ASB Bancorp Inc - FORM 10-Q

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EX-10.1 - EXHIBIT 10.1 - ASB Bancorp Inc	ex10_1.htm
EX-10.4 - EXHIBIT 10.4 - ASB Bancorp Inc	ex10_4.htm
EX-31.1 - EXHIBIT 31.1 - ASB Bancorp Inc	ex31_1.htm
EX-10.3 - EXHIBIT 10.3 - ASB Bancorp Inc	ex10_3.htm
EX-10.2 - EXHIBIT 10.2 - ASB Bancorp Inc	ex10_2.htm
EX-32.0 - EXHIBIT 32.0 - ASB Bancorp Inc	ex32_0.htm
EX-31.2 - EXHIBIT 31.2 - ASB Bancorp Inc	ex31_2.htm

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 June 30, 2015

☐	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 4,384,657 shares of Common Stock, par value $0.01 per share, issued and outstanding as of July 31, 2015.

ASB BANCORP, INC.

FORM 10-Q

Table Of Contents

		Begins On Page

Part I.	Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets (Unaudited) At June 30, 2015 and December 31, 2014	1

	Consolidated Statements of Income (Unaudited) For the Three and Six Months Ended June 30, 2015 and 2014	2

	Consolidated Statements of Comprehensive Income (Loss) (Unaudited) For the Three and Six Months Ended June 30, 2015 and 2014	3

	Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) For the Six Months Ended June 30, 2015	4

	Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2015 and 2014	5

	Notes to Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65

Item 4.	Controls and Procedures	67

Part II.	Other Information

Item 1.	Legal Proceedings	67

Item 1A.	Risk Factors	67

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68

Item 3.	Defaults Upon Senior Securities	69

Item 4.	Mine Safety Disclosures	69

Item 5.	Other Information	69

Item 6.	Exhibits	69

Signatures		70

Table of Contents

PART I.

FINANCIAL INFORMATION

Item 1. Financial Statements

ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands, except par values)	June 30, 2015				December 31, 2014*

Assets
Cash and due from banks	$	11,020		$	9,045
Interest-earning deposits with banks		41,970			47,813
Total cash and cash equivalents		52,990			56,858

Securities available for sale (amortized cost of $135,622 at June 30, 2015 and $141,266 at December 31, 2014)		134,813			141,462
Securities held to maturity (estimated fair value of $4,209 at June 30, 2015 and $4,363 at December 31, 2014)		3,899			3,999
Investment in Federal Home Loan Bank stock, at cost		2,807			2,902
Loans held for sale		8,192			5,237
Loans receivable (net of deferred loan fees of $611 at June 30, 2015 and $706 at December 31, 2014)		552,999			521,820
Allowance for loan losses		(6,124	)		(5,949	)
Loans receivable, net		546,875			515,871

Premises and equipment, net		11,823			11,932
Foreclosed real estate		9,381			8,814
Deferred income tax assets, net		5,511			5,588
Other assets		7,008			7,387

Total assets	$	783,299		$	760,050

Liabilities
Noninterest-bearing deposits	$	113,984		$	97,450
Interest-bearing deposits		509,979			505,929
Total deposits		623,963			603,379
Overnight and short-term borrowings		224			660
Federal Home Loan Bank advances		50,000			50,000
Accounts payable and other liabilities		12,949			11,614

Total liabilities		687,136			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; 4,378,411 shares issued at June 30, 2015 and December 31, 2014		44			44
Additional paid-in capital		34,152			34,047
Retained earnings		74,000			72,513
Accumulated other comprehensive loss, net of tax		(6,433	)		(5,802	)
Unearned Employee Stock Ownership Plan (ESOP) shares		(3,297	)		(3,452	)
Unearned equity incentive plan shares		(1,960	)		(2,610	)
Stock-based deferral plan shares		(343	)		(343	)

Total shareholders’ equity		96,163			94,397

Total liabilities and shareholders’ equity	$	783,299		$	760,050

* Derived from audited consolidated financial statements.

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

Table of Contents

ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in thousands, except per share data)	2015		2014			2015		2014

Interest and dividend income
Loans, including fees	$	5,664	$	5,024		$	11,185	$	9,946
Securities		557		653			1,125		1,389
Other earning assets		68		94			133		177

Total interest and dividend income		6,289		5,771			12,443		11,512

Interest expense
Deposits		390		395			767		798
Overnight and short-term borrowings		-		1			-		1
Federal Home Loan Bank advances		490		490			974		974

Total interest expense		880		886			1,741		1,773

Net interest income		5,409		4,885			10,702		9,739

Provision for (recovery of) loan losses		65		(1,390	)		259		(1,458	)

Net interest income after provision for (recovery of) loan losses		5,344		6,275			10,443		11,197

Noninterest income
Mortgage banking income		498		216			853		436
Deposit and other service charge income		618		626			1,201		1,212
Income from debit card services		462		425			882		799
Gain on sale of investment securities, net		143		93			199		207
Other noninterest income		247		194			443		356

Total noninterest income		1,968		1,554			3,578		3,010

Noninterest expenses
Salaries and employee benefits		3,344		3,521			6,688		6,819
Occupancy expense, net		444		482			912		969
Foreclosed property expenses		54		242			120		392
Data processing fees		623		674			1,200		1,322
Federal deposit insurance premiums		124		141			249		274
Advertising		146		161			260		262
Professional and outside services		276		277			476		455
Other noninterest expenses		999		852			1,877		1,717

Total noninterest expenses		6,010		6,350			11,782		12,210

Income before income tax provision		1,302		1,479			2,239		1,997

Income tax provision		437		538			752		652

Net income	$	865	$	941		$	1,487	$	1,345

Net income per common share – Basic	$	0.22	$	0.22		$	0.38	$	0.31
Net income per common share – Diluted	$	0.22	$	0.21		$	0.37	$	0.30

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

Table of Contents

ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2015			2014			2015			2014

Comprehensive Income (Loss)
Net income	$	865		$	941		$	1,487		$	1,345
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale:
Reclassification of securities gains recognized in net income		(143	)		(93	)		(199	)		(207	)
Deferred income tax benefit		53			35			74			78
Gains (losses) arising during the period		(1,673	)		1,560			(806	)		3,837
Deferred income tax benefit (expense)		625			(587	)		300			(1,443	)
Unrealized holding gains (losses) adjustment, net of tax		(1,138	)		915			(631	)		2,265

Defined Benefit Pension Plans:
Net periodic pension cost		194			144			389			287
Net pension loss		(194	)		(144	)		(389	)		(287	)

Total other comprehensive income (loss)		(1,138	)		915			(631	)		2,265

Comprehensive income (loss)	$	(273	)	$	1,856		$	856		$	3,610

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

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ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands)	Six Months Ended June 30, 2015

Common stock
December 31, 2014	$	44
June 30, 2015	$	44

Additional paid-in capital
December 31, 2014	$	34,047
ESOP shares allocated		168
Stock-based compensation expense		587
Vesting of restricted stock		(650	)
June 30, 2015	$	34,152

Retained earnings
December 31, 2014	$	72,513
Net income		1,487
June 30, 2015	$	74,000

Accumulated other comprehensive income (loss), net of tax
December 31, 2014	$	(5,802	)
Other comprehensive loss		(631	)
June 30, 2015	$	(6,433	)

Unearned ESOP shares
December 31, 2014	$	(3,452	)
ESOP shares allocated		155
June 30, 2015	$	(3,297	)

Unearned equity incentive plan shares
December 31, 2014	$	(2,610	)
Vesting of restricted stock		650
June 30, 2015	$	(1,960	)

Stock-based deferral plan shares
December 31, 2014	$	(343	)
June 30, 2015	$	(343	)

Total shareholders’ equity
December 31, 2014	$	94,397
Net income		1,487
Other comprehensive loss		(631	)
ESOP shares allocated		323
Stock-based compensation expense		587
June 30, 2015	$	96,163

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

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ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Six Months Ended June 30,
(Dollars in thousands)	2015			2014

Operating Activities
Net income	$	1,487		$	1,345
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (recovery of) loan losses		259			(1,458	)
Provision for losses on foreclosed properties		-			154
Depreciation		421			467
Gain on sale of fixed and other assets		(20	)		(1	)
Loss on sale of foreclosed real estate		1			25
Deferred income tax expense		451			885
Net amortization of premiums on securities		1,323			1,752
Gain on sale of investment securities		(199	)		(207	)
Net accretion of deferred fees on loans		(46	)		(37	)
Mortgage loans originated for sale		(39,686	)		(19,253	)
Proceeds from sale of mortgage loans		37,584			21,072
Gain on sale of mortgage loans		(853	)		(436	)
ESOP compensation expense		323			284
Stock-based compensation expense		528			937
Excess tax benefits from equity awards		(59	)		(26	)
Decrease (increase) in income tax receivable		218			(217	)
Decrease in interest receivable		13			327
Net change in other assets and liabilities		1,542			1,028

Net cash provided by operating activities		3,287			6,641

Investing Activities
Purchases of securities available for sale		(52,209	)		(18,117	)
Proceeds from sales of securities available for sale		50,624			47,679
Principal repayments on mortgage-backed and asset-backed securities		6,205			8,172
Redemption of FHLB stock		95			229
Net increase in loans receivable		(32,029	)		(22,993	)
Additions to foreclosed real estate		-			(269	)
Net proceeds from sales of foreclosed real estate		244			4,121
Purchases of premises and equipment		(312	)		(118	)
Net proceeds from sales of fixed and other assets		20			-

Net cash provided by (used in) investing activities		(27,362	)		18,704

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

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ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited)

	Six Months Ended June 30,
(Dollars in thousands)	2015			2014

Financing Activities
Net increase in deposits	$	20,584		$	19,897
Net repayments of overnight and short-term borrowings		(436	)		(396	)
Proceeds from the exercise of stock options		-			25
Excess tax benefits from equity awards		59			26
Common stock repurchased		-			(3,863	)

Net cash provided by financing activities		20,207			15,689

Net increase (decrease) in cash and cash equivalents		(3,868	)		41,034
Cash and cash equivalents at beginning of period		56,858			52,791

Cash and cash equivalents at end of period	$	52,990		$	93,825

SUPPLEMENTAL DISCLOSURES:

Cash paid for:
Interest on deposits, advances and other borrowings	$	1,754		$	1,783

Non-cash investing and financing transactions:
Transfers from loans to foreclosed real estate	$	812		$	173
Increase (decrease) in unrealized gains and losses on securities available for sale		(806	)		3,837
Increase (decrease) in deferred income taxes resulting from other comprehensive income		374			(1,365	)

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

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These interim financial statements do not contain all necessary disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for a complete set of financial statements and, therefore, should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K of ASB Bancorp, Inc. 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 six months ended June 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.

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans – Loans that management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized fees and costs on originated loans. The net amount of nonrefundable loan origination fees and certain direct costs associated with the lending processes are deferred and amortized to interest income over the contractual lives of the loans.

Loan Segments and Classes

The Bank’s portfolio segments and classes within those segments are subject to risks that could have an adverse impact on the credit quality of the loan portfolio. Management has identified the risks described below as significant risks that are generally similar among the loan segments and classes.

Commercial Loan Segment

The Bank’s commercial loans are centrally underwritten based primarily on the customer’s ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. The Bank’s commercial lenders and underwriters work to understand the borrower’s businesses and management experiences. The majority of the Bank’s commercial loans are secured by collateral, so collateral values are important to the transaction. In commercial loan transactions where the principals or other parties provide personal guarantees, the Bank’s commercial lenders and underwriters analyze the relative financial strength and liquidity of each guarantor. Risks that are common to the Bank’s commercial loan classes include general economic conditions, demand for the borrowers’ products and services, the personal circumstances of the principals, and reductions in collateral values.

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

Commercial Construction and Land Development loans are highly dependent on the supply and demand for commercial real estate in the Bank’s markets as well as the demand for the newly constructed residential homes and lots being developed by the Bank’s commercial loan 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.

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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.

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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.

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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.

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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.

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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 June 30, 2015

Unrealized gain (loss) on securities	$	631		$	(1,048	)	$	(90	)	$	(1,138	)	$	(507	)
Benefit plan liability		(5,926	)		(122	)		122			-			(5,926	)
Accumulated other comprehensive income (loss), net of tax	$	(5,295	)	$	(1,170	)	$	32		$	(1,138	)	$	(6,433	)

Three Months Ended June 30, 2014

Unrealized loss on securities	$	(1,602	)	$	973		$	(58	)	$	915		$	(687	)
Benefit plan liability		(4,421	)		(90	)		90			-			(4,421	)
Accumulated other comprehensive income (loss), net of tax	$	(6,023	)	$	883		$	32		$	915		$	(5,108	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(Dollars in thousands)	Beginning Balance			OCI Before Reclassification			Amount Reclassified			Net OCI			Ending Balance

Six Months Ended June 30, 2015

Unrealized gain (loss) on securities	$	124		$	(506	)	$	(125	)	$	(631	)	$	(507	)
Benefit plan liability		(5,926	)		(244	)		244			-			(5,926	)
Accumulated other comprehensive income (loss), net of tax	$	(5,802	)	$	(750	)	$	119		$	(631	)	$	(6,433	)

Six Months Ended June 30, 2014

Unrealized loss on securities	$	(2,952	)	$	2,394		$	(129	)	$	2,265		$	(687	)
Benefit plan liability		(4,421	)		(179	)		179			-			(4,421	)
Accumulated other comprehensive income (loss), net of tax	$	(7,373	)	$	2,215		$	50		$	2,265		$	(5,108	)

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 June 30, 2015			Three Months Ended June 30, 2014

Reclassification of securities gains recognized in net income	$	(143	)	$	(93	)	Gain on sale of investment securities
Deferred income tax expense		53			35		Income tax provision
Total reclassifications for the period	$	(90	)	$	(58	)	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

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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)	Six Months Ended June 30, 2015			Six Months Ended June 30, 2014

Reclassification of securities gains recognized in net income	$	(199	)	$	(207	)	Gain on sale of investment securities
Deferred income tax expense		74			78		Income tax provision
Total reclassifications for the period	$	(125	)	$	(129	)	Net of tax

Net periodic pension benefit	$	389		$	287		Salaries and employee benefits
Deferred income tax expense		(145	)		(108	)	Income tax provision
Total reclassifications for the period	$	244		$	179		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 2011 and thereafter are currently open to audit under statutes of limitations by the Internal Revenue Service and the North Carolina Department of Revenue.

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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 six 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.

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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 June 30,						Six Months Ended June 30,
(Dollars in thousands, except per share data)	2015			2014			2015			2014

Numerator:
Net income	$	865		$	941		$	1,487		$	1,345

Denominator:
Weighted average common shares outstanding		4,378,411			4,886,313			4,378,411			4,957,586
Less: Weighted average unvested restricted shares		(121,610	)		(178,706	)		(129,565	)		(186,987	)
Less: Weighted average unallocated ESOP shares		(333,602	)		(364,989	)		(337,471	)		(368,858	)
Weighted average common shares used to compute net income per common share – Basic		3,923,199			4,342,618			3,911,375			4,401,741
Add: Effect of dilutive securities		90,133			41,536			83,715			39,269
Weighted average common shares used to compute net income per common share – Diluted		4,013,332			4,384,154			3,995,090			4,441,010

Net income per common share – Basic	$	0.22		$	0.22		$	0.38		$	0.31
Net income per common share – Diluted	$	0.22		$	0.21		$	0.37		$	0.30

For the three and six months ended June 30, 2015, options to purchase 434,771 and 443,629 shares of common stock, respectively, and 93,206 and 90,766 restricted shares, respectively, were excluded from the computation of net income per common share because their effect would be anti-dilutive. For the three and six months ended June 30, 2014, options to purchase 469,502 and 473,020 shares of common stock, respectively, and 142,668 and 141,417 restricted shares, respectively, were excluded from the computation of net income per common share because their effect would be anti-dilutive.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 is currently evaluating this guidance to determine the impact on the Company’s consolidated financial statements.

2.	INVESTMENT SECURITIES

Securities Available for Sale – The maturities, amortized cost, unrealized gains, unrealized losses and fair values of securities available for sale are as follows:

Type And Maturity Group (Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value

June 30, 2015

U.S. Government Sponsored Enterprise (GSE) and agency securities due -
After 1 year but within 5 years	$	2,154	$	1	$	(14	)	$	2,141
Asset-backed securities issued by the Small Business Administration (SBA)		18,714		224		(17	)		18,921
Residential mortgage-backed securities issued by GSE’s (1)		54,471		94		(459	)		54,106
State and local government securities due -
After 5 years but within 10 years		8,030		39		(50	)		8,019
After 10 years		51,501		131		(758	)		50,874
Mutual funds		752		-		-			752
Total	$	135,622	$	489	$	(1,298	)	$	134,813

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 GSE’s (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 June 30, 2015 and December 31, 2014 or during the six- and twelve-month periods, respectively, then ended.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

2.	INVESTMENT SECURITIES (Continued)

Securities Held to Maturity – The maturities, amortized cost, unrealized gains, unrealized losses and fair values of securities classified as held to maturity are as follows:

Type And Maturity Group (Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value

June 30, 2015

U.S. GSE and agency securities due -
After 1 year but within 5 years	$	1,031	$	66	$	-	$	1,097
Residential mortgage-backed securities issued by GSE’s (1)		436		33		-		469
State and local government securities due -
After 5 years but within 10 years		963		85		-		1,048
After 10 years		1,469		126		-		1,595
Total	$	3,899	$	310	$	-	$	4,209

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 GSE’s (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)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

2.	INVESTMENT SECURITIES (Continued)

The following tables show investment gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2015 and December 31, 2014. The total number of securities with unrealized losses at June 30, 2015 and December 31, 2014 were 58 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.

	June 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	$	-	$	-		$	1,110	$	(14	)	$	1,110	$	(14	)
Asset-backed SBA		-		-			1,997		(17	)		1,997		(17	)
Residential mortgage- backed GSE (1)		35,703		(380	)		8,991		(79	)		44,694		(459	)
State and local government		42,635		(751	)		1,477		(57	)		44,112		(808	)
Total temporarily impaired securities	$	78,338	$	(1,131	)	$	13,575	$	(167	)	$	91,913	$	(1,298	)

(1)

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2.	INVESTMENT SECURITIES (Continued)

	December 31, 2014
	Less Than 12 Months					12 Months Or More					Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Securities Available For Sale

US GSE and agency	$	-	$	-		$	2,138	$	(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)	June 30, 2015		December 31, 2014

Pledged to Federal Reserve Discount Window	$	6,998	$	3,745
Pledged to repurchase agreements for commercial customers		1,326		1,137

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

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2015		2014		2015		2014

Interest income from taxable securities	$	246	$	329	$	551	$	716
Interest income from tax-exempt securities		311		324		574		673
Total interest income from securities	$	557	$	653	$	1,125	$	1,389

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

2.	INVESTMENT SECURITIES (Continued)

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

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2015			2014			2015			2014

Proceeds from sales of securities	$	32,089		$	17,774		$	50,624		$	47,679
Gross realized gains from sales of securities		341			328			465			554
Gross realized losses from sales of securities		(198	)		(235	)		(266	)		(347	)

3.	LOANS RECEIVABLE

Loans receivable by segment and class follow:

(Dollars in thousands)	June 30, 2015			December 31, 2014

Commercial:
Commercial construction and land development	$	27,236		$	21,661
Commercial mortgage		212,844			201,316
Commercial and industrial		17,150			15,872
Total commercial		257,230			238,849
Non-commercial:
Non-commercial construction and land development		16,174			14,781
Residential mortgage		173,940			172,163
Revolving mortgage		61,743			56,370
Consumer		44,523			40,363
Total non-commercial		296,380			283,677
Total loans receivable		553,610			522,526
Less: Deferred loan fees		(611	)		(706	)
Total loans receivable net of deferred loan fees		552,999			521,820
Less: Allowance for loan losses		(6,124	)		(5,949	)
Loans receivable, net	$	546,875		$	515,871

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

3.	LOANS RECEIVABLE (Continued)

Loans receivable by segment, class, and grade follow:

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total Loans

June 30, 2015

Commercial:
Commercial construction and land development	$	27,085	$	151	$	-	$	-	$	-	$	27,236
Commercial mortgage		198,371		13,006		1,467		-		-		212,844
Commercial and industrial		16,285		603		262		-		-		17,150
Total commercial		241,741		13,760		1,729		-		-		257,230
Non-commercial:
Non-commercial construction and land development		16,174		-		-		-		-		16,174
Residential mortgage		165,117		6,642		2,181		-		-		173,940
Revolving mortgage		58,396		2,729		618		-		-		61,743
Consumer		44,116		330		77		-		-		44,523
Total non-commercial		283,803		9,701		2,876		-		-		296,380
Total loans receivable	$	525,544	$	23,461	$	4,605	$	-	$	-	$	553,610

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

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

3.	LOANS RECEIVABLE (Continued)

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

	Past Due
(Dollars in thousands)	31-89 Days		90 Days Or More		Total		Current		Total Loans

June 30, 2015

Commercial:
Commercial construction and land development	$	-	$	-	$	-	$	27,236	$	27,236
Commercial mortgage		628		-		628		212,216		212,844
Commercial and industrial		4		117		121		17,029		17,150
Total commercial		632		117		749		256,481		257,230
Non-commercial:
Non-commercial construction and land development		-		-		-		16,174		16,174
Residential mortgage		1,406		181		1,587		172,353		173,940
Revolving mortgage		277		37		314		61,429		61,743
Consumer		96		-		96		44,427		44,523
Total non-commercial		1,779		218		1,997		294,383		296,380
Total loans receivable	$	2,411	$	335	$	2,746	$	550,864	$	553,610

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

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

3.	LOANS RECEIVABLE (Continued)

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

	June 30, 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	$	840	$	-	$	881	$	-
Commercial and industrial		262		-		221		-
Total commercial		1,102		-		1,102		-
Non-commercial:
Residential mortgage		1,589		-		1,354		-
Revolving mortgage		221		-		230		-
Consumer		-		-		2		-
Total non-commercial		1,810		-		1,586		-
Total loans receivable	$	2,912	$	-	$	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 $15.3 million at June 30, 2015 and $14.9 million at December 31, 2014.

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4.	ALLOWANCE FOR LOAN LOSSES

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

	Three Months Ended June 30, 2015									Six Months Ended June 30, 2015
(Dollars in thousands)	Commercial			Non- Commercial			Total			Commercial			Non- Commercial			Total

Balance at beginning of period	$	3,429		$	2,613		$	6,042		$	3,409		$	2,540		$	5,949
Provision for (recovery of) loan losses		96			(31	)		65			92			167			259
Charge-offs		-			(137	)		(137	)		(79	)		(310	)		(389	)
Recoveries		3			151			154			106			199			305
Balance at end of period	$	3,528		$	2,596		$	6,124		$	3,528		$	2,596		$	6,124

	Three Months Ended June 30, 2014									Six Months Ended June 30, 2014
(Dollars in thousands)	Commercial			Non- Commercial			Total			Commercial			Non- Commercial			Total

Balance at beginning of period	$	4,609		$	2,580		$	7,189		$	4,560		$	2,747		$	7,307
Recovery of loan losses		(1,184	)		(206	)		(1,390	)		(1,137	)		(321	)		(1,458	)
Charge-offs		-			(56	)		(56	)		-			(150	)		(150	)
Recoveries		16			11			27			18			53			71
Balance at end of period	$	3,441		$	2,329		$	5,770		$	3,441		$	2,329		$	5,770

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4.	ALLOWANCE FOR LOAN LOSSES (Continued)

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

	Allowance For Loan Losses						Total Loans Receivable
(Dollars in thousands)	Loans Individually Evaluated For Impairment		Loans Collectively Evaluated		Total		Loans Individually Evaluated For Impairment		Loans Collectively Evaluated		Total

June 30, 2015

Commercial:
Commercial construction and land development	$	-	$	247	$	247	$	-	$	27,236	$	27,236
Commercial mortgage		46		2,986		3,032		3,884		208,960		212,844
Commercial and industrial		20		229		249		285		16,865		17,150
Total commercial		66		3,462		3,528		4,169		253,061		257,230
Non-commercial:
Non-commercial construction and land development		-		135		135		-		16,174		16,174
Residential mortgage		97		1,010		1,107		3,502		170,438		173,940
Revolving mortgage		88		708		796		190		61,553		61,743
Consumer		-		558		558		-		44,523		44,523
Total non-commercial		185		2,411		2,596		3,692		292,688		296,380
Total loans receivable	$	251	$	5,873	$	6,124	$	7,861	$	545,749	$	553,610

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

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4.	ALLOWANCE FOR LOAN LOSSES (Continued)

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

			Recorded Investment
(Dollars in thousands)	Unpaid Principal Balance		With A Recorded Allowance		With No Recorded Allowance		Total		Related Recorded Allowance

June 30, 2015

Commercial:
Commercial mortgage	$	3,989	$	3,379	$	505	$	3,884	$	46
Commercial and industrial		752		145		140		285		20
Total commercial		4,741		3,524		645		4,169		66
Non-commercial:
Residential mortgage		3,576		1,801		1,701		3,502		97
Revolving mortgage		199		88		102		190		88
Total non-commercial		3,775		1,889		1,803		3,692		185
Total impaired loans	$	8,516	$	5,413	$	2,448	$	7,861	$	251

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

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4.	ALLOWANCE FOR LOAN LOSSES (Continued)

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

	Three Months Ended June 30, 2015				Three Months Ended June 30, 2014
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Commercial:
Commercial mortgage	$	3,902	$	33	$	4,100	$	36
Commercial and industrial		289		-		277		1
Total commercial		4,191		33		4,377		37
Non-commercial:
Residential mortgage		3,402		18		2,803		22
Revolving mortgage		301		-		251		2
Total non-commercial		3,703		18		3,054		24
Total loans receivable	$	7,894	$	51	$	7,431	$	61

	Six Months Ended June 30, 2015				Six Months Ended June 30, 2014
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Commercial:
Commercial construction and land development	$	-	$	-	$	46	$	1
Commercial mortgage		3,924		66		4,092		78
Commercial and industrial		321		1		285		3
Total commercial		4,245		67		4,423		82
Non-commercial:
Residential mortgage		3,142		42		2,867		47
Revolving mortgage		329		-		292		2
Total non-commercial		3,471		42		3,159		49
Total loans receivable	$	7,716	$	109	$	7,582	$	131

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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. There were no new restructured loans by the Bank during the three months ended June 30, 2015 or June 30, 2014. The Bank extended the payment terms on one loan and reduced the interest rate below market levels on one loan during the six months ended June 30, 2015. The Bank extended payment terms on two loans and reduced the interest rate below market levels on one loan during the six months ended June 30, 2014.

	Six Months Ended June 30, 2015						Six Months Ended June 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
Total loans modified with below market interest rate		1		153		153		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		2	$	182	$	195		3	$	629	$	655

There were no loans modified as TDRs within the preceding 12 months that stopped performing during the three months or six months ended June 30, 2015 and June 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.

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4.	ALLOWANCE FOR LOAN LOSSES (Continued)

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

(Dollars in thousands)	June 30, 2015		December 31, 2014

Nonperforming restructured loans	$	1,068	$	1,018
Performing restructured loans		4,724		4,804
Total	$	5,792	$	5,822

As of June 30, 2015, the Bank had $7,000 of residential real estate loans in the process of foreclosure and $775,000 of foreclosed residential real estate property included in foreclosed real estate.

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.

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

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2015			2014			2015			2014

Non-Qualified Defined Benefit Plan

Components of Net Periodic Benefit Costs
Interest cost	$	14		$	12		$	27		$	25
Amortization of net loss		14			7			29			14
Net periodic pension cost	$	28		$	19		$	56		$	39

Qualified Defined Benefit Plan

Components of Net Periodic Benefit Costs
Interest cost	$	247		$	250		$	495		$	500
Expected return on plan assets		(236	)		(248	)		(472	)		(495	)
Amortization of net loss		180			137			360			273
Net periodic pension cost	$	191		$	139		$	383		$	278

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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:

	June 30, 2015

Allocated ESOP shares, December 31, 2014		98,624
ESOP shares committed to be released during the period		15,565
ESOP shares withdrawn during the period		(9,219	)
Unallocated ESOP shares		329,688
Total ESOP shares		434,658

Fair value of unallocated ESOP shares (dollars in thousands)	$	7,141

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 June 30,				Six Months Ended June 30,
(Dollars in thousands)	2015		2014		2015		2014

ESOP expense	$	165	$	148	$	323	$	284

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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 six months ended June 30, 2015 were $263,000 and $528,000, respectively, and were $660,000 and $937,000, respectively, for the same periods of 2014. Compensation expense for the three and six months ended June 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 June 30, 2015		121,610		$	15.75

There were no restricted stock awards granted, forfeited or exercised during the six-month period ended June 30, 2015.

At June 30, 2015, unrecognized compensation expense, adjusted for expected forfeitures, was $1.5 million related to restricted stock. The weighted-average period over which compensation cost related to unvested awards is expected to be recognized was 2.63 years at June 30, 2015.

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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

Outstanding at June 30, 2015		60,355		496,500	$	16.00		7.11	$	2,810

Options exercisable at June 30, 2015				209,800	$	15.77		6.17	$	1,235

There were no stock options granted, forfeited or exercised during the six-month period ended June 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 six months ended June 30, 2014. There were no options granted for the six months ended June 30, 2015.

	Six Months Ended June 30, 2014

Fair value per option award		$5.91
Expected life in years		6.5 years
Expected stock price volatility		27.34%
Expected dividend yield		0.00%
Risk-free interest rate		2.04%
Expected forfeiture rate		6.39%

At June 30, 2015, the Company had $1.1 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 2.85 years at June 30, 2015. There were 209,800 options vested and exercisable at June 30, 2015.

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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.

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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)	June 30, 2015		December 31, 2014

Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit	$	170,268	$	149,590
Commitments under standby letters of credit		460		36
Total	$	170,728	$	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 the second quarter of 2015. This investment is recognized using the cost method and is included in “other assets” on the balance sheet.

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

7.	FAIR VALUE MEASUREMENTS

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

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

The fair value estimates presented below are based on pertinent information available to management as of June 30, 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.

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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. GSE’s, asset-backed securities issued by the SBA, residential mortgage-backed securities issued by U.S. GSE’s, and securities issued by state and local governments are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions and are included as recurring Level 2 assets.

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

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

The Bank does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with the accounting guidance contained in FASB ASC Topic 310: Receivables (“FASB ASC Topic 310”). The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Substantially all of the total impaired loans 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.

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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.

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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

June 30, 2015

Financial assets:
Cash and cash equivalents	$	52,990	$	-	$	-	$	52,990	$	52,990
Securities available for sale		752		134,061		-		134,813		134,813
Securities held to maturity		-		4,209		-		4,209		3,899
Investments in FHLB stock		-		-		2,807		2,807		2,807
Loans held for sale		-		8,368		-		8,368		8,192
Loans receivable, net		-		-		547,606		547,606		546,875
Accrued interest receivable		-		-		2,217		2,217		2,217
Deferred compensation assets		1,403		-		-		1,403		1,403

Financial liabilities:
Demand deposits		-		-		473,674		473,674		473,674
Time deposits		-		-		150,326		150,326		150,289
Repurchase agreements		-		-		222		222		224
Federal Home Loan Bank Advances		-		-		52,912		52,912		50,000
Deferred compensation liabilities		1,408		-		-		1,408		1,408
Accrued interest payable		-		-		102		102		102

Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit		-		-		-		-		-
Commitments under standby letters of credit		-		-		-		-		-

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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		-		-		-		-		-

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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 six months ended June 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

June 30, 2015

Securities available for sale:
U.S. GSE and agency securities	$	-	$	2,141	$	-	$	2,141	$	2,141
Asset-backed SBA securities		-		18,921		-		18,921		18,921
Residential mortgage-backed securities issued by GSE’s		-		54,106		-		54,106		54,106
State and local government securities		-		58,893		-		58,893		58,893
Mutual funds		752		-		-		752		752
Total	$	752	$	134,061	$	-	$	134,813	$	134,813

Defined benefit plan assets:
Cash and cash equivalents	$	555	$	-	$	-
Money market mutual funds		145		-		-
Debt security mutual funds		12,910		-		-
Equity security mutual funds		3,799		-		-
Total	$	17,409	$	-	$	-

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 GSE’s		-		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	$	-	$	-

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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)

June 30, 2015

Impaired loans	$	-	$	-	$	2,113	$	2,113	$	2,113
Foreclosed properties		-		-		4,997		4,997		4,997

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 six-month period ended June 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)

June 30, 2015

Impaired loans	$	2,113	Discounted appraisals (2)	Collateral discounts (3)		0%-36% (20	%)
Foreclosed properties		4,997	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.

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

A Caution About Forward-Looking Statements

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

•

statements of our goals, intentions and expectations;

•

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

•

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

•

estimates of our risks and future costs and benefits.

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

•

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

•

a continued decline in real estate values;

•

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

•

increased competitive pressures among financial services companies;

•

changes in consumer spending, borrowing and savings habits;

•

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

•

adverse changes in the securities markets;

•

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.

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Critical Accounting Policies

During the three- and six-month periods ended June 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.

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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 June 30, 2015 and our operating performance for the three- and six-month periods ended June 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.

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Comparison of Financial Condition at June 30, 2015 and December 31, 2014

The following table provides the changes in our significant asset and liability categories at June 30, 2015 compared to December 31, 2014.

(Dollars in thousands)	June 30, 2015			December 31, 2014			$ Change			% Change

Interest-earning assets
Interest-earning deposits with banks and overnight and short-term investments	$	41,970		$	47,813		$	(5,843	)		-12.2	%
Investment securities		138,712			145,461			(6,749	)		-4.6	%
Investments held at cost		2,807			2,902			(95	)		-3.3	%
Loans held for sale		8,192			5,237			2,955			56.4	%
Loans receivable, net of deferred fees		552,999			521,820			31,179			6.0	%
Total interest-earning assets		744,680			723,233			21,447			3.0	%

Noninterest-earning assets
Cash and due from banks		11,020			9,045			1,975			21.8	%
Allowance for loan losses		(6,124	)		(5,949	)		(175	)		-2.9	%
Premises and equipment, net of accumulated depreciation		11,823			11,932			(109	)		-0.9	%
Foreclosed real estate		9,381			8,814			567			6.4	%
Deferred income tax assets, net of deferred income tax liabilities		5,511			5,588			(77	)		-1.4	%
Other assets		7,008			7,387			(379	)		-5.1	%
Total noninterest-earning assets		38,619			36,817			1,802			4.9	%

Total assets	$	783,299		$	760,050		$	23,249			3.1	%

Interest-bearing liabilities
Interest-bearing deposits	$	509,979		$	505,929		$	4,050			0.8	%
Overnight and short-term borrowings		224			660			(436	)		-66.1	%
Federal Home Loan Bank advances		50,000			50,000			-			0.0	%
Total interest-bearing liabilities		560,203			556,589			3,614			0.6	%

Noninterest-bearing liabilities
Noninterest-bearing deposits		113,984			97,450			16,534			17.0	%
Accounts payable and other liabilities		12,949			11,614			1,335			11.5	%
Total noninterest-bearing liabilities		126,933			109,064			17,869			16.4	%

Total liabilities		687,136			665,653			21,483			3.2	%

Total equity		96,163			94,397			1,766			1.9	%

Total liabilities and equity	$	783,299		$	760,050		$	23,249			3.1	%

Cash and cash equivalents	$	52,990		$	56,858		$	(3,868	)		-6.8	%
Total core deposits (excludes certificate accounts)		473,674			449,286			24,388			5.4	%
Total certificates of deposit		150,289			154,093			(3,804	)		-2.5	%
Total deposits		623,963			603,379			20,584			3.4	%
Total funding liabilities		674,187			654,039			20,148			3.1	%

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Assets. Total assets increased $23.2 million, or 3.1%, to $783.3 million at June 30, 2015 from $760.1 million at December 31, 2014. Cash and cash equivalents decreased $3.9 million, or 6.8%, to $53.0 million at June 30, 2015 from $56.9 million at December 31, 2014. Investment securities decreased $6.7 million, or 4.6%, to $138.7 million at June 30, 2015 from $145.4 million at December 31, 2014, primarily due to the sale of investment securities to fund anticipated loan growth. Loans receivable, net of deferred fees, increased $31.2 million, or 6.0%, to $553.0 million at June 30, 2015 from $521.8 million at December 31, 2014 as new loan originations exceeded loan repayments, prepayments and foreclosures.

	Six Months Ended June 30,
(Dollars in thousands)	2015		2014

Loans originated:
Commercial:
Commercial mortgage	$	42,079	$	31,567
Construction and land development		14,528		1,928
Commercial and industrial		5,130		3,735
Non-commercial:
Residential mortgage		48,358		27,984
Construction and land development		17,324		11,909
Revolving mortgage		17,299		9,002
Consumer		14,761		7,165
Total loans originated	$	159,479	$	93,290

Loan principal payments, prepayments and payoffs	$	87,031	$	50,532

Residential mortgage loans sold	$	37,584	$	21,072

Nonperforming Assets. Nonperforming assets totaled $12.3 million, or 1.57% of total assets, at June 30, 2015, compared to $11.5 million, or 1.51% of total assets, at December 31, 2014. Nonperforming assets included $2.9 million in nonperforming loans and $9.4 million in foreclosed real estate at June 30, 2015 compared to $2.7 million and $8.8 million, respectively, at December 31, 2014.

Nonperforming loans increased $224,000 to $2.9 million, or 0.53% of total loans, at June 30, 2015 from $2.7 million, or 0.52% of total loans, at December 31, 2014. Of the $224,000 increase in nonperforming loans for the six months, $235,000 related to additional nonperforming residential mortgage loans, which was 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 $80,000, or 1.7%, when comparing the same periods. Total performing TDRs and nonperforming assets increased $711,000, or 4.4%, to $17.0 million, or 2.17% of total assets, at June 30, 2015 compared to $16.3 million, or 2.15% of total assets, at December 31, 2014.

At June 30, 2015, nonperforming loans included seven residential mortgage loans that totaled $1.6 million, two commercial mortgage loans that totaled $840,000, three revolving home equity loans that totaled $221,000 and four commercial and industrial loans that totaled $262,000. As of June 30, 2015, the nonperforming loans had specific reserves totaling $108,000.

TDRs at June 30, 2015 and at December 31, 2014 totaled $5.8 million. There were two additions to TDRs during the six months ended June 30, 2015. At June 30, 2015, $1.1 million of the total $5.8 million of TDRs were not performing.

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Foreclosed real estate at June 30, 2015 included nine properties with a total recorded amount of $9.4 million compared to ten properties with a total recorded amount of $8.8 million at December 31, 2014. During the six months ended June 30, 2015, two new properties that totaled $812,000 were added to foreclosed real estate, while three properties that totaled $156,000 were sold. In addition, the Bank sold one of its 15 units in a mixed-use condominium complex for net proceeds of $89,000. The Bank recorded no capital additions and no loss provisions on foreclosed real estate during the first six months of 2015.

Liabilities. Total deposits increased $20.6 million, or 3.4%, to $624.0 million at June 30, 2015 from $603.4 million at December 31, 2014. During the six months ended June 30, 2015, the Company continued its focus on core deposit growth, from which it excludes certificates of deposit. Core deposits increased $24.4 million, or 5.4%, to $473.7 million at June 30, 2015 from $449.3 million at December 31, 2014.

Commercial checking and money market accounts increased $18.6 million, or 15.3%, to $140.2 million at June 30, 2015 from $121.6 million at December 31, 2014, reflecting expanded sources of lower cost funding. The Company’s initiatives to obtain new commercial deposit relationships in conjunction with making new commercial loans significantly contributed to this increase and reflects a commitment to establishing diversified relationships with business clients.

Over the same period, certificates of deposit decreased $3.8 million, or 2.5%, to $150.3 million at June 30, 2015 from $154.1 million at December 31, 2014 as the Company continued its focus on core deposit growth. Accounts payable and other liabilities increased $1.3 million, or 11.5%, to $12.9 million at June 30, 2015 from $11.6 million at December 31, 2014. The increase in accounts payable and other liabilities at June 30, 2015 was primarily attributable to a $906,000 increase in escrowed payments from mortgage borrowers and a $403,000 increase in pension plan liabilities.

Results of Operations for the Three Months Ended June 30, 2015 and 2014

Overview. Net income was $865,000, or $0.22 per diluted share, for the quarter ended June 30, 2015 compared to $941,000, or $0.21 per diluted share, for the quarter ended June 30, 2014. Net interest income increased $524,000, which was the result of a $518,000 increase in total interest and dividend income and a decrease of $6,000 in interest expense. The provision for loan losses was $65,000 for the second quarter of 2015 compared to a recovery of loan losses of $(1.4) million for the same period of 2014. Noninterest income increased $414,000 and noninterest expenses decreased $340,000 during the second quarter of 2015 compared to the second quarter of 2014. Noninterest expenses for the second quarter decreased primarily in foreclosed properties expenses and compensation and employee benefits. The income tax provision decreased $101,000 for the quarter ended June 30, 2015 compared to the same quarter of 2014.

	Three Months Ended June 30,
(Dollars in thousands)	2015		2014			$ Change			% Change
Interest and dividend income	$	6,289	$	5,771		$	518			9.0	%
Interest expense		880		886			(6	)		-0.7	%
Net interest income		5,409		4,885			524			10.7	%
Provision for (recovery of) loan losses		65		(1,390	)		1,455			104.7	%
Net interest income after provision for (recovery of) loan losses		5,344		6,275			(931	)		-14.8	%
Noninterest income		1,968		1,554			414			26.6	%
Noninterest expenses		6,010		6,350			(340	)		-5.4	%
Income before income tax provision		1,302		1,479			(177	)		-12.0	%
Income tax provision		437		538			(101	)		-18.8	%
Net income		865		941			(76	)		-8.1	%

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Net Interest Income. Net interest income increased by $524,000, or 10.7%, to $5.4 million for the three months ended June 30, 2015 compared to $4.9 million for the three months ended June 30, 2014. Total interest and dividend income increased $518,000, or 9.0%, to $6.3 million for the three months ended June 30, 2015 from $5.8 million for the three months ended June 30, 2014, primarily as a result of an increase of $90.3 million in average loan balances, which was partially offset by a 25 basis point decrease in the average yield on loans. Average mortgage-backed security balances decreased $20.2 million for the three months ended June 30, 2015, and the average yield on mortgage-backed securities decreased 8 basis points compared to the same period of 2014. Interest expense decreased $6,000, or 0.7%, to $880,000 for the three months ended June 30, 2015 from $886,000 for the three months ended June 30, 2014, primarily due to an $8.0 million decrease in the average balances of certificates of deposit.

Interest income on loans increased $640,000, or 12.7%, to $5.7 million during the three months ended June 30, 2015, primarily due to an increase in average outstanding loans of $90.3 million, or 19.5%. Loan originations increased $26.2 million for the three months ended June 30, 2015 compared to the three months ended June 30, 2014, while residential mortgage loan sales increased by $11.6 million. Loan principal repayments increased $17.9 million to $45.3 million for the three months ended June 30, 2015 from $27.4 million for the three months ended June 30, 2014. The average balance of the investment portfolio decreased $20.6 million, or 13.4%, to $132.9 million for the three months ended June 30, 2015 as securities were sold in part to fund anticipated loan originations.

Provision for Loan Losses. The provision for loan losses was $65,000 for the three months ended June 30, 2015 compared to a recovery of loan losses of $(1.4) million for the three months ended June 30, 2014. The increase in the provision for loan losses for the second quarter of 2015 was primarily due to growth in loan volume. In the second quarter of 2014, the Bank modified its 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 Bank's reserves for loans not considered impaired in the second quarter of 2014. The allowance for loan losses totaled $6.1 million, or 1.11% of total loans, at June 30, 2015 compared to $5.9 million, or 1.14% of total loans, at December 31, 2014. The Company charged off $137,000 in loans during the three months ended June 30, 2015 compared to $56,000 during the three months ended June 30, 2014.

Noninterest Income. Noninterest income increased $414,000, or 26.6%, to $2.0 million for the three months ended June 30, 2015 from $1.6 million for the three months ended June 30, 2014. Factors that contributed to the increase in noninterest income during the 2015 period included increases of $282,000 in mortgage banking income, $50,000 in net gains from the sale of investment securities, $37,000 in income from debit card services, $28,000 in loan fees and $19,000 in gain on sale of other assets, which were partially offset by a decrease of $8,000 in deposit and other service charge income. The increase in mortgage banking income was attributable to higher volumes of residential mortgage loans originated and sold. Increased transaction volume also drove the rise in income from debit card services.

Noninterest Expenses. Noninterest expenses decreased $340,000, or 5.4%, to $6.0 million for the three months ended June 30, 2015 from $6.4 million for the three months ended June 30, 2014. The decrease for the second quarter of 2015 was primarily attributable to decreases of $188,000 in foreclosed property expenses, $177,000 in salaries and employee benefits, $51,000 in data processing expenses and $71,000 in various other expenses, which were partially offset by increases of $63,000 in mortgage software expenses, $35,000 in consumer loan expenses and $22,000 in indirect auto expenses. The decrease in salaries and benefits was primarily due to a $380,000 additional expense during the second quarter of 2014 for accelerated vesting related to the disability of an equity incentive plan participant. The decrease was partially offset by a $145,000 increase in compensation expense for employee incentives and $61,000 in increased pension plan expenses in 2015. The decrease in foreclosed property expenses included a reduction of $135,000 in valuation write-downs of foreclosed properties.

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Income Tax Provision. Income tax provision decreased $101,000 to $437,000 for the three months ended June 30, 2015 from $538,000 for the three months ended June 30, 2014, primarily due to a decrease in pre-tax income. The effective tax rate was 33.56% for the three months ended June 30, 2015 compared to 36.38% for the three months ended June 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.

Results of Operations for the Six Months Ended June 30, 2015 and 2014

Overview. Net income was $1.5 million or $0.37 per diluted common share, for the six months ended June 30, 2015, compared to $1.3 million, or $0.30 per diluted common share, for the six months ended June 30, 2014. Income before income taxes increased $242,000, primarily due to an increase of $963,000 in net interest income, an increase of $568,000 in noninterest income, and a decrease of $428,000 in noninterest expenses, which were partially offset by an increase of $1.7 million in provision for loan losses.

	Six Months Ended June 30,
(Dollars in thousands)	2015		2014			$ Change			% Change

Interest and dividend income	$	12,443	$	11,512		$	931			8.1	%
Interest expense		1,741		1,773			(32	)		-1.8	%
Net interest income		10,702		9,739			963			9.9	%
Provision for (recovery of) loan losses		259		(1,458	)		1,717			117.8	%
Net interest income after provision for (recovery of) loan losses		10,443		11,197			(754	)		-6.7	%
Noninterest income		3,578		3,010			568			18.9	%
Noninterest expenses		11,782		12,210			(428	)		-3.5	%
Income before income tax provision		2,239		1,997			242			12.1	%
Income tax provision		752		652			100			15.3	%
Net income		1,487		1,345			142			10.6	%

Net Interest Income. Net interest income increased by $963,000, or 9.9%, to $10.7 million for the six months ended June 30, 2015 compared to $9.7 million for the six months ended June 30, 2014. Interest income on loans increased $1.2 million, primarily resulting from an $85.4 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 $264,000, attributable to a $27.2 million decrease in the average balance in mortgage-backed and other investment securities and a 4 basis point reduction in the average yield earned on the investment portfolio. Interest expense decreased $32,000, or 1.8%, to $1.7 million for the six months ended June 30, 2015. The lower interest expense was primarily attributable to lower average balances of certificates of deposit, as well as an average rate reduction of 1 basis point on certificates of deposit and 1 basis point on NOW accounts. The decreases in interest expense were partially offset by higher average balances of NOW, money market and savings accounts and an increase of 1 basis point in the average rate paid on money market accounts.

Provision for Loan Losses. The Company recorded a provision for loan losses in the amount of $259,000 for the six months ended June 30, 2015 compared to a recovery of loan losses of $(1.5) million for the six months ended June 30, 2014. Net charge-offs were $84,000 for the first six months of 2015 compared to $79,000 for the first six months of 2014. As was the case for the second quarter of 2014, the increase in the six-month provision for loan losses primarily resulted from a $1.3 million reduction in loan loss reserves due to a modification of the loan loss methodology during the second quarter of 2014, and the increase in the provision for loan losses for the six-month period of 2015 was primarily due to growth in loan volume.

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Noninterest Income. Noninterest income increased $568,000, or 18.9%, to $3.6 million for the six months ended June 30, 2015 from $3.0 million for the six months ended June 30, 2014. Factors that contributed to the increase in noninterest income during the 2015 period included increases of $417,000 in mortgage banking income, $83,000 in income from debit card services and $21,000 in income from an investment in a Small Business Investment Company, which were partially offset by lower securities net gains and lower deposit and service charge income. As was the case for the second 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 $428,000, or 3.5%, to $11.8 million for the six months ended June 30, 2015 from $12.2 million for the six months ended June 30, 2014. The lower 2015 noninterest expenses primarily reflected decreases of $272,000 in foreclosed property expenses, $131,000 in compensation and employee benefits, $122,000 in data processing expenses and $57,000 in occupancy expenses, which were partially offset by increases of $68,000 in consumer loan expenses, $63,000 in mortgage software expenses and $36,000 in indirect auto expenses. The decrease in foreclosed property expenses included a reduction of $154,000 in valuation write-downs of foreclosed properties. As was the case for the second quarter of 2015, the decrease in salaries and benefits was attributable to a $380,000 additional expense during the second quarter of 2014 for accelerated vesting related to the disability of an equity incentive plan participant. The decrease for the six months was partially offset by a $145,000 increase in incentive compensation expenses and a $122,000 increase in pension plan expenses in 2015.

Income Tax Provision. Income tax expense increased by $100,000 for the six months ended June 30, 2015 compared to the six months ended June 30, 2014, primarily due to an increase in pre-tax income. The effective tax rate was 33.59% for the six months ended June 30, 2015 compared to 32.65% for the six months ended June 30, 2014, with the increase primarily resulting from a decrease in favorable permanent tax differences relative to the size of the pre-tax income in 2015 compared to 2014.

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%.

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	For The Three Months Ended June 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	$	57,116		$	39		0.27	%	$	90,641		$	66		0.29	%
Loans receivable		553,522			5,664		4.10	%		463,251			5,024		4.35	%
Investment securities		56,696			331		3.09	%		57,044			347		3.21	%
Mortgage-backed and similar securities		76,239			226		1.19	%		96,443			306		1.27	%
Other interest-earning assets		2,807			29		4.14	%		2,902			28		3.87	%
Total interest-earning assets		746,380			6,289		3.44	%		710,281			5,771		3.32	%
Allowance for loan losses		(6,143	)							(7,261	)
Noninterest-earning assets		42,015								45,786

Total assets	$	782,252							$	748,806

Liabilities and equity

NOW accounts	$	153,441			55		0.14	%	$	150,072			54		0.14	%
Money market accounts		160,830			71		0.18	%		153,616			66		0.17	%
Savings accounts		45,018			11		0.10	%		37,525			9		0.10	%
Certificates of deposit		152,981			253		0.66	%		160,955			266		0.66	%
Total interest-bearing deposits		512,270			390		0.31	%		502,168			395		0.32	%
Overnight and short-term borrowings		651			-		0.00	%		622			1		0.64	%
Federal Home Loan Bank advances		50,000			490		3.93	%		50,000			490		3.93	%
Total interest-bearing liabilities		562,921			880		0.63	%		552,790			886		0.64	%
Noninterest-bearing deposits		108,492								84,425
Other noninterest-bearing liabilities		13,931								9,588
Total liabilities		685,344								646,803

Total equity		96,908								102,003

Total liabilities and equity	$	782,252							$	748,806

Net interest income				$	5,409							$	4,885
Interest rate spread							2.81	%							2.68	%
Net interest margin							2.96	%							2.82	%
Average interest-earning assets to average interest-bearing liabilities		132.59	%							128.49	%

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	For The Six Months Ended June 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	$	53,249		$	73	0.28		%	$	77,896		$	113		0.29	%
Loans receivable		544,377			11,185		4.14	%		458,960			9,946		4.37	%
Investment securities		52,990			616		3.09	%		58,452			720		3.27	%
Mortgage-backed and similar securities		82,335			509		1.25	%		104,119			669		1.30	%
Other interest-earning
assets		2,848			60		4.25	%		3,006			64		4.29	%
Total interest-earning assets		735,799			12,443		3.46	%		702,433			11,512		3.37	%
Allowance for loan losses		(6,082	)							(7,288	)
Noninterest-earning assets		41,889								48,457

Total assets	$	771,606							$	743,602

Liabilities and equity

NOW accounts	$	152,466			107		0.14	%	$	147,287			108		0.15	%
Money market accounts		159,043			140		0.18	%		153,839			133		0.17	%
Savings accounts		44,183			21		0.10	%		36,539			18		0.10	%
Certificates of deposit		153,493			499		0.66	%		162,949			539		0.67	%
Total interest-bearing Deposits		509,185			767		0.30	%		500,614			798		0.32	%
Overnight and short-term borrowings		801			-		0.00	%		753			-		0.00	%
Federal Home Loan Bank
advances		50,000			974		3.93	%		50,000			975		3.93	%
Total interest-bearing liabilities		559,986			1,741		0.63	%		551,367			1,773		0.65	%
Noninterest-bearing deposits		101,558								80,745
Other noninterest-bearing liabilities		13,701								9,172
Total liabilities		675,245								641,284

Total equity		96,361								102,318

Total liabilities and equity	$	771,606							$	743,602

Net interest income				$	10,702							$	9,739

Interest rate spread							2.83	%							2.72	%
Net interest margin							2.99	%							2.86	%
Average interest-earning assets to average interest-bearing liabilities		131.40	%							127.40	%

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Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior 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 June 30, 2015 Compared To Three Months Ended June 30, 2014									Six Months Ended June 30, 2015 Compared To Six Months Ended June 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	$	(23	)	$	(4	)	$	(27	)	$	(34	)	$	(6	)	$	(40	)
Loans receivable		936			(296	)		640			1,776			(537	)		1,239
Investment securities		(2	)		(14	)		(16	)		(65	)		(39	)		(104	)
Mortgage-backed and similar securities		(61	)		(19	)		(80	)		(135	)		(25	)		(160	)
Other interest-earning assets		(1	)		2			1			(3	)		(1	)		(4	)
Total interest-earning assets		849			(331	)		518			1,539			(608	)		931

Interest expense:
NOW accounts		1			-			1			4			(5	)		(1	)
Money market accounts		3			2			5			5			2			7
Savings accounts		2			-			2			4			(1	)		3
Certificates of deposit		(13	)		-			(13	)		(31	)		(9	)		(40	)
Total interest-bearing deposits		(7	)		2			(5	)		(18	)		(13	)		(31	)
Overnight and short-term borrowings		-			(1	)		(1	)		-			-			-
Federal Home Loan Bank advances		-			-			-			-			(1	)		(1	)
Total interest-bearing liabilities		(7	)		1			(6	)		(18	)		(14	)		(32	)

Net increase (decrease) in interest income	$	856		$	(332	)	$	524		$	1,557		$	(594	)	$	963

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.

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Risk Management

Overview. Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for on a mark-to-market basis. Other risks that we face are operational 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.

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The following table provides information with respect to our nonperforming assets at the dates indicated.

(Dollars in thousands)	June 30, 2015			December 31, 2014			$ Change			% Change

Nonperforming loans:

Nonaccruing loans (1)
Commercial:
Commercial mortgage	$	840		$	881		$	(41	)		-4.7	%
Commercial and industrial		262			221			41			18.6	%
Total commercial		1,102			1,102			-			0.0	%
Non-commercial:
Residential mortgage		1,589			1,354			235			17.4	%
Revolving mortgage		221			230			(9	)		-3.9	%
Consumer		-			2			(2	)		-100.0	%
Total non-commercial		1,810			1,586			224			14.1	%
Total nonaccruing loans (1)		2,912			2,688			224			8.3	%

Total loans past due 90 or more days and still accruing		-			-			-			0.0	%

Total nonperforming loans		2,912			2,688			224			8.3	%

Foreclosed real estate		9,381			8,814			567			6.4	%

Total nonperforming assets		12,293			11,502			791			6.9	%

Performing troubled debt restructurings (2)		4,724			4,804			(80	)		-1.7	%
Performing troubled debt restructurings and total nonperforming assets	$	17,017		$	16,306			711			4.4	%

Allowance for loan losses	$	6,124		$	5,949

Total loans	$	552,999		$	521,820

Allowance as a percentage of total loans		1.11	%		1.14	%
Allowance as a percentage of nonperforming loans		210.30	%		221.32	%
Total nonperforming loans to total loans		0.53	%		0.52	%
Total nonperforming loans to total assets		0.37	%		0.35	%
Total nonperforming assets to total assets		1.57	%		1.51	%
Performing troubled debt restructurings and total nonperforming assets to total assets		2.17	%		2.15	%

(1)	Nonaccruing loans include nonaccruing troubled debt restructurings.

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

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We periodically modify loans by extending loan terms or granting other concessions to help borrowers remain current and avoid foreclosure. These modified loans, also referred to as TDRs, totaled $5.8 million at June 30, 2015 and December 31, 2014. During the six months ended June 30, 2015, two loans totaling $195,000 were restructured during the period. At June 30, 2015, $1.1 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 $87,000 for the three- and six-month periods ended June 30, 2015, respectively, compared to $34,000 and $59,000, respectively, for the comparable periods of 2014. Interest income of $51,000 and $109,000 related to impaired loans was recognized for the three- and six-month periods ended June 30, 2015, respectively, compared to $61,000 and $131,000, respectively, for the same periods of 2014.

At June 30, 2015, our nonaccruing loans of $2.9 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 June 30, 2015, the loans were considered impaired and nonaccruing with an aggregate balance of $840,000. The Bank had no specific eserve as of June 30, 2015.

●	Residential Mortgage Loans

○

Ten loans to multiple unrelated borrowers on one-to-four family residential properties with an aggregate balance of $1.8 million as of June 30, 2015.

At June 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 June 30, 2015, the loan was a performing TDR with a balance of $3.0 million that matures in May of 2017. As of June 30, 2015, the loan was considered impaired and had a specific reserve of $45,000.

●	Residential Mortgage Loans

○

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

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Foreclosed properties consisted of the following at the dates indicated.

	June 30, 2015				December 31, 2014
(Dollars in thousands)	Number		Amount		Number		Amount

By foreclosed loan type:

Commercial construction and land development		7	$	8,606		8	$	8,706
Residential mortgage		2		775		2		108
Total		9	$	9,381		10	$	8,814

An analysis of foreclosed real estate follows:

(Dollars in thousands)	Six Months Ended June 30, 2015

Beginning balance	$	8,814
Transfers from loans		812
Loss on sale of foreclosed properties		(1	)
Net proceeds from sales of foreclosed properties		(244	)
Ending balance	$	9,381

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 six months of 2015, the Bank sold one office unit. At June 30, 2015, the adjusted recorded amount was $4.4 million for the remaining eight retail units and six office units.

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Federal regulations require us to review and classify our assets on a regular basis. In addition, the FDIC and the NCCoB have the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful, and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable on the basis of currently existing facts, conditions, and values, and there is a high possibility of loss. Assets classified “loss” are considered uncollectible and of such little value that continued recognition as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose an institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving close attention. When we classify an asset as substandard or doubtful, we may establish a specific allowance for loan losses. If we classify an asset as loss, we 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)	June 30, 2015		December 31, 2014		$ Change			% Change

Adversely classified loans:
Substandard	$	4,605	$	4,303	$	302			7.0	%
Total adversely classified loans		4,605		4,303		302			7.0	%
Special mention loans		23,461		27,962		(4,501	)		-16.1	%
Total classified and special mention loans		28,066		32,265		(4,199	)		-13.0	%

Total other classified and special mention assets		-		-		-			0.0	%

Total classified and special mention assets	$	28,066	$	32,265	$	(4,199	)		-13.0	%

Other than as disclosed in the above tables and related discussions, there were no other loans where management had serious doubts about the ability of the borrowers to comply with the present loan repayment terms.

At June 30, 2015, substandard loans totaling $4.6 million included $2.9 million in nonaccruing loans that were previously discussed as nonperforming loans. The remaining $1.7 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 June 30, 2015, the loans were performing with a total balance of $628,000

●	Residential Mortgage Loans

○

Fifteen loans to multiple unrelated borrowers for one-to-four family residential properties with an aggregate balance of $1.2 million as of June 30, 2015.

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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 June 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 June 30, 2015, cash and cash equivalents totaled $53.0 million, including $42.0 million in interest-bearing deposits in other banks, of which $36.3 million was on deposit with the Federal Reserve Bank. Securities totaling $134.8 million at June 30, 2015 classified as available-for-sale provided an additional source of liquidity. In addition, at June 30, 2015, we had the ability to borrow a total of approximately $71.6 million from the Federal Home Loan Bank of Atlanta and approximately $6.6 million from the Federal Reserve Bank’s discount window. At June 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 June 30, 2015, we had $170.3 million in commitments to extend credit outstanding, although we expect that significantly less will ultimately be funded. Certificates of deposit due within one year of June 30, 2015 totaled $89.1 million, or 59.3%, 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.

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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 June 30, 2015

Long-term debt obligations	$	50,000	$	-	$	40,000	$	10,000	$	-
Operating lease obligations		1,255		362		372		121		400
Total	$	51,255	$	362	$	40,372	$	10,121	$	400

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 June 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).

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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.

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It is management’s belief that, as of June 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)

June 30, 2015

Common equity tier I capital	$	102,596		18.40	%	$	25,098		4.50	%	$	36,253		6.50	%
Tier I leverage capital		102,596		13.02	%		31,527		4.00	%		39,409		5.00	%
Tier I risk-based capital		102,596		18.40	%		33,464		6.00	%		44,619		8.00	%
Total risk-based capital		108,720		19.49	%		44,619		8.00	%		55,774		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)

June 30, 2015

Common equity tier I capital	$	92,581		16.61	%	$	25,076		4.50	%	$	36,221		6.50	%
Tier I leverage capital		92,581		11.79	%		31,416		4.00	%		39,269		5.00	%
Tier I risk-based capital		92,581		16.61	%		33,435		6.00	%		44,580		8.00	%
Total risk-based capital		98,705		17.71	%		44,580		8.00	%		55,725		10.00	%
NC Savings Bank capital		98,705		12.65	%		39,028		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)	June 30, 2015 capital ratios are based on BASEL III and December 31, 2014 are based on BASEL I.

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Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit and letters of credit.

For the six months ended June 30, 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 nonmaturity 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.

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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 June 30, 2015								Over The Next Twelve Months Ending June 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	$	91,858	$	(30,527	)		-24.94	%	$	21,049	$	(1,070	)		-4.84	%
200		100,021		(22,364	)		-18.27	%		20,788		(1,331	)		-6.02	%
100		111,707		(10,678	)		-8.72	%		21,438		(681	)		-3.08	%
0		122,385		-			0.00	%		22,119		-			0.00	%
(100)		120,520		(1,865	)		-1.52	%		20,671		(1,448	)		-6.55	%

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Item 4. Controls and Procedures

The Company’s management has carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of 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 June 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 June 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.

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

On March 31, 2015, the Company announced that the Company's Board of Directors approved a stock repurchase program whereby the Company may repurchase up to 5%, or 218,920 shares, of its outstanding common stock as and when deemed appropriate by management and under any plan that may be deployed in accordance with Rule 10b5-1 of the Exchange Act of 1934. The Rule 10b5-1 repurchase plan allows the Company to repurchase its shares during periods when it would normally not be active in the market due to its internal blackout period. As of June 30, 2015, the Company had not repurchased any shares of its common stock under this repurchase program.

The following table sets forth information as of June 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		496,500	$	16.00		60,355
Equity compensation plans not approved by security holders		–		n/a		–
Total		496,500	$	16.00		60,355

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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)
10.1	Employment Agreement, dated as of June 16, 2015, by and between ASB Bancorp, Inc., Asheville Savings Bank, S.S.B. and Suzanne S. DeFerie *
10.2	Employment Agreement, dated as of June 16, 2015, by and between ASB Bancorp, Inc., Asheville Savings Bank, S.S.B. and Kirby A. Tyndall *
10.3	Employment Agreement, dated as of June 16, 2015, by and between ASB Bancorp, Inc., Asheville Savings Bank, S.S.B. and David A. Kozak *
10.4	Employment Agreement, dated as of June 16, 2015, by and between ASB Bancorp, Inc., Asheville Savings Bank, S.S.B. and Vikki D. Bailey *
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.0	Section 1350 Certifications
101.0	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (Loss), (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statement of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

Management contract or compensatory plan, contract or arrangement.

(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.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		ASB BANCORP, INC.
		Registrant

August 7, 2015	By:	/s/ SUZANNE S. DEFERIE
		Suzanne S. DeFerie
		President and Chief Executive Officer
		(Principal Executive Officer)

August 7, 2015	By:	/s/ KIRBY A. TYNDALL
		Kirby A. Tyndall
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

ASB Bancorp Inc - FORM 10-Q - August 7, 2015

Attached files

ASB Bancorp Inc Reports