nine months of 2014.  The increase in the nine-month provision for loan losses primarily resulted from a 2014 reduction in loan loss reserves due to a modification of our loan loss methodology for unimpaired commercial construction and land development, unimpaired residential construction and land development, and unimpaired commercial and industrial loans, which resulted in a nonrecurring reduction of approximately $1.3 million in the reserves for loans not considered impaired. The provision for loan losses for the nine-month period of 2015 was primarily due to loan growth.
 
Noninterest Income.  Noninterest income increased $1.0 million, or 21.7%, to $5.7 million for the nine months ended September 30, 2015 from $4.7 million for the nine months ended September 30, 2014. Factors that contributed to the increase in noninterest income during the 2015 period included increases of $686,000 in mortgage banking income, $194,000 in net gains from the sale of investment securities, $119,000 in fees from debit card services, $68,000 in deposit and other service charge income and $21,000 in income from an investment in a Small Business Investment Company. As was the case for the third quarter of 2015, the increase in mortgage banking income was attributable to higher volumes of residential mortgage loans originated and sold, and increased transaction volume that resulted in increased income from debit card services.

Noninterest Expenses. Noninterest expenses decreased $215,000, or 1.2%, to $17.6 million for the nine months ended September 30, 2015 from $17.8 million for the nine months ended September 30, 2014. The lower 2015 noninterest expenses primarily reflected decreases of $248,000 in foreclosed property expenses, $82,000 in occupancy expenses, $76,000 in advertising and $56,000 in professional and outside services, which were partially offset by increases of $195,000 in compensation and employee benefits, $63,000 in consumer loan expenses and $57,000 in indirect auto expenses. The decrease in foreclosed property expenses included a reduction of $119,000 in valuation write-downs of foreclosed properties. Compensation and employee benefits for the nine months ended September 30, 2015 included increases of $319,000 in incentive compensation expenses and $183,000 in pension plan expenses, which were partially offset by a decrease of $403,000 in equity incentive plan expenses primarily due to additional expense of $380,000 in 2014 for accelerated vesting related to the disability of a participant.

Income Tax Provision. Income tax expense increased by $333,000 for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, primarily due to an increase in pre-tax income. The effective tax rate was 32.19% for the nine months ended September 30, 2015 compared to 33.13% for the nine months ended September 30, 2014, with the decrease primarily resulting from an increase in favorable permanent tax differences relative to the size of the pre-tax income in 2015 compared to 2014 that was partially offset by a $34,000 increase in deferred state income taxes due to a reduction in the state income tax rate to 4% from 5%.

Average Balances and Yields

The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs are derived by dividing annualized income or expense by the average balances of assets or liabilities for the periods presented.  Average balances have been calculated using daily balances. Nonaccrual loans are included in average balances only.  Loan fees are included in interest income on loans and are not material.  The yields on tax exempt loans and municipal investment securities have been included on a tax-equivalent basis using a federal marginal tax rate of 34%.
 
   
For The Three Months Ended September 30,
 
   
2015
   
2014
 
(Dollars in thousands)
 
Average
Balance
   
Interest
And
Dividends
   
Yield/
Cost
   
Average
Balance
   
Interest
And
Dividends
   
Yield/
Cost
 
                         
Assets
                       
                         
Interest-earning deposits with banks
 
$
50,036
   
$
32
     
0.25
%
 
$
75,649
   
$
50
     
0.26
%
Loans receivable
   
564,562
     
5,762
     
4.05
%
   
480,074
     
5,168
     
4.27
%
Investment securities
   
66,741
     
421
     
3.31
%
   
49,054
     
292
     
3.11
%
Mortgage-backed and similar securities
   
72,182
     
211
     
1.16
%
   
103,088
     
336
     
1.29
%
Other interest-earning assets
   
2,807
     
33
     
4.66
%
   
2,902
     
27
     
3.69
%
Total interest-earning assets
   
756,328
     
6,459
     
3.46
%
   
710,767
     
5,873
     
3.33
%
Allowance for loan losses
   
(6,164
)
                   
(5,816
)
               
Noninterest-earning assets
   
42,061
                     
42,843
                 
                                                 
Total assets
 
$
792,225
                   
$
747,794
                 
                                                 
Liabilities and equity
                                               
                                                 
NOW accounts
 
$
152,710
     
55
     
0.14
%
 
$
148,727
     
52
     
0.14
%
Money market accounts
   
165,809
     
76
     
0.18
%
   
154,006
     
67
     
0.17
%
Savings accounts
   
46,877
     
11
     
0.09
%
   
38,870
     
10
     
0.10
%
Certificates of deposit
   
148,123
     
240
     
0.64
%
   
160,095
     
262
     
0.65
%
Total interest-bearing deposits
   
513,519
     
382
     
0.30
%
   
501,698
     
391
     
0.31
%
Overnight and short-term borrowings
   
159
     
-
     
0.00
%
   
271
     
-
     
0.00
%
Federal Home Loan Bank advances
   
50,000
     
495
     
3.93
%
   
50,000
     
495
     
3.93
%
Total interest-bearing liabilities
   
563,678
     
877
     
0.62
%
   
551,969
     
886
     
0.64
%
Noninterest-bearing deposits
   
117,214
                     
90,185
                 
Other noninterest-bearing liabilities
   
13,520
                     
9,884
                 
Total liabilities
   
694,412
                     
652,038
                 
                                                 
Total equity
   
97,813
                     
95,756
                 
                                                 
Total liabilities and equity
 
$
792,225
                   
$
747,794
                 
                                                 
Net interest income
         
$
5,582
                   
$
4,987
         
                                                 
Interest rate spread
                   
2.84
%
                   
2.69
%
Net interest margin
                   
3.00
%
                   
2.84
%
Average interest-earning assets to average interest-bearing liabilities
   
134.18
%
                   
128.77
%
               
 
   
For The Nine Months Ended September 30,
 
   
2015
   
2014
 
(Dollars in thousands)
 
Average
Balance
   
Interest
And
Dividends
   
Yield/
Cost
   
Average
Balance
   
Interest
And
Dividends
   
Yield/
Cost
 
                         
Assets
                       
                         
Interest-earning deposits with banks
 
$
52,166
   
$
104
     
0.27
%
 
$
77,139
   
$
162
     
0.28
%
Loans receivable
   
551,179
     
16,947
     
4.11
%
   
466,076
     
15,114
     
4.34
%
Investment securities
   
57,622
     
1,038
     
3.18
%
   
55,284
     
1,012
     
3.22
%
Mortgage-backed and similar securities
   
78,915
     
719
     
1.22
%
   
103,773
     
1,005
     
1.29
%
Other interest-earning assets
   
2,834
     
94
     
4.43
%
   
2,971
     
92
     
4.14
%
Total interest-earning assets
   
742,716
     
18,902
     
3.46
%
   
705,243
     
17,385
     
3.36
%
Allowance for loan losses
   
(6,109
)
                   
(6,792
)
               
Noninterest-earning assets
   
41,948
                     
46,564
                 
                                                 
Total assets
 
$
778,555
                   
$
745,015
                 
                                                 
Liabilities and equity
                                               
                                                 
NOW accounts
 
$
152,548
     
162
     
0.14
%
 
$
147,772
     
159
     
0.14
%
Money market accounts
   
161,322
     
216
     
0.18
%
   
153,896
     
202
     
0.18
%
Savings accounts
   
45,091
     
32
     
0.09
%
   
37,325
     
28
     
0.10
%
Certificates of deposit
   
151,684
     
739
     
0.65
%
   
161,986
     
800
     
0.66
%
Total interest-bearing deposits
   
510,645
     
1,149
     
0.30
%
   
500,979
     
1,189
     
0.32
%
Overnight and short-term borrowings
   
585
     
-
     
0.00
%
   
591
     
1
     
0.23
%
Federal Home Loan Bank advances
   
50,000
     
1,469
     
3.93
%
   
50,000
     
1,469
     
3.93
%
Total interest-bearing liabilities
   
561,230
     
2,618
     
0.62
%
   
551,570
     
2,659
     
0.64
%
Noninterest-bearing deposits
   
106,834
                     
83,926
                 
Other noninterest-bearing liabilities
   
13,641
                     
9,413
                 
Total liabilities
   
681,705
                     
644,909
                 
                                                 
Total equity
   
96,850
                     
100,106
                 
                                                 
Total liabilities and equity
 
$
778,555
                   
$
745,015
                 
                                                 
Net interest income
         
$
16,284
                   
$
14,726
         
                                                 
Interest rate spread
                   
2.84
%
                   
2.72
%
Net interest margin
                   
2.99
%
                   
2.85
%
Average interest-earning assets to average interest-bearing liabilities
   
132.34
%
                   
127.86
%
               
 
Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior period volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior period rate). The net column represents the sum of the volume and rate columns. Changes attributable to changes in both rate and volume have been allocated proportionally based on the absolute dollar amounts of change in each.
 
   
Three Months Ended September 30, 2015
Compared To The
Three Months Ended September 30, 2014
   
Nine Months Ended September 30, 2015
Compared To The
Nine Months Ended September 30, 2014
 
   
Increase (Decrease)
Due To:
       
Increase (Decrease)
Due To:
     
(Dollars in thousands)
 
Volume
   
Rate
   
Net
   
Volume
   
Rate
   
Net
 
                         
Interest income:
                       
Interest-earning deposits with banks
 
$
(16
)
 
$
(2
)
 
$
(18
)
 
$
(50
)
 
$
(8
)
 
$
(58
)
Loans receivable
   
873
     
(279
)
   
594
     
2,648
     
(815
)
   
1,833
 
Investment securities
   
111
     
18
     
129
     
42
     
(16
)
   
26
 
Mortgage-backed and similar securities
   
(93
)
   
(32
)
   
(125
)
   
(229
)
   
(57
)
   
(286
)
Other interest-earning assets
   
(1
)
   
7
     
6
     
(4
)
   
6
     
2
 
Total interest-earning assets
   
874
     
(288
)
   
586
     
2,407
     
(890
)
   
1,517
 
                                                 
Interest expense:
                                               
NOW accounts
   
1
     
2
     
3
     
5
     
(2
)
   
3
 
Money market accounts
   
5
     
4
     
9
     
10
     
4
     
14
 
Savings accounts
   
2
     
(1
)
   
1
     
6
     
(2
)
   
4
 
Certificates of deposit
   
(19
)
   
(3
)
   
(22
)
   
(50
)
   
(11
)
   
(61
)
Total interest-bearing deposits
   
(11
)
   
2
     
(9
)
   
(29
)
   
(11
)
   
(40
)
Overnight and short-term borrowings
   
-
     
-
     
-
     
-
     
(1
)
   
(1
)
Total interest-bearing liabilities
   
(11
)
   
2
     
(9
)
   
(29
)
   
(12
)
   
(41
)
                                                 
Net increase (decrease) in interest income
 
$
885
   
$
(290
)
 
$
595
   
$
2,436
   
$
(878
)
 
$
1,558
 

With the prolonged low interest rate environment, the interest rate component continues to reflect the pressures of net interest margin compression.  The growth in loans has led to favorable changes in the volume component and overall net interest income levels in 2015 compared to 2014.
 
Risk Management

Overview. Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for on a mark-to-market basis. Other risks that we face are operational risks, liquidity risk and reputation risk. Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.

Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. We do not offer Alt-A, sub-prime or no-documentation mortgage loans.

When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. When the loan becomes 15 days past due, a late notice is sent to the borrower. When the loan becomes 30 days past due, a more formal letter is sent. Between 15 and 30 days past due, telephone calls are also made to the borrower. After 30 days, we regard the borrower in default. At 60 days delinquent, the borrower may be sent a letter from our attorney and we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Generally, when a consumer loan becomes 60 days past due, we institute collection proceedings and attempt to repossess any personal property that secures the loan. Management informs the Board of Directors monthly of the amount of loans delinquent more than 30 days, all loans in foreclosure and repossessed property that we own.

Analysis of Nonperforming Assets and Classified Assets. We consider repossessed assets and loans that are 90 days or more past due and certain loans that are less than 90 days past due, but that we will not be able to collect the full amount of, to be nonperforming assets. Loans are generally placed on nonaccrual status when they become 90 days delinquent, or sooner if the facts and circumstances indicate that we will not be able to collect the full amount of the loan, at which time the accrual of interest ceases and accrued interest is reversed and deducted from income. Typically, payments received on a nonaccrual loan are first applied to the outstanding principal balance to the extent that principal is due and then recognized as interest income.

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. Property acquired through foreclosure is recorded at the lower of its cost or fair market value at the date of foreclosure. Any holding costs and declines in fair value after acquisition of the property result in charges against income.
 
The following table provides information with respect to our nonperforming assets at the dates indicated.
 
(Dollars in thousands)
 
September 30,
2015
   
December 31,
2014
   
$ Change
   
% Change
 
                 
Nonperforming loans:
               
                 
Nonaccruing loans (1)
               
Commercial:
               
Commercial mortgage
 
$
824
   
$
881
   
$
(57
)
   
-6.5
%
Commercial and industrial
   
245
     
221
     
24
     
10.9
%
Total commercial
   
1,069
     
1,102
     
(33
)
   
-3.0
%
Non-commercial:
                               
Residential mortgage
   
1,541
     
1,354
     
187
     
13.8
%
Revolving mortgage
   
204
     
230
     
(26
)
   
-11.3
%
Consumer
   
1
     
2
     
(1
)
   
-50.0
%
Total non-commercial
   
1,746
     
1,586
     
160
     
10.1
%
Total nonaccruing loans (1)
   
2,815
     
2,688
     
127
     
4.7
%
                                 
Total loans past due 90 or more days and still accruing
   
-
     
-
     
-
     
0.0
%
                                 
Total nonperforming loans
   
2,815
     
2,688
     
127
     
4.7
%
                                 
Foreclosed real estate
   
8,871
     
8,814
     
57
     
0.6
%
                                 
Total nonperforming assets
   
11,686
     
11,502
     
184
     
1.6
%
                                 
Performing troubled debt restructurings (2)
   
4,730
     
4,804
     
(74
)
   
-1.5
%
Performing troubled debt restructurings and total nonperforming assets
 
$
16,416
   
$
16,306
     
110
     
0.7
%
                                 
Allowance for loan losses
 
$
6,297
   
$
5,949
                 
                                 
Total loans
 
$
569,085
   
$
521,820
                 
                                 
Allowance as a percentage of total loans
   
1.11
%
   
1.14
%
               
Allowance as a percentage of nonperforming loans
   
223.69
%
   
221.32
%
               
Total nonperforming loans to total loans
   
0.49
%
   
0.52
%
               
Total nonperforming loans to total assets
   
0.35
%
   
0.35
%
               
Total nonperforming assets to total assets
   
1.46
%
   
1.51
%
               
Performing troubled debt restructurings and total nonperforming assets to total assets
   
2.06
%
   
2.15
%
               
 

(1) Nonaccruing loans include nonaccruing troubled debt restructurings.
(2) Performing troubled debt restructurings exclude nonaccruing troubled debt restructurings.
 
We periodically modify loans by extending loan terms or granting other concessions to help borrowers remain current and avoid foreclosure. These modified loans, also referred to as TDRs, totaled $5.8 million at September 30, 2015 and December 31, 2014. During the nine months ended September 30, 2015, three loans totaling $240,000 were restructured during the period. At September 30, 2015, $1.0 million of the total $5.8 million of TDRs were not performing according to their restructured terms and were included in the previous nonperforming assets table as nonaccruing loans.

Interest income that would have been recorded had nonaccruing loans been current according to their original terms amounted to $48,000 and $135,000 for the three- and nine-month periods ended September 30, 2015, respectively, compared to $41,000 and $100,000, respectively, for the comparable periods of 2014.  Interest income of $53,000 and $162,000 related to impaired loans was recognized for the three- and nine-month periods ended September 30, 2015, respectively, compared to $53,000 and $184,000, respectively, for the same periods of 2014.

At September 30, 2015, our nonaccruing loans of $2.8 million, including nonperforming TDRs, were primarily comprised of the following:

Commercial Mortgage Loans

Two loans to unrelated borrowers on commercial buildings located in Western North Carolina. As of September 30, 2015, the loans were considered impaired and nonaccruing with an aggregate balance of $824,000.  The Bank had a $10,000 specific reserve as of September 30, 2015.

Residential Mortgage Loans

Eleven loans to multiple unrelated borrowers on one-to-four family residential properties with an aggregate balance of $1.7 million as of September 30, 2015.

At September 30, 2015, our performing TDRs of $4.7 million included the following:

Commercial Mortgage Loans

One loan for the purchase of an existing mobile home park to be used for future development secured by nonowner-occupied commercial real estate located in coastal South Carolina. The loan was modified in the fourth quarter of 2014, which extended the terms of the loan and required scheduled principal payments. The future performance of the loan is dependent upon the guarantor group’s willingness and ability to service the debt. Such willingness and ability was demonstrated by the fact that, as of September 30, 2015, the loan was a performing TDR with a balance of $3.0 million that matures in May of 2017. As of September 30, 2015, the loan was considered impaired and had a specific reserve of $34,000.

Residential Mortgage Loans

Eleven loans to multiple unrelated borrowers on one-to-four family residential properties with an aggregate balance of $1.7 million as of September 30, 2015.
 
Foreclosed properties consisted of the following at the dates indicated.
 
   
September 30, 2015
   
December 31, 2014
 
(Dollars in thousands)
 
Number
   
Amount
   
Number
   
Amount
 
                 
By foreclosed loan type:
               
                 
Commercial construction and land development
   
7
   
$
8,102
     
8
   
$
8,706
 
Residential mortgage
   
2
     
769
     
2
     
108
 
Total
   
9
   
$
8,871
     
10
   
$
8,814
 
 
An analysis of foreclosed real estate follows:
 
(Dollars in thousands)
 
Nine Months Ended
September 30, 2015
 
     
Beginning balance
 
$
8,814
 
Transfers from loans
   
812
 
Loss provisions
   
(6
)
Loss on sale of foreclosed properties
   
(1
)
Net proceeds from sales of foreclosed properties
   
(748
)
Ending balance
 
$
8,871
 
 
The Bank’s largest foreclosed property resulted from a loan relationship that had an original purpose of constructing a mixed-use retail, commercial office, and residential condominium project located in Western North Carolina. As a result of this foreclosure, the Bank acquired 44 of the 48 condominium units in the building. Following an additional write-down of approximately $630,000 on the loans secured by this collateral in the fourth quarter of 2012, the Bank recorded this foreclosed property in the amount of $9.8 million.  During 2013, the Bank recorded additional write-downs totaling $1.6 million, which resulted in an adjusted recorded amount of $8.2 million at December 31, 2013.  During the year ended December 31, 2014, the Bank recorded an additional write-down of $133,000 on the property and sold 28 residential condominium units and one office unit.  During the first nine months of 2015, the Bank sold one retail unit and two office units.  At September 30, 2015, the adjusted recorded amount was $4.0 million for the remaining seven retail units and five office units.
 
Federal regulations require us to review and classify our assets on a regular basis. In addition, the FDIC and the NCCoB have the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful, and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable on the basis of currently existing facts, conditions, and values, and there is a high possibility of loss. Assets classified “loss” are considered uncollectible and of such little value that continued recognition as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose an institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving close attention. When we classify an asset as substandard or doubtful, we may establish a specific allowance for loan losses. If we classify an asset as loss, we charge off an amount equal to 100% of the portion of the asset classified loss.

The following table shows the aggregate amounts of our classified and special mention assets at the dates indicated.
 
(Dollars in thousands)
 
September 30,
2015
   
December 31,
2014
   
$ Change
   
% Change
 
                 
Adversely classified loans:
               
Substandard
 
$
3,997
   
$
4,303
   
$
(306
)
   
-7.1
%
Total adversely classified loans
   
3,997
     
4,303
     
(306
)
   
-7.1
%
Special mention loans
   
25,383
     
27,962
     
(2,579
)
   
-9.2
%
Total classified and special mention loans
   
29,380
     
32,265
     
(2,885
)
   
-8.9
%
                                 
Total other classified and special mention assets
   
-
     
-
     
-
     
0.0
%
                                 
Total classified and special mention assets
 
$
29,380
   
$
32,265
   
$
(2,885
)
   
-8.9
%
 
Other than as disclosed in the above tables and related discussions, there were no other loans where management had serious doubts about the ability of the borrowers to comply with the present loan repayment terms.

At September 30, 2015, substandard loans totaling $4.0 million included $2.5 million in nonaccruing loans that were previously discussed as nonperforming loans. The remaining $1.5 million in performing substandard loans included the following:

Commercial Mortgage Loans

Two loans to one borrower on two commercial properties located in western North Carolina. As of September 30, 2015, the loans were performing with a total balance of $622,000

Residential Mortgage Loans

Eleven loans to multiple unrelated borrowers for one-to-four family residential properties with an aggregate balance of $787,000 as of September 30, 2015.
 
Adversely classified assets include loans that are classified due to factors other than payment delinquencies, such as the absence of current financial statements and other required documentation, insufficient cash flows or other deficiencies, and therefore, are not included as nonperforming assets.

At September 30, 2015, special mention loans included the Bank’s largest performing TDR commercial mortgage as previously discussed.

Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities and borrowings from the Federal Home Loan Bank of Atlanta. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

We regularly adjust our investments in liquid assets based upon our assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on securities and interest-earning deposits we place with other banks, and (iv) the objectives of our asset-liability management policy.

Our most liquid assets are cash and cash equivalents and interest-bearing deposits.  The level of these assets depends on our operating, financing, lending and investing activities during any given period.  At September 30, 2015, cash and cash equivalents totaled $55.8 million, including $46.4 million in interest-bearing deposits in other banks, of which $40.0 million was on deposit with the Federal Reserve Bank.  Securities totaling $134.6 million at September 30, 2015 classified as available-for-sale provided an additional source of liquidity. In addition, at September 30, 2015, we had the ability to borrow a total of approximately $71.8 million from the Federal Home Loan Bank of Atlanta and approximately $14.7 million from the Federal Reserve Bank’s discount window. At September 30, 2015, we had $50.0 million in Federal Home Loan Bank advances outstanding and $5.5 million in letters of credit to secure public funds deposits.

A significant use of our liquidity is the funding of loan originations. At September 30, 2015, we had $170.5 million in commitments to extend credit outstanding, although we expect that significantly less will ultimately be funded. Certificates of deposit due within one year of September 30, 2015 totaled $85.6 million, or 58.8%, of total certificates of deposit. We believe the large percentage of certificates of deposit that mature within one year reflects customer hesitancy to invest funds for longer periods due to the continued low interest rate environment and local competitive pressure. If these maturing deposits do not remain with us, we may seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may pay higher rates on such deposits or other borrowings than we currently pay on the maturing certificates of deposit. However, based on past experience, we believe that a significant portion of our certificates of deposit will remain with us. We believe we have the ability to attract and retain deposits by adjusting the interest rates we offer.

In addition, we believe that our branch network, which is presently comprised of 13 full-service branch offices located throughout our primary market area, and the general cash flows from our existing lending and investment activities will afford us sufficient long-term liquidity.
 
The following tables present our contractual obligations as of the dates indicated.
 
       
Payments Due By Period
 
(Dollars in thousands)
 
Total
   
Less Than
One Year
   
One To
Three Years
   
Three To
Five Years
   
More Than
Five Years
 
                     
At September 30, 2015
                   
                     
Long-term debt obligations
 
$
50,000
   
$
-
   
$
50,000
   
$
-
   
$
-
 
Operating lease obligations
   
1,164
     
362
     
297
     
121
     
384
 
Total
 
$
51,164
   
$
362
   
$
50,297
   
$
121
   
$
384
 
                                         
At December 31, 2014
                                       
                                         
Long-term debt obligations
 
$
50,000
   
$
-
   
$
40,000
   
$
10,000
   
$
-
 
Operating lease obligations
   
1,436
     
362
     
523
     
121
     
430
 
Total
 
$
51,436
   
$
362
   
$
40,523
   
$
10,121
   
$
430
 

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 September 30, 2015, we exceeded all of our regulatory capital requirements and were considered “well capitalized” under regulatory guidelines.

We strive to manage our capital for maximum shareholder benefit. The capital from our October 2011 stock offering significantly increased our liquidity and capital resources. Over time, the initial level of liquidity was reduced as net proceeds from the stock offering were used for general corporate purposes, including the funding of lending activities.  Our financial condition and results of operations were enhanced by the capital from the offering, resulting over time in increased net interest-earning assets and net income.  However, the large increase in equity resulting from the capital raised in the conversion offering initially had an adverse impact on our return on equity. To help us better manage our capital, we repurchased shares of our common stock and may consider other capital deployment measures as regulations permit.

The Basel Committee on Banking Supervision, an international forum for cooperation on banking supervisory matters, promulgates capital standards for banking organizations. In July 2013, the federal bank regulatory agencies issued a final rule that revised their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”) and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more (such as the Company) and top-tier savings and loan holding companies, which we collectively refer to herein as “covered” banking organizations. The final rule became effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period for certain provisions), and all of the requirements in the final rule will be fully phased in by January 1, 2019.

The rule imposes higher risk-based capital and leverage requirements for covered banking institutions than those previously in place. Specifically, the rule imposes the following minimum capital requirements:

a new common equity Tier 1 risk-based capital ratio of 4.5%;

a Tier 1 risk-based capital ratio of 6% (increased from the previous 4% requirement);

a total risk-based capital ratio of 8% (unchanged from previous requirements); and

a leverage ratio of 4% (previously 3% for depository institutions with the highest supervisory composite rating and 4% for other depository institutions).
 
Under the rule, Tier 1 capital is redefined to include two components: Common Equity Tier 1 capital and additional Tier 1 capital. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as non-cumulative perpetual preferred stock. The rule permits bank holding companies with less than $15 billion in total consolidated assets to continue to include trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 capital, but not in Common Equity Tier 1 capital, subject to certain restrictions. Tier 2 capital consists of instruments that currently qualify in Tier 2 capital plus instruments that the rule has disqualified from Tier 1 capital treatment.

In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer will be phased in incrementally over time, becoming fully effective on January 1, 2019, and will consist of an additional amount of common equity equal to 2.5% of risk-weighted assets.

The previous capital rules require certain deductions from or adjustments to capital. The final rule retains many of these deductions and adjustments and also provides for new ones. As a result, deductions from Common Equity Tier 1 capital will be required for goodwill (net of associated deferred tax liabilities); intangible assets such as non-mortgage servicing assets and purchased credit card relationships (net of associated deferred tax liabilities); deferred tax assets that arise from net operating loss and tax credit carryforwards (net of any related valuations allowances and net of deferred tax liabilities); any gain on sale in connection with a securitization exposure; any defined benefit pension fund net asset (net of any associated deferred tax liabilities) held by a bank holding company (this provision does not apply to a bank or savings association); the aggregate amount of outstanding equity investments (including retained earnings) in financial subsidiaries; and identified losses. Other deductions will be necessary from different levels of capital.

Additionally, the final rule provides for the deduction of three categories of assets: (i) deferred tax assets arising from temporary differences that cannot be realized through net operating loss carrybacks (net of related valuation allowances and of deferred tax liabilities), (ii) mortgage servicing assets (net of associated deferred tax liabilities) and (iii) investments in more than 10% of the issued and outstanding common stock of unconsolidated financial institutions (net of associated deferred tax liabilities). The amount in each category that exceeds 10% of Common Equity Tier 1 capital must be deducted from Common Equity Tier 1 capital. The remaining, non-deducted amounts are then aggregated, and the amount by which this total amount exceeds 15% of Common Equity Tier 1 capital must be deducted from Common Equity Tier 1 capital. Amounts of minority investments in consolidated subsidiaries that exceed certain limits and investments in unconsolidated financial institutions may also have to be deducted from the category of capital to which such instruments belong.

Accumulated other comprehensive income (“AOCI”) is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The final rule provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. The Company elected to opt out of this one-time opportunity for the first quarter of 2015. The final rule also has the effect of increasing capital requirements by increasing the risk weights on certain assets, including high volatility commercial real estate, mortgage servicing rights not includable in Common Equity Tier 1 capital, equity exposures, and claims on securities firms, that are used in the denominator of the three risk-based capital ratios.
 
It is management’s belief that, as of September 30, 2015, the Company and the Bank would have met all capital adequacy requirements under Basel III on a fully phased-in basis if such requirements were effective at that time. Management expects that the capital ratios for the Company and Bank under Basel III will continue to exceed the well-capitalized minimum capital requirements.

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. (1)
                       
                         
September 30, 2015
                       
                         
Common equity tier I capital
 
$
104,512
     
18.33
%
 
$
25,653
     
4.50
%
 
$
37,054
     
6.50
%
Tier I leverage capital
   
104,512
     
13.09
%
   
31,926
     
4.00
%
   
39,908
     
5.00
%
Tier I risk-based capital
   
104,512
     
18.33
%
   
34,204
     
6.00
%
   
45,605
     
8.00
%
Total risk-based capital
   
110,812
     
19.44
%
   
45,605
     
8.00
%
   
57,006
     
10.00
%
                                                 
December 31, 2014
                                               
                                                 
Common equity tier I capital
   
n/a
 
   
n/a
 
   
n/a
 
   
n/a
 
   
n/a
 
   
n/a
 
Tier I leverage capital
   
100,199
     
13.17
%
   
30,442
     
4.00
%
   
38,052
     
5.00
%
Tier I risk-based capital
   
100,199
     
19.83
%
   
20,210
     
4.00
%
   
30,315
     
6.00
%
Total risk-based capital
   
106,149
     
21.01
%
   
40,420
     
8.00
%
   
50,525
     
10.00
%
                                                 
Asheville Savings Bank, S.S.B. (1)
                                         
                                                 
September 30, 2015
                                               
                                                 
Common equity tier I capital
 
$
93,983
     
16.51
%
 
$
25,623
     
4.50
%
 
$
37,012
     
6.50
%
Tier I leverage capital
   
93,983
     
11.82
%
   
31,813
     
4.00
%
   
39,766
     
5.00
%
Tier I risk-based capital
   
93,983
     
16.51
%
   
34,164
     
6.00
%
   
45,553
     
8.00
%
Total risk-based capital
   
100,283
     
17.61
%
   
45,553
     
8.00
%
   
56,941
     
10.00
%
NC Savings Bank capital
   
100,283
     
12.61
%
   
39,753
     
5.00
%
   
n/a
 
   
n/a
 
                                                 
December 31, 2014
                                               
                                                 
Common equity tier I capital
   
n/a
 
   
n/a
 
   
n/a
 
   
n/a
 
   
n/a
 
   
n/a
 
Tier I leverage capital
   
93,044
     
12.26
%
   
30,353
     
4.00
%
   
37,942
     
5.00
%
Tier I risk-based capital
   
93,044
     
18.43
%
   
20,195
     
4.00
%
   
30,293
     
6.00
%
Total risk-based capital
   
98,994
     
19.61
%
   
40,390
     
8.00
%
   
50,488
     
10.00
%
NC Savings Bank capital
   
98,994
     
13.07
%
   
37,870
     
5.00
%
   
n/a
 
   
n/a
 
 

(1) Regulatory capital ratios are based on BASEL III capital standards for 2015 and BASEL I capital standards for 2014.
 
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 nine months ended September 30, 2015 and the year ended December 31, 2014, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk Management. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk emphasizes: adjusting the maturities of borrowings; adjusting the investment portfolio mix and duration; and, generally selling in the secondary market substantially all newly originated fixed rate one-to-four family residential real estate loans. We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments.

We have an Asset/Liability Management Committee (“ALCO”) which includes our Chairman of the Board and an additional director, both of whom are independent directors, and members of senior management, to communicate, coordinate and control all aspects involving asset-liability management. The Committee meets quarterly to establish and monitor the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest and net income.

Interest Rate Risk Analysis. Our profitability depends to a large extent on our net interest income, which is the difference between interest income from loans and investments and interest expense on deposits and borrowings. Like most financial institutions, our interest income and interest expense are significantly affected by changes in market interest rates and other economic factors beyond our control. Our interest-earning assets consist of fixed and floating rate loans and investment securities that generally adjust more slowly to changes in interest rates than our interest-bearing liabilities, which are primarily non-maturity deposits. Accordingly, our earnings are usually adversely affected during periods of rising interest rates and positively impacted during periods of declining interest rates. The recent periods of sustained historically low interest rates have also reduced our net interest margins as we could not lower our cost of interest-bearing liabilities commensurate with the reductions in the yields on our interest-earning assets.

We implement an interest rate risk simulation model to determine our possible adverse exposure to net interest income and economic value of equity due to changes in interest rates, repricing risk, yield curve risk and basis risk. Our internal simulation model evaluates our projected future net interest income and economic value of equity under various interest rate scenarios and applies certain contractual and behavioral assumptions to calculate results in an increasing rate scenario, in a decreasing rate scenario and in a constant rate scenario. The major assumptions applied to our internal simulation model include, but are not limited to, the present value discounting method, calculated and reported rate shock and rate ramp scenarios, key rates, curves and spreads, internal rate restrictions (such as rate floors and caps and teaser rates), prepay and decay tables and interest rate exposure limits.
 
Based on the results of our internal simulation model, which management believes accurately reflects the extraordinary stress currently existing in the financial markets with respect to potential margin compression resulting from our difficulty in reducing our costs of funds further in the current competitive pricing environment, our earnings may be adversely affected if interest rates were to further decline. Such a decline could result from, among other things, the Federal Reserve Board’s purchase of government securities and/or mortgage-backed securities in an effort to further stimulate the national economy. Although the current rate environment remains stable, we continue to carefully monitor, through our Asset/Liability Committee management process, the competitive landscape related to interest rates as well as various economic indicators in order to best position ourselves with respect to changing interest rates.

The following table reflects the estimated effects of changes in interest rates on the present value of our equity and on our projected net interest income over the next twelve months.
 
   
As Of September 30, 2015
   
Over The Next Twelve Months
Ending September 30, 2016
 
   
Present Value Of Equity
   
Projected Net Interest Income
 
(Dollars in thousands)
 
Market
Value
   
$ Change
   
% Change
   
Net Interest
Income
   
$ Change
   
% Change
 
                         
Change in Rates
                       
(in Basis Points “BP”):
                       
                         
300 BP
 
$
101,079
   
$
(23,008
)
   
-18.54
%
 
$
22,337
   
$
224
     
1.01
%
200
   
108,517
     
(15,570
)
   
-12.55
%
   
21,879
     
(234
)
   
-1.06
%
100
   
116,659
     
(7,428
)
   
-5.99
%
   
21,961
     
(152
)
   
-0.69
%
0
   
124,087
     
-
     
0.00
%
   
22,113
     
-
     
0.00
%
(100)
   
122,425
     
(1,662
)
   
-1.34
%
   
20,633
     
(1,480
)
   
-6.69
%
 
Item 4. Controls and Procedures

The Company’s management has carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of its “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act during the quarter ended September 30, 2015.  In connection with the above evaluation of the effectiveness of the Company's disclosure controls and procedures, no changes in its internal control over financial reporting were identified as having occurred during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incidental to our business. We are not a party to any pending legal proceedings that, after consultation with legal counsel, we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

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 for the year ended December 31, 2014, filed with the SEC on March 13, 2015.  We do not believe that there have been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company’s purchases of its common stock made during the quarter consisted of stock repurchases under the Company’s approved plan and are set forth in the following table.

Period
 
Total
Number
Of Shares
Purchased
   
Average
Price Paid
Per Common
Share
   
Total
Number Of
Shares
Purchased
As Part Of
Publicly
Announced
Programs
   
Maximum
Number Of
Shares That
May Yet Be
Purchased
Under The
Plan Or
Programs
 
July 1 - July 31, 2015
   
14,145
   
$
22.65
     
14,145
     
204,775
 
August 1 - August 31, 2015
   
-
     
-
     
-
     
204,775
 
September 1 - September 30, 2015
   
-
     
-
     
-
     
204,775
 
Total
   
14,145
   
$
22.65
     
14,145
     
204,775
 
 
On March 31, 2015, the Company announced that the Company's Board of Directors approved a stock repurchase program whereby the Company may repurchase up to 5%, or 218,920 shares, of its outstanding common stock as and when deemed appropriate by management and under any plan that may be deployed in accordance with Rule 10b5-1 of the Exchange Act of 1934.  The Rule 10b5-1 repurchase plan allows the Company to repurchase its shares during periods when it would normally not be active in the market due to its internal blackout period. During the third quarter of 2015, a total of 14,145 shares of common stock were repurchased under this plan at an average cost of $22.65.

The following table sets forth information as of September 30, 2015 regarding shares of our common stock that may be issued upon exercise of options previously granted and currently outstanding under our stock option plans, as well as the number of shares available for the grant of options that had not been granted as of that date.

Plan Category
 
Number Of Securities To
Be Issued Upon Exercise
Of Outstanding Options
Warrants And Rights
(a)
   
Weighted-Average
Exercise Price
Of Outstanding Options
Warrants And Rights
(b)
   
Number Of Securities
Remaining Available For
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected In
Column (a)
(c)
 
             
Equity compensation plans approved by security holders
   
455,500
   
$
16.03
     
60,355
 
Equity compensation plans not approved by security holders
   
     
n/a
 
   
 
Total
   
455,500
   
$
16.03
     
60,355
 
 
Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits
 
3.1
Articles of Incorporation of ASB Bancorp, Inc. (1)
3.2
Bylaws of ASB Bancorp, Inc. (1)
3.3
Amendment of the Bylaws of ASB Bancorp, Inc., adopted September 15, 2014 (2)
4.1
Form of Common Stock Certificate of ASB Bancorp, Inc. (1)
Rule 13a-14(a) Certification of Chief Executive Officer
Rule 13a-14(a) Certification of Chief Financial Officer
Section 1350 Certifications
101.0
     
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL(Extensible Business Reporting Language):  (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

 
(1)
Incorporated herein by reference to the exhibits to ASB Bancorp, Inc.’s Registration Statement on Form S-1 (File No. 333-174527), filed with the SEC 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 SEC on September 19, 2014.
 
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
       
November 6, 2015
By:
 
/s/ SUZANNE S. DEFERIE
     
Suzanne S. DeFerie
     
President and Chief Executive Officer
     
(Principal Executive Officer)
       
November 6, 2015
By:
 
/s/ KIRBY A. TYNDALL
     
Kirby A. Tyndall
     
Executive Vice President and Chief Financial Officer
     
(Principal Financial and Accounting Officer)
 
 
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