ASB Bancorp (ASBB) 10-Q 2017 Q1 Quarterly report

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 March 31, 2017

OR

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

For the transition period from _______________ to _______________

Commission file number: 001-35279

ASB BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

(828) 254-7411

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
(Do not check if a smaller reporting company)		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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 3,788,025 shares of Common Stock, par value $0.01 per share, issued and outstanding as of April 30, 2017.

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 March 31, 2017 and December 31, 2016	1
	Consolidated Statements of Income (Unaudited) For the Three Months Ended March 31, 2017 and 2016	2
	Consolidated Statements of Comprehensive Income (Unaudited) For the Three Months Ended March 31, 2017 and 2016	3
	Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) For the Three Months Ended March 31, 2017	4
	Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 2017 and 2016	5
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	62
Item 4.	Controls and Procedures	64
Part II.	Other Information
Item 1.	Legal Proceedings	64
Item 1A.	Risk Factors	64
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65
Item 3.	Defaults Upon Senior Securities	65
Item 4.	Mine Safety Disclosures	65
Item 5.	Other Information	65
Item 6.	Exhibits	66
Signatures		67

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands, except par values)	March 31, 2017				December 31, 2016*
Assets
Cash and due from banks	$	10,742		$	10,862
Interest-earning deposits with banks		49,709			35,862
Total cash and cash equivalents		60,451			46,724
Securities available for sale (amortized cost of $99,662 at March 31, 2017 and $102,482 at December 31, 2016)		97,463			99,909
Securities held to maturity (estimated fair value of $3,838 at March 31, 2017 and $3,875 at December 31, 2016)		3,643			3,672
Investment in Federal Home Loan Bank stock, at cost		1,565			2,829
Loans held for sale		4,238			7,145
Loans receivable (net of deferred loan fees of $172 at March 31, 2017 and $241 at December 31, 2016)		605,826			603,582
Allowance for loan losses		(6,573	)		(6,544	)
Loans receivable, net		599,253			597,038
Premises and equipment, net		10,997			11,122
Foreclosed real estate		5,055			5,069
Deferred income tax assets, net		3,520			3,863
Bank owned life insurance		10,271			10,185
Other assets		7,043			8,267
Total assets	$	803,499		$	795,823
Liabilities
Noninterest-bearing deposits	$	133,201		$	123,999
Interest-bearing deposits		548,868			523,624
Total deposits		682,069			647,623
Overnight and short-term borrowings		708			392
Federal Home Loan Bank advances		20,000			50,000
Accounts payable and other liabilities		6,982			6,671
Total liabilities		709,759			704,686
Shareholders’ Equity
Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued		-			-
Common stock, $0.01 par value; 60,000,000 shares authorized; 3,788,025 shares issued at March 31, 2017 and  December 31, 2016		38			38
Additional paid-in capital		19,976			20,170
Retained earnings		79,140			77,306
Accumulated other comprehensive loss, net of tax		(1,626	)		(1,865	)
Unearned Employee Stock Ownership Plan (ESOP) shares		(2,747	)		(2,824	)
Unearned equity incentive plan shares		(661	)		(1,310	)
Stock-based deferral plan shares		(380	)		(378	)
Total shareholders’ equity		93,740			91,137
Total liabilities and shareholders’ equity	$	803,499		$	795,823

* Derived from audited consolidated financial statements.

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

1

ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)  

	Three Months Ended March 31,
(Dollars in thousands, except per share data)	2017		2016
Interest and dividend income
Loans, including fees	$	6,294	$	6,023
Securities		520		588
Other earning assets		109		66
Total interest and dividend income		6,923		6,677
Interest expense
Deposits		390		354
Federal Home Loan Bank advances		426		490
Total interest expense		816		844
Net interest income		6,107		5,833
Provision for loan losses		57		399
Net interest income after provision for loan losses		6,050		5,434
Noninterest income
Mortgage banking income		445		313
Deposit and other service charge income		734		663
Income from debit card services		429		435
Gain on sale of investment securities, net		27		456
Other noninterest income		311		182
Total noninterest income		1,946		2,049
Noninterest expenses
Salaries and employee benefits		3,231		3,313
Occupancy expense, net		430		434
Foreclosed property expenses		38		43
Data processing fees		617		667
Federal deposit insurance premiums		63		113
Advertising		101		102
Professional and outside services		220		320
Other noninterest expenses		888		769
Total noninterest expenses		5,588		5,761
Income before income tax provision		2,408		1,722
Income tax provision		574		601
Net income	$	1,834	$	1,121
Net income per common share – Basic	$	0.53	$	0.31
Net income per common share – Diluted	$	0.50	$	0.30

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

2

ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)  

	Three Months Ended March 31,
(Dollars in thousands)	2017			2016
Comprehensive Income
Net income	$	1,834		$	1,121
Other comprehensive income
Unrealized holding gains on securities available for sale:
Reclassification of securities gains recognized in net income		(27	)		(456	)
Deferred income tax benefit		10			167
Gains arising during the period		401			1,507
Deferred income tax expense		(145	)		(552	)
Unrealized holding gains adjustment, net of tax		239			666
Defined Benefit Pension Plans:
Net periodic pension cost		(60	)		(174	)
Net pension gain		60			174
Total other comprehensive income		239			666
Comprehensive income	$	2,073		$	1,787

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

3

ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands)	Three Months Ended March 31, 2017
Common stock
December 31, 2016	$	38
March 31, 2017	$	38
Additional paid-in capital
December 31, 2016	$	20,170
ESOP shares allocated		191
Stock-based compensation expense		264
Vesting of restricted stock		(649	)
March 31, 2017	$	19,976
Retained earnings
December 31, 2016	$	77,306
Net income		1,834
March 31, 2017	$	79,140
Accumulated other comprehensive income (loss), net of tax
December 31, 2016	$	(1,865	)
Other comprehensive income		239
March 31, 2017	$	(1,626	)
Unearned ESOP shares
December 31, 2016	$	(2,824	)
ESOP shares allocated		77
March 31, 2017	$	(2,747	)
Unearned equity incentive plan shares
December 31, 2016	$	(1,310	)
Vesting of restricted stock		649
March 31, 2017	$	(661	)
Stock-based deferral plan shares
December 31, 2016	$	(378	)
Stock-based deferral plan shares purchased		(2	)
March 31, 2017	$	(380	)
Total shareholders’ equity
December 31, 2016	$	91,137
Net income		1,834
Other comprehensive income		239
ESOP shares allocated		268
Stock-based compensation expense		264
Stock-based deferral plan shares purchased		(2	)
March 31, 2017	$	93,740

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

4

ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Three Months Ended March 31,
(Dollars in thousands)	2017			2016
Operating Activities
Net income	$	1,834		$	1,121
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		57			399
Depreciation		193			194
Gain on sale of foreclosed real estate		(16	)		-
Increase in cash surrender value of bank owned life insurance		(86	)		-
Deferred income tax expense (benefit)		208			(7	)
Net amortization of premiums on securities		475			585
Gain on sale of investment securities		(27	)		(456	)
Net amortization of deferred fees on loans		40			15
Mortgage loans originated for sale		(13,660	)		(10,084	)
Proceeds from sale of mortgage loans		17,012			13,062
Gain on sale of mortgage loans		(445	)		(313	)
ESOP compensation expense		268			192
Stock-based compensation expense		264			267
Excess tax benefits from equity awards		(228	)		(136	)
Decrease in income tax receivable		593			209
Decrease in interest receivable		107			179
Net change in other assets and liabilities		1,063			487
Net cash provided by operating activities		7,652			5,714
Investing Activities
Purchases of securities available for sale		(1,175	)		(1,106	)
Proceeds from sales of securities available for sale		1,194			18,248
Principal repayments on mortgage-backed and asset-backed securities		2,382			2,770
Redemption (purchase) of FHLB stock		1,264			(107	)
Net increase in loans receivable		(2,312	)		(19,726	)
Net proceeds from sales of foreclosed real estate		30			49
Purchases of premises and equipment		(68	)		(171	)
Net cash provided by (used in) investing activities		1,315			(43	)

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

5

ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited)

	Three Months Ended March 31,
(Dollars in thousands)	2017			2016
Financing Activities
Net increase (decrease) in deposits	$	34,446		$	(2,489	)
Net repayments of Federal Home Loan Bank advances		(30,000	)		-
Net proceeds from overnight and short-term borrowings		316			372
Stock-based deferral plan shares purchased		(2	)		-
Excess tax benefits from equity awards		-			136
Net cash provided by (used in) financing activities		4,760			(1,981	)
Net increase in cash and cash equivalents		13,727			3,690
Cash and cash equivalents at beginning of period		46,724			33,401
Cash and cash equivalents at end of period	$	60,451		$	37,091
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest on deposits, advances and other borrowings	$	865		$	841
Income taxes		-			77
Non-cash investing and financing transactions:
Increase in unrealized gains and losses on securities available for sale		401			1,507
Decrease in deferred income taxes resulting from other comprehensive income		(135	)		(385	)

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

6

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These interim financial statements do not contain all necessary disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for a complete set of financial statements and, therefore, should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K of ASB Bancorp, Inc. for the year ended December 31, 2016 filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2017.  These financial statements were prepared on a basis consistent with the audited consolidated financial statements previously referenced and include all normal and recurring adjustments that management believes are necessary in order to conform to GAAP.  The results for the three months ended March 31, 2017  are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or any other future period.

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

The Bank is headquartered in Asheville, North Carolina and provides mortgage, consumer and commercial banking services primarily in Buncombe, Henderson, McDowell, Transylvania and Madison counties in North Carolina. The Bank is regulated by the Office of the North Carolina Commissioner of Banks (“NCCoB”) and the Federal Deposit Insurance Corporation (“FDIC”). The Company is regulated by the Board of Governors of the Federal Reserve System (the “FRB”) and the NCCoB.

Principles of Consolidation – The consolidated financial statements include the accounts of the Parent and its wholly owned subsidiary, the Bank (collectively, the “Company”). The Bank has two wholly-owned subsidiaries, Appalachian Financial Services, Inc., which has on occasion managed the Bank’s real estate acquired through debt default but is currently inactive, and Wenoca, Inc., which serves as the Bank’s trustee regarding deeds of trust. Both subsidiaries are organized as North Carolina corporations. For purposes of the consolidated financial statements, all significant intercompany accounts and transactions have been eliminated. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America.

Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Investment Securities – Realized gains and losses on sales of investment securities are recognized at the time of sale (“trade date”) based upon the specific identification method.

Interest income includes amortization of purchase premiums and discounts. Realized gains and losses are derived from the amortized cost of the security sold. Declines in the fair value of held to maturity and available for sale debt securities below their cost that are deemed to be other than temporary because of credit risk impairment are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other factors, (i) the length of time and the extent to 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 and leases are generally secured by real property, personal property, or business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation.

Non-Commercial Loan Segment

The Bank underwrites its non-commercial loans using automated credit scoring and analysis tools. These credit scoring tools take into account factors such as payment history, credit utilization, length of credit 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. Recent declines in value have led to unprecedented levels of foreclosures and losses within the banking industry. Non-commercial construction and land development loans can experience delays in completion and cost overruns that exceed the borrower’s financial ability to complete the project. Such cost overruns can result in foreclosure of partially completed and unmarketable collateral.

Revolving Mortgage loans are often secured by second liens on residential real estate, thereby making such loans particularly susceptible to declining collateral values. A substantial decline in collateral value could render the Bank’s second lien position to be effectively unsecured. Additional risks include lien perfection inaccuracies and disputes with first lien holders that may further weaken collateral positions. Further, the open-end structure of these loans creates the risk that customers may draw on the lines in excess of the collateral value if there have been significant declines since origination.

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

Credit Quality Indicators

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

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

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

Special Mention – A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.

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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)

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

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

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

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

The Bank might consider modifying both accruing or nonaccruing loans as TDRs. When a modification includes a reduction of principal that resulted from a partial charge-off of the loan, the Bank typically accounts for the TDR as a nonaccruing loan.

The Bank classifies TDRs as impaired loans and evaluates the need for an allowance for loan loss on a loan-by-loan basis consistent with its evaluation of impaired loans that have not been modified as TDRs. An allowance is based on either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the estimated fair value of the underlying collateral less any selling costs, if the loan is deemed to be collateral dependent.

The Bank’s policy for recognition of interest income on loans considered to be impaired, including restructured loans, is the same as its interest income recognition policy for loans not considered to be impaired.

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loan Charge-Offs – The Bank charges off loan balances, in whole or in part, when available, verifiable, and documentable information confirms that specific loans, or portions of specific loans, are uncollectible or unrecoverable. For unsecured loans, losses are confirmed when it can be determined that the borrower, or any guarantor, is unwilling or unable to pay the amounts as agreed. When the borrower, or any guarantors, are unwilling or unable to pay the amounts as agreed on a loan secured by collateral and any recovery is dependent upon the sale of the collateral, the loan is deemed to be collateral dependent. Repayments or recoveries for collateral dependent loans are directly affected by the value of the collateral at liquidation.  As such, loan repayment can be affected by factors that influence the amount recoverable, the timing of the recovery, or a combination of the two. Such factors include economic conditions that affect the markets in which the loan or its collateral is sold, bankruptcy, repossession and foreclosure laws, and consumer banking regulations. Losses are also confirmed when the loan, or a portion of the loan, is classified as loss resulting from loan reviews conducted by the Bank.

Charge-offs of loans in the commercial loan segment are recognized when the uncollectibility of the loan balance and the inability to recover sufficient value from the sale of any collateral securing the loan is confirmed. The uncollectibility of the loan balance is evidenced by the inability of the commercial borrower to generate cash flows sufficient to repay the loan as agreed causing the loan to become delinquent. For collateral dependent commercial loans, the Bank determines the fair value of the collateral based on appraisals, current market conditions, and estimated costs to sell the collateral. For collateral dependent commercial loans where the loan balance, including any accrued interest, net deferred fees or costs, and unamortized premiums or discounts, exceeds the fair value of the collateral securing the loan, the deficiency is identified as unrecoverable, is deemed to be a confirmed loss, and is charged off.

Charge-offs of loans in the non-commercial loan segment are generally confirmed and recognized in a manner similar to loans in the commercial loan segment. Secured non-commercial loans that are identified as uncollectible and are deemed to be collateral dependent are confirmed as loss to the extent the fair value of the collateral is insufficient to recover the loan balance. Closed-end consumer loans that become 120 cumulative days past due and open-end consumer loans that become 180 cumulative days past due are charged off to the extent that the fair value of any collateral, less estimated costs to sell the collateral, is insufficient to recover the loan balance. Closed-end and open-end loans secured by residential real estate that become 180 days past due are charged off to the extent that the fair value of the residential real estate securing the loan, less estimated costs to sell the collateral, is insufficient to recover the loan balance. Loans determined to be fraudulent are charged off within 90 days of discovery. Loans to borrowers in bankruptcy are subject to modification by the bankruptcy court and are charged off to the extent that the fair value of any collateral securing the loan, less estimated costs to sell the collateral, is insufficient to recover the loan balance, unless the Bank expects repayment is likely to occur. Such loans are charged off within 60 days of the receipt of notification from a bankruptcy court or when the loans become 120 days past due, whichever is shorter.

Foreclosed Real Estate and Repossessed Assets – Foreclosed real estate and repossessed assets consist of real estate and other assets acquired as a result of customers’ loan defaults. Foreclosed real estate and repossessed assets are stated at the lower of the related loan balance or the fair value of the property net of the estimated costs of disposal with a charge to the allowance for loan losses upon foreclosure or repossession. Any write-downs subsequent to foreclosure or repossession are charged against operating earnings. To the extent recoverable, costs relating to the development and improvement of real property are capitalized, whereas those costs relating to holding the property are charged to expense.

Bank Owned Life Insurance – The Bank purchased bank owned life insurance (“BOLI”) as a financing tool for employee benefits. The earnings on the BOLI are recorded as other noninterest income. Since the

12

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Bank intends to hold the BOLI until the death of the insured, the Bank benefits from the tax-exempt nature of income resulting from increases in the cash surrender values of the life insurance policies. The value of the life insurance to the Bank is the tax preferred treatment of increases in policy cash values and death benefits and the cash flow generated at the death of the insured. The largest risk to the BOLI program is credit risk of the insurance carriers. To mitigate this risk, annual financial condition reviews are completed on all carriers.

Comprehensive Income – Comprehensive income is defined as the change in equity of an enterprise during a period from transactions and other events and circumstances from non-owner sources and, accordingly, includes both net income and amounts referred to as other comprehensive income (“OCI”). The items of OCI are included in the Consolidated Statements of Comprehensive Income. The accumulated balance of OCI is included in the equity section of the Consolidated Balance Sheets. The Company’s components of accumulated OCI include unrealized gains and/or losses on investment securities classified as available for sale and certain changes in the Company’s benefit obligations under its retirement plans. The Company adjusts the level of accumulated OCI related to its retirement plans on an annual basis, consistent with the receipt of its annual actuarial studies.

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

	Three Months Ended March 31, 2017
(Dollars in thousands)	Beginning Balance			OCI Before Reclassification		Amount Reclassified			Net OCI		Ending Balance
Three Months Ended March 31, 2017
Unrealized loss on securities	$	(1,647	)	$	256	$	(17	)	$	239	$	(1,408	)
Benefit plan liability		(218	)		38		(38	)		-		(218	)
Accumulated other comprehensive income (loss), net of tax	$	(1,865	)	$	294	$	(55	)	$	239	$	(1,626	)
Three Months Ended March 31, 2016
Unrealized gain on securities	$	265		$	955	$	(289	)	$	666	$	931
Benefit plan liability		(5,326	)		110		(110	)		-		(5,326	)
Accumulated other comprehensive income (loss), net of tax	$	(5,061	)	$	1,065	$	(399	)	$	666	$	(4,395	)

13

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 March 31, 2017			Three Months Ended March 31, 2016
Reclassification of securities gains recognized in net income	$	(27	)	$	(456	)	Gain on sale of investment securities
Deferred income tax expense		10			167		Income tax provision
Total reclassifications for the period	$	(17	)	$	(289	)	Net of tax
Net periodic pension cost	$	(60	)	$	(174	)	Salaries and employee benefits
Deferred income tax benefit		22			64		Income tax provision
Total reclassifications for the period	$	(38	)	$	(110	)	Net of tax

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

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

The Bank’s loss carry forward period under applicable North Carolina income tax laws is 15 years with a remaining loss carry forward period of 12 years. The Bank includes interest and penalties related to income tax liabilities in noninterest expense. The Bank’s tax filings for the years 2013 and thereafter are currently open to audit under statutes of limitations by the Internal Revenue Service and the North Carolina Department of Revenue.

14

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Pension Plan – The Bank has qualified and nonqualified defined benefit pension plans. The Bank recognizes the overfunded or underfunded status of the plans as an asset or liability in its consolidated balance sheets 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. GAAP requires additional disclosure in the notes to financial statements about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation.  In November 2016, the Bank settled its qualified pension plan liability, which  was recognized in the fourth quarter of 2016 when participants received annuities or lump sum payments of their accrued benefit balances.  The Bank also decided to settle its non-qualified pension plan for all participants effective August 15, 2016.  The settlement is expected to be recognized in the third quarter of 2017. See note 5 included in the consolidated financial statements regarding the plan termination.

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

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

Equity Incentive Plan – The Company issued restricted stock and stock options under the 2012 Equity Incentive Plan (the “2012 Equity Incentive Plan”) to key officers and outside directors during the first quarter of 2013 and to additional key officers and a newly appointed outside director during 2014.  There were no grants under the 2012 Equity Incentive Plan during 2016 or during the first three months of 2017. The Company uses a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured based on the fair value of the award as of the grant date and recognized over the vesting period.

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Net Income Per Common Share – Where presented, basic net income per common share is the Company’s net income available to common shareholders, which represents net income less dividends paid or payable to preferred stock shareholders, if any, divided by the weighted average number of common shares outstanding during the period. In calculating the weighted average number of common shares outstanding, shares held by the ESOP are not considered to be outstanding until they are committed to be released for allocation and the weighted average of unvested restricted shares are not considered outstanding until the shares vest.

For diluted income per common share, net income available to common shareholders is divided by the weighted average number of common shares issued and outstanding for each period plus amounts representing the dilutive effect of stock options and restricted stock. The effects of restricted stock and stock options are excluded from the computation of diluted income per common share in periods in which the effect would be antidilutive. Potential common shares that might be issued by the Company relate solely to outstanding stock options and restricted stock and are determined using the treasury stock method.

Net income per common share has been computed based on the following:

	Three Months Ended March 31,
(Dollars in thousands, except per share data)	2017			2016
Numerator:
Net income	$	1,834		$	1,121
Denominator:
Weighted average common shares outstanding		3,788,025			3,985,475
Less: Weighted average unvested restricted shares		(57,016	)		(97,144	)
Less: Weighted average unallocated ESOP shares		(278,609	)		(309,964	)
Weighted average common shares used to compute net income per common share – Basic		3,452,400			3,578,367
Add: Effect of dilutive securities		244,794			141,760
Weighted average common shares used to compute net income per common share – Diluted		3,697,194			3,720,127
Net income per common share – Basic	$	0.53		$	0.31
Net income per common share – Diluted	$	0.50		$	0.30

For the three months ended March 31, 2017, there were no options to purchase shares of common stock and there were no restricted stock shares excluded from the computation of net income per common share because their effect would be anti-dilutive.  For the three months ended March 31, 2016, options to purchase 71 shares of common stock were excluded from the computation of net income per common share because their effect would be anti-dilutive and there were no restricted stock shares excluded from the computation of net income per common share because their effect would be anti-dilutive.

During the first quarter of 2017, the Company adopted the new guidance in Accounting Standards Update ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, on a prospective basis for the reporting for its 2012 Equity Incentive Plan.  The adoption had the effect of increasing net income by decreasing income taxes by $228,000 and increasing the weighted average common shares on a diluted basis by 41,359 shares.

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Reclassifications – Certain reclassifications have been made to the financial statements of the prior periods presented to conform to the current period presentation. The reclassifications had no effect on net income, net income per common share, or shareholders’ equity as previously reported.

Recent Accounting Pronouncements

Accounting Standards Update ASU 2016-01 – In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance on the classification and measurement of financial instruments and also amends certain disclosure requirement associated with the fair value of those instruments.  For public entities, the amendments in ASU 2016-01 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.  The Company is currently evaluating this guidance to determine the impact on the Company’s consolidated financial statements.

Accounting Standards Update ASU 2016-02 – In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 introduces a new lease model that refines the evaluation for lease accounting and addresses other concerns related to the current leases model. For public entities, the new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.  The Company is currently evaluating this guidance to determine the impact on the Company’s consolidated financial statements.  Upon adoption, the Company expects to report higher assets and liabilities as a result of including additional leases on the Consolidated Balance Sheet.

Accounting Standards Update ASU 2016-09 – In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718):  Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payments, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. For public entities, ASU 2016-09 is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2016.  Amongst other provisions upon adoption, the Company elected to continue to estimate forfeitures of equity-based awards. The Company adopted the new guidance on a prospective basis in the first quarter of 2017.  The adoption had the effect of increasing net income by decreasing income taxes by $228,000 and increasing the weighted average common shares on a diluted basis by 41,359 shares during the first quarter of 2017.

Accounting Standards Update ASU 2016-13 – In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), which improves financial reporting by requiring timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations.  ASU 2016-13 requires the measurement of all expected credit losses for financial assets not recorded at fair value based on historical experience, current conditions, and reasonable and supportable forecasts.  For public entities that are SEC filers, ASU 2016-13 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. This standard will be required to be implemented through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the amendments are effective. Upon adoption, the Company expects that the allowance for credit losses will likely be higher; however, the Company is still in the process of determining the magnitude of the increase and its impact on the Company’s consolidated financial statements.

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounting Standards Update ASU 2016-15 – In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):  Classification of Certain Cash Receipts and Cash Payments, which was issued to address diversity in practice of how certain cash receipts and cash payments are currently presented and classified in the statement of cash flows.  The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017 and for interim periods within those fiscal years.  Early adoption is permitted.  The amendments should be applied using a retrospective transition method to each period presented. The Company is currently evaluating this guidance to determine the impact on the Company’s consolidated financial statements.

Accounting Standards Update ASU 2016-20 – In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, to make a limited number of revisions to the guidance in Update 2014-09, which is not yet effective.  The effective date and transition requirements for the amendments in ASU 2016-20 are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09).  Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606):  Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. Public business entities are now required to adopt 2014-09 for reporting periods beginning after December 15, 2017 and for interim periods within those fiscal years. All entities will be required to apply the standard retrospectively, either using a full retrospective or a modified retrospective approach. Early adoption is not permitted.  Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, adoption of the new guidance is not expected to have a material impact on the components of the Company’s Consolidated Statement of Income most closely associated with financial instruments, including securities gains/losses and interest income. The Company is currently evaluating this guidance to determine the impact on other components of noninterest income. If the Company chooses a full retrospective approach, the adoption will require a restatement for 2016 and 2017 to show comparative financial statements with a cumulative adjustment as of January 1, 2016 to disclose revenue and the direct effects of change in accounting principle.

Accounting Standards Update ASU 2017-07 – In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The amendments in ASU 2017-07 are effective for public business entities for annual periods beginning after December 15, 2017 and for interim periods within those annual periods.  Early adoption is permitted.  The amendments should be applied using a retrospective transition method to each period presented. The Company is currently evaluating this guidance to determine the impact on the Company’s consolidated financial statements.

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  

2. INVESTMENT SECURITIES

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

Type And Maturity Group (Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
March 31, 2017
U.S. Government Sponsored Enterprise (GSE) and agency securities due -
Within 1 year	$	1,007	$	-	$	-		$	1,007
After 1 year but within 5 years		1,079		-		(6	)		1,073
Asset-backed securities issued by the Small Business Administration (SBA)		4,046		21		(8	)		4,059
Residential mortgage-backed securities issued by GSEs (1)		38,347		94		(615	)		37,826
State and local government securities due -
After 10 years		54,402		104		(1,775	)		52,731
Mutual funds		781		-		(14	)		767
Total	$	99,662	$	219	$	(2,418	)	$	97,463
December 31, 2016
U.S. Government Sponsored Enterprise (GSE) and agency securities due -
Within 1 year	$	1,011	$	-	$	-		$	1,011
After 1 year but within 5 years		1,085		-		(7	)		1,078
Asset-backed securities issued by the Small Business Administration (SBA)		4,407		17		(11	)		4,413
Residential mortgage-backed securities issued by GSEs (1)		40,619		88		(733	)		39,974
State and local government securities due -
After 10 years		54,583		54		(1,967	)		52,670
Mutual funds		777		-		(14	)		763
Total	$	102,482	$	159	$	(2,732	)	$	99,909

(1) Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at March 31, 2017 and December 31, 2016 or during the three- and twelve-month periods, respectively, then ended.

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)  

2. INVESTMENT SECURITIES (Continued)

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

Type And Maturity Group (Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
March 31, 2017
U.S. GSE  and agency securities due -
After 1 year but within 5 years	$	1,005	$	10	$	-	$	1,015
Residential mortgage-backed securities issued by GSEs (1)		197		16		-		213
State and local government securities due -
After 1 year but within 5 years		972		73		-		1,045
After 5 years but within 10 years		1,469		96		-		1,565
Total	$	3,643	$	195	$	-	$	3,838
December 31, 2016
U.S. GSE  and agency securities due -
Within 1 year	$	1,009	$	18	$	-	$	1,027
Residential mortgage-backed securities issued by GSEs (1)		223		17		-		240
State and local government securities due -
After 5 years but within 10 years		2,440		168		-		2,608
Total	$	3,672	$	203	$	-	$	3,875

(1) Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at March 31, 2017 and December 31, 2016 or during the three- and twelve-month periods, respectively, then ended.

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

2. INVESTMENT SECURITIES (Continued)

The following tables show investment gross unrealized losses and fair value, aggregated by investment  category and length of time that individual securities have been in a continuous unrealized loss position,  at March 31, 2017 and December 31, 2016. The total number of securities with unrealized losses at  March 31, 2017 and December 31, 2016 were 48 and 56, respectively. The unrealized losses relate to debt and equity securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased. The unrealized losses are not likely to reverse unless and until market interest rates decline to the levels that existed when the securities were purchased. Management has the intent to hold securities with unrealized losses until a recovery of the market value occurs. Management has determined that it is more likely than not that the Company will not be required to sell any of the securities with unrealized losses prior to a recovery of market value sufficient to negate the unrealized loss. Management has analyzed the creditworthiness of the underlying issuers and determined that the Company will collect all contractual cash flows and, therefore, all impairment is considered to be temporary.

	March 31, 2017
	Less Than 12 Months					12 Months Or More					Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Securities Available For Sale
US GSE and agency	$	1,073	$	(6	)	$	-	$	-		$	1,073	$	(6	)
Asset-backed SBA		716		(1	)		1,011		(7	)		1,727		(8	)
Residential mortgage-backed GSE (1)		14,880		(470	)		16,081		(145	)		30,961		(615	)
State and local government		37,626		(1,775	)		-		-			37,626		(1,775	)
Mutual funds		767		(14	)		-		-			767		(14	)
Total temporarily impaired securities	$	55,062	$	(2,266	)	$	17,092	$	(152	)	$	72,154	$	(2,418	)

(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 March 31, 2017 or during the three-month period then ended.

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

2. INVESTMENT SECURITIES (Continued)

	December 31, 2016
	Less Than 12 Months					12 Months Or More					Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Securities Available For Sale
US GSE and agency	$	2,088	$	(7	)	$	-	$	-		$	2,088	$	(7	)
Asset-backed SBA		1,647		(3	)		1,049		(8	)		2,696		(11	)
Residential mortgage-backed GSE (1)		15,274		(549	)		18,352		(184	)		33,626		(733	)
State and local government		46,333		(1,967	)		-		-			46,333		(1,967	)
Mutual funds		776		(14	)		-		-			776		(14	)
Total temporarily impaired securities	$	66,118	$	(2,540	)	$	19,401	$	(192	)	$	85,519	$	(2,732	)

(1) Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at December 31, 2016 or during the twelve-month period then ended.

Investment securities pledged as collateral follows:

(Dollars in thousands)	March 31, 2017		December 31, 2016
Pledged to Federal Reserve Discount Window	$	7,555	$	8,264
Pledged to repurchase agreements for commercial customers		1,073		840

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

	Three Months Ended March 31,
(Dollars in thousands)	2017		2016
Interest income from taxable securities	$	132	$	220
Interest income from tax-exempt securities		388		368
Total interest income from securities	$	520	$	588

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ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

2. INVESTMENT SECURITIES (Continued)

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

	Three Months Ended March 31,
(Dollars in thousands)	2017		2016
Proceeds from sales of securities	$	1,194	$	18,248
Gross realized gains from sales of securities		27		470
Gross realized losses from sales of securities		-		(14	)

3. LOANS RECEIVABLE

Loans receivable by segment and class follow:

(Dollars in thousands)	March 31, 2017			December 31, 2016
Commercial:
Commercial construction and land development	$	22,865		$	27,813
Commercial mortgage		245,997			241,125
Commercial and industrial		24,831			23,819
Total commercial		293,693			292,757
Non-commercial:
Non-commercial construction and land development		23,494			20,801
Residential mortgage		203,655			200,590
Revolving mortgage		65,071			66,870
Consumer		20,085			22,805
Total non-commercial		312,305			311,066
Total loans receivable		605,998			603,823
Less: Deferred loan fees		(172	)		(241	)
Total loans receivable net of deferred loan fees		605,826			603,582
Less: Allowance for loan losses		(6,573	)		(6,544	)
Loans receivable, net	$	599,253		$	597,038

23

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
March 31, 2017
Commercial:
Commercial construction and land development	$	22,732	$	133	$	-	$	-	$	-	$	22,865
Commercial mortgage		234,593		10,811		593		-		-		245,997
Commercial and industrial		23,914		711		206		-		-		24,831
Total commercial		281,239		11,655		799		-		-		293,693
Non-commercial:
Non-commercial construction and land development		23,494		-		-		-		-		23,494
Residential mortgage		197,298		5,771		586		-		-		203,655
Revolving mortgage		61,687		2,935		449		-		-		65,071
Consumer		19,438		585		62		-		-		20,085
Total non-commercial		301,917		9,291		1,097		-		-		312,305
Total loans receivable	$	583,156	$	20,946	$	1,896	$	-	$	-	$	605,998
December 31, 2016
Commercial:
Commercial construction and land development	$	27,677	$	136	$	-	$	-	$	-	$	27,813
Commercial mortgage		229,571		10,954		600		-		-		241,125
Commercial and industrial		22,872		735		212		-		-		23,819
Total commercial		280,120		11,825		812		-		-		292,757
Non-commercial:
Non-commercial construction and land development		20,801		-		-		-		-		20,801
Residential mortgage		193,235		6,200		1,155		-		-		200,590
Revolving mortgage		63,479		2,829		562		-		-		66,870
Consumer		22,360		393		52		-		-		22,805
Total non-commercial		299,875		9,422		1,769		-		-		311,066
Total loans receivable	$	579,995	$	21,247	$	2,581	$	-	$	-	$	603,823

24

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
March 31, 2017
Commercial:
Commercial construction and land development	$	-	$	-	$	-	$	22,865	$	22,865
Commercial mortgage		-		-		-		245,997		245,997
Commercial and industrial		213		57		270		24,561		24,831
Total commercial		213		57		270		293,423		293,693
Non-commercial:
Non-commercial construction and land development		-		-		-		23,494		23,494
Residential mortgage		165		184		349		203,306		203,655
Revolving mortgage		14		213		227		64,844		65,071
Consumer		201		32		233		19,852		20,085
Total non-commercial		380		429		809		311,496		312,305
Total loans receivable	$	593	$	486	$	1,079	$	604,919	$	605,998
December 31, 2016
Commercial:
Commercial construction and land development	$	-	$	-	$	-	$	27,813	$	27,813
Commercial mortgage		-		-		-		241,125		241,125
Commercial and industrial		-		63		63		23,756		23,819
Total commercial		-		63		63		292,694		292,757
Non-commercial:
Non-commercial construction and land development		-		-		-		20,801		20,801
Residential mortgage		293		626		919		199,671		200,590
Revolving mortgage		156		240		396		66,474		66,870
Consumer		250		-		250		22,555		22,805
Total non-commercial		699		866		1,565		309,501		311,066
Total loans receivable	$	699	$	929	$	1,628	$	602,195	$	603,823

25

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:

	March 31, 2017				December 31, 2016
(Dollars in thousands)	Nonaccruing		Past Due 90 Days Or More And Still Accruing		Nonaccruing		Past Due 90 Days Or More And Still Accruing
Commercial:
Commercial and industrial	$	57	$	-	$	63	$	-
Total commercial		57		-		63		-
Non-commercial:
Residential mortgage		184		-		626		-
Revolving mortgage		295		-		323		-
Consumer		32		-		-		-
Total non-commercial		511		-		949		-
Total loans receivable	$	568	$	-	$	1,012	$	-

The Bank services loans for Habitat for Humanity of Western North Carolina as an in-kind donation. The balances of these loans were $16.6 million at March 31, 2017 and $16.7 million at December 31, 2016.

Loans made to directors and executive officers in the ordinary course of business with terms consistent with those offered to the Bank’s other customers follow:

(Dollars in thousands)	March 31, 2017			December 31, 2016
Director and executive officer loans, beginning of period	$	3,356		$	3,530
New loans		85			191
Repayments of loans		(202	)		(365	)
Director and executive officer loans, end of period	$	3,239		$	3,356

26

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:

(Dollars in thousands)	Commercial		Non- Commercial			Total
Three Months Ended March 31, 2017
Balance at beginning of period	$	3,968	$	2,576		$	6,544
Provision for loan losses		8		49			57
Charge-offs		-		(53	)		(53	)
Recoveries		13		12			25
Balance at end of period	$	3,989	$	2,584		$	6,573

(Dollars in thousands)	Commercial		Non- Commercial			Total
Three Months Ended March 31, 2016
Balance at beginning of period	$	3,710	$	2,579		$	6,289
Provision for (recovery of) loan losses		464		(65	)		399
Charge-offs		-		(8	)		(8	)
Recoveries		5		37			42
Balance at end of period	$	4,179	$	2,543		$	6,722

27

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
March 31, 2017
Commercial:
Commercial construction and land development	$	-	$	247	$	247	$	-	$	22,865	$	22,865
Commercial mortgage		3		3,405		3,408		2,869		243,128		245,997
Commercial and industrial		5		329		334		205		24,626		24,831
Total commercial		8		3,981		3,989		3,074		290,619		293,693
Non-commercial:
Non-commercial construction and land development		-		200		200		-		23,494		23,494
Residential mortgage		18		1,334		1,352		1,630		202,025		203,655
Revolving mortgage		82		744		826		340		64,731		65,071
Consumer		-		206		206		-		20,085		20,085
Total non-commercial		100		2,484		2,584		1,970		310,335		312,305
Total loans receivable	$	108	$	6,465	$	6,573	$	5,044	$	600,954	$	605,998
December 31, 2016
Commercial:
Commercial construction and land development	$	-	$	295	$	295	$	-	$	27,813	$	27,813
Commercial mortgage		8		3,338		3,346		2,894		238,231		241,125
Commercial and industrial		6		321		327		212		23,607		23,819
Total commercial		14		3,954		3,968		3,106		289,651		292,757
Non-commercial:
Non-commercial construction and land development		-		177		177		-		20,801		20,801
Residential mortgage		22		1,309		1,331		2,172		198,418		200,590
Revolving mortgage		83		767		850		241		66,629		66,870
Consumer		-		218		218		-		22,805		22,805
Total non-commercial		105		2,471		2,576		2,413		308,653		311,066
Total loans receivable	$	119	$	6,425	$	6,544	$	5,519	$	598,304	$	603,823

28

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
March 31, 2017
Commercial:
Commercial mortgage	$	2,869	$	2,869	$	-	$	2,869	$	3
Commercial and industrial		292		148		57		205		5
Total commercial		3,161		3,017		57		3,074		8
Non-commercial:
Residential mortgage		1,642		772		858		1,630		18
Revolving mortgage		354		82		258		340		82
Total non-commercial		1,996		854		1,116		1,970		100
Total impaired loans	$	5,157	$	3,871	$	1,173	$	5,044	$	108
December 31, 2016
Commercial:
Commercial mortgage	$	2,894	$	2,894	$	-	$	2,894	$	8
Commercial and industrial		697		149		63		212		6
Total commercial		3,591		3,043		63		3,106		14
Non-commercial:
Residential mortgage		2,089		583		1,589		2,172		22
Revolving mortgage		255		83		158		241		83
Total non-commercial		2,344		666		1,747		2,413		105
Total impaired loans	$	5,935	$	3,709	$	1,810	$	5,519	$	119

29

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 March 31, 2017				Three Months Ended March 31, 2016
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial:
Commercial construction and land development	$	-	$	-	$	126	$	-
Commercial mortgage		2,878		31		3,648		32
Commercial and industrial		207		2		244		-
Total commercial		3,085		33		4,018		32
Non-commercial:
Residential mortgage		1,926		13		2,886		14
Revolving mortgage		302		-		93		-
Total non-commercial		2,228		13		2,979		14
Total loans receivable	$	5,313	$	46	$	6,997	$	46

The Bank did not restructure any loans during the three months ended March 31, 2017 and March 31, 2016. There were no loans modified as TDRs within the preceding twelve months that stopped performing during the three months ended March 31, 2017 and March 31, 2016.

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

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

(Dollars in thousands)	March 31, 2017		December 31, 2016
Nonperforming restructured loans	$	12	$	13
Performing restructured loans		4,461		4,543
Total	$	4,473	$	4,556

As of March 31, 2017 and December 31, 2016, the Bank had $119,000 and $496,000, respectively, of residential real estate loans in the process of foreclosure and $953,000 of foreclosed residential real estate property included in foreclosed real estate for both periods.

30

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

5. BENEFIT PLANS

Defined Benefit Plans – Prior to November 2016, the Bank had a qualified defined benefit pension plan covering substantially all of its employees. The benefits were based on years of service and the employee’s compensation during employment. The Bank’s funding policy was based on actuarially determined amounts. Prior service costs were amortized using the straight line method. Contributions were intended to provide for not only benefits attributed to service to date but also for those expected to be earned in the future. In addition, the Bank currently has a non-qualified plan covering certain officers whose benefit under the qualified plan would be reduced as a result of Internal Revenue Code limitations. The non-qualified plan is an unfunded plan and any benefits payable shall be paid from the general assets of the Bank.

The Bank settled its qualified pension plan liability in November 2016 for all participants. The settlement was recognized in the fourth quarter of 2016 when participants received annuities or lump sum payments of their accrued benefit balances. The Bank decided to settle its non-qualified pension plan for all participants effective August 15, 2016.  The settlement expense is estimated at $200,000 and is expected to be recognized in the third quarter of 2017.

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

	Three Months Ended March 31,
(Dollars in thousands)	2017		2016
Non-Qualified Defined Benefit Plan
Components of Net Periodic Benefit Costs:
Interest cost	$	6	$	14
Amortization of net loss		60		12
Net periodic pension cost	$	66	$	26

	Three Months Ended March 31,
(Dollars in thousands)	2017		2016
Qualified Defined Benefit Plan
Components of Net Periodic Benefit Costs:
Interest cost	$	-	$	235
Expected return on plan assets		-		(200	)
Amortization of net loss		-		162
Net periodic pension cost	$	-	$	197

31

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 trust until released for allocation to the participants as principal and interest payments are made by the ESOP to the Parent.

Shares released are allocated to each eligible participant based on the ratio of each participant’s compensation, as defined in the ESOP, to the total compensation of all eligible plan participants. Forfeited shares shall be reallocated among other active participants in the Plan. At the discretion of the Bank, cash dividends, when paid on allocated shares, will be distributed to participants’ accounts or used to repay the principal and interest on the ESOP loan used to acquire Parent stock on which dividends were paid. Cash dividends on unallocated shares will be used to repay the outstanding debt of the ESOP.

Shares held by the ESOP include the following:

	March 31, 2017
Allocated ESOP shares, December 31, 2016		141,710
ESOP shares committed to be released during the period		7,739
ESOP shares withdrawn during the period		(18	)
Unallocated ESOP shares		274,740
Total ESOP shares		424,171
Fair value of unallocated ESOP shares (dollars in thousands)	$	9,341

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.

32

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

5. BENEFIT PLANS (Continued)

Total expense recognized in connection with the ESOP follows:

	Three Months Ended March 31,
(Dollars in thousands)	2017		2016
ESOP expense	$	268	$	192

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 223,382 shares of its common stock at a total cost of $3.6 million, or an average of $16.12 per share, through an independent trustee to fulfill anticipated restricted stock awards.  The share-based awards granted under the 2012 Equity Incentive Plan have some similar characteristics, except some awards have been granted in restricted stock and other awards have been granted in stock options.  Therefore, the following disclosures have been disaggregated for the restricted stock awards and the stock option grants under the plan due to their dissimilar characteristics.

Share-based compensation expenses related to restricted stock and stock options recognized for the three months ended March 31, 2017 and 2016 were $264,000 and $267,000, respectively.

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

	Restricted Stock Awards			Weighted Average Grant Date Fair Value
Unvested restricted shares at December 31, 2015		121,610		$	15.75
Vested and released to participants		(40,297	)		15.74
Unvested restricted shares at December 31, 2016		81,313		$	15.75
Vested and released to participants		(40,296	)		15.74
Unvested restricted shares at March 31, 2017		41,017		$	15.78

There were no restricted stock awards granted or forfeited during the three-month period ended March 31, 2017.

At March 31, 2017, unrecognized compensation expense, adjusted for expected forfeitures, was $525,000 related to restricted stock.  The weighted-average period over which compensation cost related to unvested awards is expected to be recognized was 0.90 years at March 31, 2017.

33

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, 2015		60,355		450,500		$	16.03		7.24	$	4,473
Exercised		-		(6,600	)		15.71
Outstanding at December 31, 2016		60,355		443,900		$	16.04		6.24	$	6,089
Outstanding at March 31, 2017		60,355		443,900		$	16.04		6.00	$	7,975
Options exercisable at March 31, 2017				337,800		$	15.90		5.94	$	6,115

The fair value of each option award is estimated on the date of the grant using the Black-Scholes option pricing model.  There were no stock options granted, exercised or forfeited during the three-month periods ended March 31, 2017 and March 31, 2016.

At March 31, 2017, the Company had $433,000 of unrecognized compensation expense related to stock options.  The weighted average period over which compensation cost related to unvested stock options is expected to be recognized was 1.24 years at March 31, 2017. There were 337,800 options vested and exercisable at March 31, 2017.

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.

34

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

6. COMMITMENTS AND CONTINGENCIES (Continued)

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.

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

(Dollars in thousands)	March 31, 2017		December 31, 2016
Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit	$	191,157	$	190,213
Commitments under standby letters of credit		274		604
Total	$	191,431	$	190,817

Concentrations of Credit Risk - The Bank’s primary market area consists of Buncombe, Henderson, McDowell, Transylvania and Madison counties of North Carolina.  The majority of the Bank’s loans are residential mortgage loans and commercial real estate loans. The Bank’s policy generally will allow residential mortgage loans up to 80% of the value of the real estate that is pledged as collateral or up to 95% with private mortgage insurance and commercial real estate loans up to 85% of the value of the real estate that serves as collateral to secure the loan.

Interest Rate Risk - The Bank’s profitability depends to a large extent on its net interest income, which is the difference between interest income from loans and investments and interest expense on deposits and borrowings. Like most financial institutions, the Bank’s interest income and interest expense are significantly affected by changes in market interest rates and other economic factors beyond its control. The Bank’s interest-earning assets consist primarily of long-term, fixed-rate mortgage loans, adjustable rate mortgage loans, commercial loans, and investments that typically adjust more slowly to changes in interest rates than its interest-bearing liabilities, which are primarily term deposits. Accordingly, the Bank’s earnings are usually adversely affected during periods of rising interest rates and positively impacted during periods of declining interest rates. However, based on the results of the Bank’s interest rate risk simulation model, which management believes accurately reflects the extraordinary stress currently existing in the financial markets with respect to potential margin compression resulting from the Bank’s difficulty in reducing its cost of funds further in this competitive pricing environment, the Bank’s earnings may well be adversely affected if interest rates decline further. Such a decline in rates could result from, among other factors, the Federal Reserve Board’s purchase of government securities and/or mortgage-backed securities in an effort to further stimulate the economy. Accordingly, the Bank is carefully monitoring, through its Asset/Liability management process, the competitive landscape related to interest rates as well as various economic indicators in order to optimally position the Bank in terms of changes in interest rates.

Litigation - The Bank is periodically involved in legal actions in the normal course of business. 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.

35

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

6. COMMITMENTS AND CONTINGENCIES (Continued)

Investment Commitments - During 2012, the Bank entered into an agreement to invest $2.0 million as a limited partner in a Small Business Investment Company. The Bank invested $350,000 of its investment commitment in 2013, $250,000 in 2014, $200,000 in 2015 and $300,000 in 2016.  This investment is recognized using the cost method and is included in “other assets” on the balance sheet.

7. FAIR VALUE MEASUREMENTS

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

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

The fair value estimates presented below are based on pertinent information available to management as of March 31, 2017 and December 31, 2016. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since the dates presented herein and, therefore, current estimates of fair value may differ significantly from the amounts presented.

The fair value measurement and disclosure guidance contained in FASB ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

Level 1

The fair values of Level 1 assets are determined by quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities that are traded in an active exchange market, as well as certain U.S. Treasury debt securities.

36

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

7. FAIR VALUE MEASUREMENTS (Continued)

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency mortgage-backed debt securities, SBA asset-backed securities, securities issued by state and local governments, corporate debt securities and loans held for sale.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments, loans receivable held for investment, accrued interest receivable and payable, time deposits, repurchase agreements, and Federal Home Loan Bank (“FHLB”) advances.

The methodologies for estimating fair values of financial assets and financial liabilities are determined as discussed below. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest, Federal Home Loan Bank Stock and demand deposits.

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

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

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

37

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

7. FAIR VALUE MEASUREMENTS (Continued)

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

When the fair value of the collateral is based on an observable market price or a current appraised value, the impaired loan is recorded as nonrecurring Level 2 assets. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Bank records the impaired loan as nonrecurring Level 3 assets.

Accrued Interest Receivable and Payable – The carrying amount is a reasonable estimate of fair value.

Deferred Compensation Assets – Assets include debt and equity securities that are traded in an active exchange market. Fair values are obtained from quoted prices in active markets for identical assets.

Demand and Savings Deposits – The fair values of demand and savings deposits approximate the carrying values of these liabilities because the balances may be withdrawn at any time without penalty.

Time Deposits and Repurchase Agreements – Fair value of fixed maturity certificates of deposit is estimated using the FHLB Rate Curve for similar remaining maturities. Fair value of repurchase agreements is estimated using the borrowing rate for overnight borrowings.

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

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

Defined Benefit Plan Assets – The Nonqualified Defined Benefit Plan had no plan assets because it was not funded. The assets of the Qualified Defined Benefit Plan, which are invested in interest-bearing depository accounts and money market, debt and equity security mutual funds, are included at fair value in the Qualified Plan’s separate financial statements. Fair value measurement is based upon quoted prices of like or similar securities. The fair values of the Plan’s investments in interest-bearing depository accounts and money market, debt and equity security mutual funds are determined by quoted prices and are included as recurring Level 1 assets.  There were no assets or liabilities in the Qualified Defined Benefit Plan as of March 31, 2017 due to the termination and settlement of the plan during the fourth quarter of 2016.

Foreclosed Properties – Foreclosed properties are measured and recorded at the lower of cost or estimated fair value. The fair value of foreclosed properties is measured using the current appraised value of the property less the estimated expenses necessary to sell the property. Foreclosed properties are classified as nonrecurring Level 3 assets.

38

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
March 31, 2017
Financial assets:
Cash and cash equivalents	$	60,451	$	-	$	-	$	60,451	$	60,451
Securities available for sale		767		96,696		-		97,463		97,463
Securities held to maturity		-		3,838		-		3,838		3,643
Investments in FHLB stock		-		-		1,565		1,565		1,565
Loans held for sale		-		4,349		-		4,349		4,238
Loans receivable, net		-		-		597,906		597,906		599,253
Accrued interest receivable		-		-		2,221		2,221		2,221
Deferred compensation assets		1,406		-		-		1,406		1,406
Financial liabilities:
Demand deposits		-		-		541,379		541,379		541,379
Time deposits		-		-		139,410		139,410		140,690
Repurchase agreements		-		-		707		707		708
Federal Home Loan Bank Advances		-		-		20,394		20,394		20,000
Deferred compensation liabilities		1,409		-		-		1,409		1,409
Accrued interest payable		-		-		71		71		71
Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit		-		-		-		-		-
Commitments under standby letters of credit		-		-		-		-		-

39

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, 2016
Financial assets:
Cash and cash equivalents	$	46,724	$	-	$	-	$	46,724	$	46,724
Securities available for sale		763		99,146		-		99,909		99,909
Securities held to maturity		-		3,875		-		3,875		3,672
Investments in FHLB stock		-		-		2,829		2,829		2,829
Loans held for sale		-		7,299		-		7,299		7,145
Loans receivable, net		-		-		595,305		595,305		597,038
Accrued interest receivable		-		-		2,328		2,328		2,328
Deferred compensation assets		1,426		-		-		1,426		1,426
Financial liabilities:
Demand deposits		-		-		516,125		516,125		516,125
Time deposits		-		-		130,397		130,397		131,498
Repurchase agreements		-		-		392		392		392
Federal Home Loan Bank Advances		-		-		50,717		50,717		50,000
Deferred compensation liabilities		1,430		-		-		1,430		1,430
Accrued interest payable		-		-		120		120		120
Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit		-		-		-		-		-
Commitments under standby letters of credit		-		-		-		-		-

40

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 three months ended March 31, 2017 and March 31, 2016.

(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
March 31, 2017
Securities available for sale:
U.S. GSE and agency securities	$	-	$	2,080	$	-	$	2,080	$	2,080
Asset-backed SBA securities		-		4,059		-		4,059		4,059
Residential mortgage-backed securities issued by GSEs		-		37,826		-		37,826		37,826
State and local government securities		-		52,731		-		52,731		52,731
Mutual funds		767		-		-		767		767
Total	$	767	$	96,696	$	-	$	97,463	$	97,463
December 31, 2016
Securities available for sale:
U.S. GSE and agency securities	$	-	$	2,089	$	-	$	2,089	$	2,089
Asset-backed SBA securities		-		4,413		-		4,413		4,413
Residential mortgage-backed securities issued by GSEs		-		39,974		-		39,974		39,974
State and local government securities		-		52,670		-		52,670		52,670
Mutual funds		763		-		-		763		763
Total	$	763	$	99,146	$	-	$	99,909	$	99,909

41

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
Description	Level 1		Level 2		Level 3		Carrying Amount In Balance Sheets (1)		Assets/ Liabilities Measured At Fair Value (1)
March 31, 2017
Impaired loans	$	-	$	-	$	404	$	404	$	404
Foreclosed properties		-		-		1,792		1,792		1,792
December 31, 2016
Impaired loans	$	-	$	-	$	595	$	595	$	595
Foreclosed properties		-		-		1,806		1,806		1,806

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

There were no transfers between valuation levels for any asset during the three-month periods ended  March 31, 2017 and March 31, 2016.  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)
March 31, 2017
Impaired loans	$	404	Discounted appraisals (2)	Collateral discounts (3)	0%-26% (19%)
Foreclosed properties		1,792	Discounted appraisals (2)	Collateral discounts (3)	0%-22% (6%)
December 31, 2016
Impaired loans	$	595	Discounted appraisals (2)	Collateral discounts (3)	0%-36% (23%)
Foreclosed properties		1,806	Discounted appraisals (2)	Collateral discounts (3)	0%-22% (6%)

(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.

42

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

8. BUSINESS COMBINATIONS

On May 1, 2017, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with First Bancorp, the holding company for First Bank, Southern Pines, North Carolina.  Under the Merger Agreement, the Company will merge with and into First Bancorp (the “Merger”), and the Bank will merge with and into First Bank.  The aggregate merger consideration has a total current value of approximately $175 million, or $43.12 per share.

Subject to the terms and conditions of the Merger Agreement, the Company's shareholders will have the right to receive 1.44 shares of First Bancorp common stock or $41.90 in cash, or a combination thereof, for each share of the Company's common stock.  The total merger consideration will be prorated as necessary to ensure that 10% of the total outstanding shares of the Company's common stock will be exchanged for cash, and 90% of the total outstanding shares of the Company's common stock will be exchanged for shares of the First Bancorp common stock in the Merger, provided that the number of shares of First Bancorp's common stock to be issued will not exceed 19.9% of the number of shares of First Bancorp's common stock issued and outstanding immediately before the effective time of the Merger, and to the extent the number of shares of First Bancorp's common stock would exceed 19.9%, the proration of the total merger consideration will be appropriately adjusted. Additionally, at closing each outstanding and unexercised option to acquire shares of the Company's common stock, whether or not previously vested, will be cancelled in exchange for a cash payment of $41.90 minus the exercise price for each Company share subject to such stock option.

The Merger Agreement has been unanimously approved by the boards of directors of each of the Company and First Bancorp. The closing of the Merger is subject to the approval of the Company's shareholders, requisite regulatory approvals, the effectiveness of the registration statement to be filed by First Bancorp with respect to the shares of First Bancorp common stock to be issued in the Merger, and other customary closing conditions.  The parties anticipate closing the Merger during the fourth quarter of 2017.

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

A Caution About Forward-Looking Statements

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

• statements of our goals, growth and performance targets, intentions and expectations;

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

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

• estimates of our risks and future costs and benefits.

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

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

• our ability to successfully consummate our previously announced merger with First Bancorp, including the ability to obtain required governmental approvals of the merger on the proposed terms and schedule or that the terms of the proposed merger may need to be unfavorably modified to satisfy such approvals or other closing conditions;

43

• the diversion of management time from core banking functions due to merger-related issues;

• potential difficulty in maintaining relationships with customers, associates or business partners as a result of our previously announced merger with First Bancorp;

• a 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, 2016.

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

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

Critical Accounting Policies

During the three-month period ended March 31, 2017, 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, 2016 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.

44

Fair Value of Investments. Securities are characterized as available for sale or held to maturity based on management’s ability and intent regarding such investment at acquisition. On an ongoing basis, management estimates the fair value of its investment securities based on information and assumptions it deems reliable and reasonable, which may be quoted market prices or if quoted market prices are not available, fair values extrapolated from the quoted prices of similar instruments. Based on this information, an assessment must be made as to whether any decline in the fair value of an investment security should be considered as an other than temporary impairment and recorded in noninterest income as a loss on investments. The determination of such impairment is subject to a variety of factors, including management’s judgment and experience. See notes 2 and 7 included in the consolidated financial statements.

Pension Plan. The Company had a noncontributory defined benefit pension plan. This plan was 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. In November 2016, the Bank settled its qualified pension plan liability, which was recognized in the fourth quarter of 2016 when participants received annuities or lump sum payments of their accrued benefit balances. See note 5 included in the consolidated financial statements regarding the plan termination.

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 March 31, 2017 and our operating performance for the three-month period ended March 31, 2017. 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.

45

Comparison of Financial Condition at March 31, 2017 and December 31, 2016

The following table provides the changes in our significant asset and liability categories at March 31, 2017 compared to December 31, 2016.

(Dollars in thousands)	March 31, 2017			December 31, 2016			$ Change			% Change
Interest-earning assets:
Interest-earning deposits with banks and overnight and short-term investments	$	49,709		$	35,862		$	13,847			38.6	%
Investment securities		101,106			103,581			(2,475	)		-2.4	%
Investments held at cost		1,565			2,829			(1,264	)		-44.7	%
Loans held for sale		4,238			7,145			(2,907	)		-40.7	%
Loans receivable, net of deferred fees		605,826			603,582			2,244			0.4	%
Total interest-earning assets		762,444			752,999			9,445			1.3	%
Noninterest-earning assets:
Cash and due from banks		10,742			10,862			(120	)		-1.1	%
Allowance for loan losses		(6,573	)		(6,544	)		(29	)		-0.4	%
Premises and equipment, net of accumulated depreciation		10,997			11,122			(125	)		-1.1	%
Foreclosed real estate		5,055			5,069			(14	)		-0.3	%
Deferred income tax assets, net of deferred income tax liabilities		3,520			3,863			(343	)		-8.9	%
Bank owned life insurance		10,271			10,185			86			0.8	%
Other assets		7,043			8,267			(1,224	)		-14.8	%
Total noninterest-earning assets		41,055			42,824			(1,769	)		-4.1	%
Total assets	$	803,499		$	795,823		$	7,676			1.0	%
Interest-bearing liabilities:
Interest-bearing deposits	$	548,868		$	523,624		$	25,244			4.8	%
Overnight and short-term borrowings		708			392			316			80.6	%
Federal Home Loan Bank advances		20,000			50,000			(30,000	)		-60.0	%
Total interest-bearing liabilities		569,576			574,016			(4,440	)		-0.8	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		133,201			123,999			9,202			7.4	%
Accounts payable and other liabilities		6,982			6,671			311			4.7	%
Total noninterest-bearing liabilities		140,183			130,670			9,513			7.3	%
Total liabilities		709,759			704,686			5,073			0.7	%
Total equity		93,740			91,137			2,603			2.9	%
Total liabilities and equity	$	803,499		$	795,823		$	7,676			1.0	%
Cash and cash equivalents	$	60,451		$	46,724		$	13,727			29.4	%
Total core deposits (excludes certificate accounts)		541,379			516,125			25,254			4.9	%
Total certificates of deposit		140,690			131,498			9,192			7.0	%
Total deposits		682,069			647,623			34,446			5.3	%
Total funding liabilities		702,777			698,015			4,762			0.7	%

46

Assets. Total assets increased $7.7 million, or 1.0%, to $803.5 million at March 31, 2017 from $795.8 million at December 31, 2016. Cash and cash equivalents increased $13.7 million, or 29.4%, to $60.5 million at March 31, 2017 from $46.7 million at December 31, 2016, primarily attributable to deposit growth. Investment securities decreased $2.5 million, or 2.4%, to $101.1 million at March 31, 2017 from $103.6 million at December 31, 2016, primarily due to the redeployment of investment securities to fund loan growth. Loans receivable, net of deferred fees, increased $2.2 million, or 0.4%, to $605.8 million at March 31, 2017 from $603.6 million at December 31, 2016 as new loan originations, primarily residential mortgage and commercial real estate loan originations, exceeded loan repayments, prepayments and foreclosures.

	Three Months Ended March 31,
(Dollars in thousands)	2017		2016
Loans originated:
Commercial:
Commercial mortgage	$	17,486	$	26,549
Construction and land development		-		4,778
Commercial and industrial		12,690		3,686
Non-commercial:
Residential mortgage		17,878		15,638
Construction and land development		11,600		10,046
Revolving mortgage		4,565		6,141
Consumer		149		85
Total loans originated	$	64,368	$	66,923
Loan principal payments, prepayments and payoffs	$	48,146	$	30,212
Residential mortgage loans sold	$	17,012	$	13,062

Nonperforming Assets. Nonperforming assets totaled $5.8 million, or 0.72% of total assets, at March 31, 2017 compared to $6.3 million, or 0.79% of total assets, at December 31, 2016. Nonperforming assets included $568,000 in nonperforming loans and $5.2 million in foreclosed real estate and repossessed assets at March 31, 2017 compared to $1.0 million and $5.3 million, respectively, at December 31, 2016.

Nonperforming loans decreased $444,000 to $568,000, or 0.09% of total loans, at March 31, 2017 compared to $1.0 million, or 0.17% of total loans, at December 31, 2016. Residential mortgage nonperforming loans decreased $442,000, and revolving nonperforming loans decreased $28,000 for the first three months of 2017, which was partially offset by an increase of $32,000 in consumer nonperforming loans. Performing troubled debt restructurings (“TDRs”) decreased $82,000, or 1.8%, when comparing the same periods. Total performing TDRs and nonperforming assets decreased $546,000, or 5.0%, to $10.3 million, or 1.28% of total assets, at March 31, 2017 from $10.8 million, or 1.36% of total assets, at December 31, 2016.

At March 31, 2017, nonperforming loans included four revolving home equity loans that totaled $295,000, one residential mortgage loan in the amount of $184,000, two commercial and industrial loans that totaled $57,000 and two consumer loans that totaled $32,000. As of March 31, 2017, the nonperforming loans had specific reserves totaling $82,000. TDRs were $4.5 million at March 31, 2017 and $4.6 million at December 31, 2016. There were no additions to TDRs during the three months ended March 31, 2017. At March 31, 2017, all of the $4.5 million in TDRs were performing, with the exception of $12,000, which were not performing according to their restructured terms and were included as nonaccruing loans.

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Foreclosed real estate at March 31, 2017 included seven properties with a total recorded amount of $5.1 million compared to ten properties with a total recorded amount of $5.1 million at December 31, 2016. During the three months ended March 31, 2017, no new properties were added to foreclosed real estate, while three properties in the amount of $30,000 were sold with an additional gain of $16,000. The Bank recorded no additional loss provisions on foreclosed real estate during the first three months of 2017, and there were no capital additions during the period.

Liabilities. Total deposits increased $34.4 million, or 5.3%, to $682.1 million at March 31, 2017 from $647.6 million at December 31, 2016. During the three months ended March 31, 2017, we continued our focus on core deposit growth, from which we exclude certificates of deposit. Core deposits increased $25.3 million, or 4.9%, to $541.4 million at March 31, 2017 from $516.1 million at December 31, 2016.

Commercial checking and money market accounts increased $14.3 million, or 9.2%, to $169.6 million at March 31, 2017 from $155.3 million at December 31, 2016, reflecting expanded sources of lower cost funding. Our efforts to obtain new commercial deposit relationships in conjunction with making new commercial loans significantly contributed to this increase and reflects our commitment to establishing diversified relationships with business clients.

Certificates of deposit increased $9.2 million, or 7.0%, to $140.7 million at March 31, 2017 from $131.5 million at December 31, 2016, which included an $11.2 million increase in longer term brokered deposits since December 31, 2016. Accounts payable and other liabilities increased $311,000, or 4.7%, to $7.0 million at March 31, 2017 from $6.7 million at December 31, 2016. The increase in accounts payable and other liabilities at March 31, 2017 was primarily attributable to escrow payments made by borrowers.

Results of Operations for the Three Months Ended March 31, 2017 and 2016

Overview. Net income was $1.8 million, or $0.50 per diluted common share, for the three months ended March 31, 2017, compared to $1.1 million, or $0.30 per diluted common share, for the three months ended March 31, 2016. Income before income taxes increased $686,000 in 2017, primarily due to a decrease of $342,000 in provision for loan losses and an increase of $274,000 in net interest income.

	Three Months Ended March 31,
(Dollars in thousands)	2017		2016		$ Change			% Change
Interest and dividend income	$	6,923	$	6,677	$	246			3.7	%
Interest expense		816		844		(28	)		-3.3	%
Net interest income		6,107		5,833		274			4.7	%
Provision for loan losses		57		399		(342	)		-85.7	%
Net interest income after provision for loan losses		6,050		5,434		616			11.3	%
Noninterest income		1,946		2,049		(103	)		-5.0	%
Noninterest expenses		5,588		5,761		(173	)		-3.0	%
Income before income tax provision		2,408		1,722		686			39.8	%
Income tax provision		574		601		(27	)		-4.5	%
Net income		1,834		1,121		713			63.6	%

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Net Interest Income. Net interest income increased by $274,000, or 4.7%, to $6.1 million for the three months ended March 31, 2017 compared to $5.8 million for the three months ended March 31, 2016. Interest income on loans increased $271,000, primarily resulting from an $18.3 million increase in average loan balances and a 9 basis point increase in the average yield on loans. Interest on investment securities decreased $68,000, attributable to a $23.3 million decrease in the average balance of investment securities, which was partially offset by a 30 basis point increase in the average yield earned on the investment portfolio. Interest expense decreased $28,000, or 3.3%, for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. The lower interest expense was primarily attributable to the repayment of $30.0 million in Federal Home Loan Bank advances that matured in March 2017, which was partially offset by a 2 basis points rate increase on total interest-bearing deposits and higher average balances of interest-bearing deposits. For the same comparable three-month periods, average noninterest-bearing deposits grew $11.4 million, or 10.0%, which provided deposit funding growth without adding deposit interest expense.

Provision for Loan Losses. The Company recorded a provision for loan losses in the amount of $57,000 for the three months ended March 31, 2017 compared to $399,000 for the three months ended March 31, 2016. The Company charged off $53,000 in loans for the first quarter of 2017 compared to $8,000 for the first quarter of 2016. The decrease in the three-month provision for loan losses was primarily due to continued improvement in asset quality and the payoff of a residential nonperforming loan for $434,000 during the first quarter of 2017. The allowance for loan losses was 1.08% of total loans at March 31, 2017 and December 31, 2016 compared to 1.13% at March 31, 2016.

Noninterest Income. Noninterest income decreased $103,000, or 5.0%, to $1.9 million for the three months ended March 31, 2017 from $2.0 million for the three months ended March 31, 2016. The decrease in noninterest income during the 2017 period was primarily due to a $429,000 decrease in gains realized from the sale of investment securities, which was partially offset by increases of $132,000 in mortgage banking income, $87,000 in income from investments in bank owned life insurance and $71,000 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 during the 2017 period. Increased income on deposit and other fees primarily related to commercial checking accounts.

Noninterest Expenses. Noninterest expenses decreased $173,000, or 3.0%, to $5.6 million for the three months ended March 31, 2017 from $5.8 million for the three months ended March 31, 2016. The lower 2017 noninterest expenses primarily reflected decreases of $100,000 in professional and outside services, $82,000 in salaries and employee benefits, $50,000 in data processing fees, and $50,000 in federal deposit insurance premiums, which were partially offset by increases of $72,000 in debit card expenses and $55,000 in training and recruiting expenses. The decrease in salaries and employee benefits included a $197,000 reduction in pension plan expenses that resulted from the termination of the qualified pension plan during the fourth quarter of 2016, which was partially offset by increases in other employee benefits.

Income Tax Provision. Income tax expense decreased by $27,000 for the three months ended March 31, 2017 compared to the three months ended March 31, 2016, primarily attributable to the offset of an income tax benefit of $228,000 due to the adoption of a new accounting pronouncement during the first quarter of 2017 related to the tax benefit on restricted stock vested and released during the quarter for the Company's equity incentive plan. The income tax benefit was previously recognized in the equity section of the balance sheet as a credit to additional paid-in capital. The income tax benefit was partially offset by the increase in pre-tax income for the first three months of 2017. The effective tax rate, excluding the income tax benefit discussed above was 33.31% for the three months ended March 31, 2017 compared to 34.90% for the three months ended March 31, 2016, with the decrease primarily resulting in a 1% reduction in the state income tax rate compared to the first quarter of 2016.

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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 March 31,
	2017								2016
(Dollars in thousands)	Average Balance			Interest And Dividends		Yield/ Cost			Average Balance (1)			Interest And Dividends		Yield/ Cost
Assets
Interest-earning deposits with banks	$	42,502		$	79		0.75	%	$	24,283		$	32		0.53	%
Loans receivable		611,614			6,294		4.17	%		593,341			6,023		4.08	%
Investment securities		58,903			408		3.72	%		58,214			388		3.54	%
Mortgage-backed and similar securities		43,535			112		1.04	%		67,539			200		1.19	%
Other interest-earning assets		2,594			30		4.69	%		2,886			34		4.74	%
Total interest-earning assets		759,148			6,923		3.77	%		746,263			6,677		3.67	%
Allowance for loan losses		(6,583	)							(6,408	)
Noninterest-earning assets		47,389								36,768
Total assets	$	799,954							$	776,623
Liabilities and equity
NOW accounts	$	162,550			50		0.12	%	$	156,491			52		0.13	%
Money market accounts		171,757			80		0.19	%		170,888			73		0.17	%
Savings accounts		60,685			14		0.09	%		49,603			12		0.10	%
Certificates of deposit		135,764			246		0.73	%		132,056			217		0.66	%
Total interest-bearing deposits		530,756			390		0.30	%		509,038			354		0.28	%
Overnight and short-term borrowings		666			-		0.00	%		719			-		0.00	%
Federal Home Loan Bank advances		44,444			426		3.89	%		50,000			490		3.94	%
Total interest-bearing liabilities		575,866			816		0.57	%		559,757			844		0.61	%
Noninterest-bearing deposits		124,963								113,592
Other noninterest-bearing liabilities		6,304								11,860
Total liabilities		707,133								685,209
Total equity		92,821								91,414
Total liabilities and equity	$	799,954							$	776,623
Net interest income				$	6,107							$	5,833
Interest rate spread							3.20	%							3.06	%
Net interest margin							3.33	%							3.21	%
Average interest-earning assets to average interest-bearing liabilities		131.83	%							133.32	%

(1) Certain amounts for prior periods were reclassified to conform to the March 31, 2017 presentation. The reclassifications had no effect on net income or equity as previously reported.

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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 March 31, 2017 Compared To The Three Months Ended March 31, 2016
	Increase (Decrease) Due To:
(Dollars in thousands)	Volume			Rate			Net
Interest income:
Interest-earning deposits with banks	$	30		$	17		$	47
Loans receivable		187			84			271
Investment securities		5			15			20
Mortgage-backed and similar securities		(64	)		(24	)		(88	)
Other interest-earning assets		(3	)		(1	)		(4	)
Total interest-earning assets		155			91			246
Interest expense:
NOW accounts		2			(4	)		(2	)
Money market accounts		-			7			7
Savings accounts		3			(1	)		2
Certificates of deposit		6			23			29
Total interest-bearing deposits		11			25			36
Federal Home Loan Bank advances		(53	)		(11	)		(64	)
Total interest-bearing liabilities		(42	)		14			(28	)
Net increase in interest income	$	197		$	77		$	274

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 2017 compared to 2016.

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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, less estimated costs to sell such property. 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)	March 31, 2017			December 31, 2016			$ Change			% Change
Nonperforming loans:
Nonaccruing loans (1)
Commercial:
Commercial and industrial	$	57		$	63		$	(6	)		-9.5	%
Total commercial		57			63			(6	)		-9.5	%
Non-commercial:
Residential mortgage		184			626			(442	)		-70.6	%
Revolving mortgage		295			323			(28	)		-8.7	%
Consumer		32			-			32			n/a
Total non-commercial		511			949			(438	)		-46.2	%
Total nonaccruing loans (1)		568			1,012			(444	)		-43.9	%
Total loans past due 90 or more days and still accruing		-			-			-			0.0	%
Total nonperforming loans		568			1,012			(444	)		-43.9	%
Foreclosed real estate		5,055			5,069			(14	)		-0.3	%
Repossessed assets		184			190			(6	)		-3.2	%
Total nonperforming assets		5,807			6,271			(464	)		-7.4	%
Performing troubled debt restructurings (2)		4,461			4,543			(82	)		-1.8	%
Performing troubled debt restructurings and total nonperforming assets	$	10,268		$	10,814			(546	)		-5.0	%
Allowance for loan losses	$	6,573		$	6,544
Total loans	$	605,826		$	603,582
Allowance as a percentage of total loans		1.08	%		1.08	%
Allowance as a percentage of nonperforming loans		1,157.22	%		646.64	%
Total nonperforming loans to total loans		0.09	%		0.17	%
Total nonperforming loans to total assets		0.07	%		0.13	%
Total nonperforming assets to total assets		0.72	%		0.79	%
Performing troubled debt restructurings and total nonperforming assets to total assets		1.28	%		1.36	%

(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 allowing interest-only payments on more than a temporary basis, reducing interest rates, forgiving principal, or a combination of these to help borrowers remain current and avoid foreclosure. These modified loans, also referred to as TDRs, totaled $4.5 million at March 31, 2017 and $4.6 million at December 31, 2016. There were no loans restructured during the three months ended March 31, 2017. At March 31, 2017, $12,000 of the total $4.5 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 $14,000 for the three months ended March 31, 2017 compared to $46,000 for the three months ended March 31, 2016. Interest income of $46,000 related to impaired loans was recognized for each of the three-month periods ended March 31, 2017 and 2016.

At March 31, 2017, our nonaccruing loans of $568,000, including nonperforming TDRs, were primarily comprised of the following:

● Residential Mortgage Loans

○ Five loans to multiple unrelated borrowers on one-to-four family residential properties with an aggregate balance of $479,000 as of March 31, 2017.

At March 31, 2017, our performing TDRs of $4.5 million included the following:

● Commercial Mortgage Loans

○ One loan for the purchase of an existing mobile home park to be used for future development secured by nonowner-occupied commercial real estate located in coastal South Carolina. The loan was modified in the fourth quarter of 2014, which extended the terms of the loan and required scheduled principal payments. The future performance of the loan is dependent upon the guarantor group’s willingness and ability to service the debt. Such willingness and ability was demonstrated by the fact that, as of March 31, 2017, the loan was a performing TDR with a balance of $2.9 million that matures in May of 2017. As of March 31, 2017, the loan was considered impaired and had a specific reserve of $3,000.

● Residential Mortgage Loans

○ Ten loans to multiple unrelated borrowers on one-to-four family residential properties with an aggregate balance of $1.4 million as of March 31, 2017.

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Foreclosed properties consisted of the following at the dates indicated.

	March 31, 2017				December 31, 2016
(Dollars in thousands)	Number		Amount		Number		Amount
By foreclosed loan type:
Commercial construction and land development		5	$	4,102		8	$	4,116
Residential mortgage		2		953		2		953
Total		7	$	5,055		10	$	5,069

An analysis of foreclosed real estate follows:
(Dollars in thousands)	Three Months Ended March 31, 2017
Beginning balance	$	5,069
Gain on sale of foreclosed properties		16
Net proceeds from sales of foreclosed properties		(30	)
Ending balance	$	5,055

The Bank’s largest foreclosed property resulted from a loan relationship that had an original purpose of constructing a mixed-use retail, commercial office, and residential condominium project located in Western North Carolina. As a result of this foreclosure, the Bank acquired 44 of the 48 condominium units in the building. Following an additional write-down of approximately $630,000 on the loans secured by this collateral in the fourth quarter of 2012, the Bank recorded this foreclosed property in the amount of $9.8 million. During 2013, the Bank recorded additional write-downs totaling $1.6 million, which resulted in an adjusted recorded amount of $8.2 million at December 31, 2013. During 2014, the Bank recorded an additional write-down of $133,000 on the property and sold 28 residential condominium units and one office unit. During 2015, the Bank sold one retail unit and two office units. During 2016, the Bank sold one retail unit. During the three months ended March 31, 2017, there were no units sold. As of March 31, 2017, the adjusted recorded amount was $3.3 million for the remaining six retail units and five office units.

Federal regulations require us to review and classify our assets on a regular basis. In addition, the FDIC and the NCCoB have the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful, and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable on the basis of currently existing facts, conditions, and values, and there is a high possibility of loss. Assets classified “loss” are considered uncollectible and of such little value that continued recognition as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose an institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving close attention. When we classify an asset as substandard or doubtful, we may establish a specific allowance for loan losses. If we classify an asset as loss, we charge off an amount equal to 100% of the portion of the asset classified loss.

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

(Dollars in thousands)	March 31, 2017		December 31, 2016		$ Change			% Change
Adversely classified loans:
Substandard	$	1,896	$	2,581	$	(685	)		-26.5	%
Doubtful		-		-		-			0.0	%
Total adversely classified loans		1,896		2,581		(685	)		-26.5	%
Special mention loans		20,946		21,247		(301	)		-1.4	%
Total classified and special mention loans		22,842		23,828		(986	)		-4.1	%
Total other classified and special mention assets		-		-		-			0.0	%
Total classified and special mention assets	$	22,842	$	23,828	$	(986	)		-4.1	%

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

At March 31, 2017, substandard loans totaling $1.9 million included $568,000 in nonaccruing loans that were previously discussed as nonperforming loans. The remaining $1.3 million in performing substandard loans included the following:

● Commercial Mortgage Loans

○ Two loans to one borrower on two commercial properties located in western North Carolina. As of March 31, 2017, the loans were performing with a total balance of $593,000.

● Residential Mortgage Loans

○ Six loans to multiple unrelated borrowers for one-to-four family residential properties with an aggregate balance of $557,000 as of March 31, 2017.

Adversely classified assets include loans that are classified due to factors other than payment delinquencies, such as the absence of current financial statements and other required documentation, insufficient cash flows or other deficiencies, and therefore, are not included as nonperforming assets.

At March 31, 2017, special mention loans included the Bank’s largest performing TDR commercial mortgage as previously discussed.

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

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

Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At March 31, 2017, cash and cash equivalents totaled $60.5 million, including $49.7 million in interest-bearing deposits in other banks, of which $45.4 million was on deposit with the Federal Reserve Bank. Investment securities totaling $97.5 million at March 31, 2017 classified as available-for-sale provided an additional source of liquidity. In addition, at March 31, 2017, we had the ability to borrow a total of approximately $125.5 million from the Federal Home Loan Bank of Atlanta and approximately $7.2 million from the Federal Reserve Bank’s discount window. At March 31, 2017, we had $20.0 million in Federal Home Loan Bank advances outstanding and $8.0 million in letters of credit to secure public funds deposits.

A significant use of our liquidity is the funding of loan originations. At March 31, 2017, we had $191.2 million in commitments to extend credit outstanding, although we expect that significantly less will ultimately be funded. Certificates of deposit due within one year of March 31, 2017 totaled $73.4 million, or 52.2%, of total certificates of deposit. We believe the large percentage of certificates of deposit that mature within one year reflects customer hesitancy to invest funds for longer periods due to the continued low interest rate environment and local competitive pressure. If these maturing deposits do not remain with us, we may seek other sources of funds, including new certificates of deposit and borrowings. Depending on market conditions, we may pay higher rates on such deposits or other borrowings than we currently pay on the maturing certificates of deposit. However, based on past experience, we believe that a significant portion of our certificates of deposit will remain with us. We believe we have the ability to attract and retain deposits by adjusting the interest rates we offer.

In addition, we believe that our branch network, which is presently comprised of 13 full-service branch offices located throughout our primary market area, and the general cash flows from our existing lending and investment activities will afford us sufficient long-term liquidity.

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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 March 31, 2017
Long-term debt obligations	$	20,000	$	10,000	$	10,000	$	-	$	-
Operating lease obligations		1,521		239		478		478		326
Total	$	21,521	$	10,239	$	10,478	$	478	$	326
At December 31, 2016
Long-term debt obligations	$	50,000	$	40,000	$	10,000	$	-	$	-
Operating lease obligations		1,623		281		478		478		386
Total	$	51,623	$	40,281	$	10,478	$	478	$	386

Capital Management. We are subject to various regulatory capital requirements administered by the FDIC and the NCCoB, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2017, we exceeded all of our regulatory capital requirements and were considered “well capitalized” under regulatory guidelines.

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

Regulatory capital rules released by the federal bank regulatory agencies in July 2013 to implement capital standards, referred to as Basel III and developed by an international body known as the Basel Committee on Banking Supervision, impose higher minimum capital requirements for bank holding companies and banks. The rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies with more than $1 billion in total consolidated assets. More stringent requirements are imposed on “advanced approaches” banking organizations ‒ which are organizations with $250 billion or more in total consolidated assets, with $10 billion or more in total foreign exposures, or that have opted in to the Basel II capital regime. The new regulatory capital rules began to phase in on January 1, 2015 for the Company and the Bank, and all of the requirements in the rules will be fully phased in by January 1, 2019.

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The rules include certain new and higher risk-based capital and leverage requirements than those previously in place. Specifically, the following minimum capital requirements apply to us:

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

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

• a total risk-based capital ratio of 8% (unchanged from former requirement); and

• a leverage ratio of 4% (also unchanged from the former requirement).

Under the rules, Tier 1 capital is redefined to include two components: Common Equity Tier 1 capital and additional Tier 1 capital. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as noncumulative perpetual preferred stock. The rules permit bank holding companies with less than $15 billion in total consolidated assets to continue to include trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 capital, but not in Common Equity Tier 1 capital, subject to certain restrictions. Tier 2 capital consists of instruments that currently qualify in Tier 2 capital plus instruments that the rules have disqualified from Tier 1 capital treatment. Cumulative perpetual preferred stock, formerly includable in Tier 1 capital, is now included only in Tier 2 capital. Accumulated other comprehensive income (“AOCI”) is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The rules provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. We elected to opt out from the inclusion of AOCI in Common Equity Tier 1 capital.

In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer will be phased in incrementally over time, becoming fully effective on January 1, 2019, and will consist of an additional amount of common equity equal to 2.5% of risk-weighted assets. As of January 1, 2017, our conservation buffers were 11.04% for common equity Tier 1 capital, 9.54% for Tier 1 capital and 9.77% for total capital.

In general, the rules have had the effect of increasing capital requirements by increasing the risk weights on certain assets, including high volatility commercial real estate, certain loans past due 90 days or more or in nonaccrual status, mortgage servicing rights not includable in common equity Tier 1 capital, equity exposures, and claims on securities firms, that are used in the denominator of the three risk-based capital ratios.

It is management’s belief that, as of March 31, 2017, the Company and the Bank would have met all capital adequacy requirements under the new capital rules on a fully phased-in basis if such requirements were effective at that time.

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The Company and the Bank had the following actual and required regulatory capital amounts as of the periods indicated:

						Regulatory Requirements Applicable To Banks
	Actual					Minimum For Capital Adequacy Purposes					Minimum To Be Well Capitalized
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
ASB Bancorp, Inc.
March 31, 2017
Common equity tier I capital	$	95,360		15.97	%	$	26,873		4.50	%	$	38,816		6.50	%
Tier I leverage capital		95,360		11.89	%		32,071		4.00	%		40,089		5.00	%
Tier I risk-based capital		95,360		15.97	%		35,830		6.00	%		47,774		8.00	%
Total risk-based capital		101,933		17.07	%		47,774		8.00	%		59,717		10.00	%
December 31, 2016
Common equity tier I capital	$	92,996		15.54	%	$	26,934		4.50	%	$	38,905		6.50	%
Tier I leverage capital		92,996		11.58	%		32,111		4.00	%		40,139		5.00	%
Tier I risk-based capital		92,996		15.54	%		35,913		6.00	%		47,884		8.00	%
Total risk-based capital		99,540		16.63	%		47,884		8.00	%		59,854		10.00	%
Asheville Savings Bank, S.S.B.
March 31, 2017
Common equity tier I capital	$	89,831		15.05	%	$	26,861		4.50	%	$	38,800		6.50	%
Tier I leverage capital		89,831		11.23	%		32,002		4.00	%		40,002		5.00	%
Tier I risk-based capital		89,831		15.05	%		35,815		6.00	%		47,754		8.00	%
Total risk-based capital		96,404		16.15	%		47,754		8.00	%		59,692		10.00	%
NC Savings Bank capital		96,404		12.02	%		40,108		5.00	%		n/a		n/a
December 31, 2016
Common equity tier I capital	$	87,670		14.65	%	$	26,924		4.50	%	$	38,890		6.50	%
Tier I leverage capital		87,670		10.94	%		32,067		4.00	%		40,084		5.00	%
Tier I risk-based capital		87,670		14.65	%		35,899		6.00	%		47,865		8.00	%
Total risk-based capital		94,214		15.75	%		47,865		8.00	%		59,832		10.00	%
NC Savings Bank capital		94,214		11.86	%		39,731		5.00	%		n/a		n/a

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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 three months ended March 31, 2017 and the year ended December 31, 2016, 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 which includes our Chairman of the Board and an additional Director, both of whom are Independent Directors, and members of Senior Management, to communicate, coordinate and control all aspects involving asset-liability management. The Committee meets quarterly to establish and monitor the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

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

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

We implement an interest rate risk simulation model to determine our possible adverse exposure to net interest income and economic value of equity due to changes in interest rates, repricing risk, yield curve risk and basis risk. Our internal simulation model evaluates our projected future net interest income and economic value of equity under various interest rate scenarios and applies certain contractual and behavioral assumptions to calculate results in an increasing rate scenario, in a decreasing rate scenario and in a constant rate scenario. The major assumptions applied to our internal simulation model include, but are not limited to, the present value discounting method, calculated and reported rate shock and rate ramp scenarios, key rates, curves and spreads, internal rate restrictions (such as rate floors and caps and teaser rates), prepay and decay tables and interest rate exposure limits.

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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 March 31, 2017							Over The Next Twelve Months Ending March 31, 2018
		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	$	104,048	$	(30,740	)		-22.81	%	$	24,857	$	(1,467	)		-5.57	%
200		116,539		(18,249	)		-13.54	%		25,572		(752	)		-2.86	%
100		126,503		(8,285	)		-6.15	%		26,057		(267	)		-1.01	%
0		134,788		-			0.00	%		26,324		-			0.00	%
(100)		131,188		(3,600	)		-2.67	%		23,960		(2,364	)		-8.98	%

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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 March 31, 2017. In connection with the above evaluation of the effectiveness of the Company's disclosure controls and procedures, no changes in its internal control over financial reporting were identified as having occurred during the quarter ended March 31, 2017 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, 2016, filed with the SEC on March 15, 2017. 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, 2016.

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

The Company did not repurchase any of its common stock during the first quarter of 2017.

The following table sets forth information as of March 31, 2017 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		443,900	$	16.04		60,355
Equity compensation plans not approved by security holders		–		n/a		–
Total		443,900	$	16.04		60,355

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits

2.1	Agreement and Plan of Merger and Reorganization, dated May 1, 2017, by and between First Bancorp and ASB Bancorp, Inc. (1)
3.1	Articles of Incorporation of ASB Bancorp, Inc. (2)
3.2	Bylaws of ASB Bancorp, Inc. (2)
3.3	Amendment of the Bylaws of ASB Bancorp, Inc., adopted September 15, 2014 (3)
4.1	Form of Common Stock Certificate of ASB Bancorp, Inc. (2)
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 March 31, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

(1) Incorporated herein by reference to the exhibits to ASB Bancorp, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 1, 2017.

(2) Incorporated herein by reference to the exhibits to ASB Bancorp, Inc.’s Registration Statement on Form S-1 (File No. 333-174527), filed with the Securities and Exchange Commission on May 26, 2011.

(3) Incorporated herein by reference to the exhibits to ASB Bancorp, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 19, 2014.

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SIGNATURES

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

		ASB BANCORP, INC.
		Registrant
May 9, 2017	By:	/s/ SUZANNE S. DEFERIE
		Suzanne S. DeFerie
		President and Chief Executive Officer
		(Principal Executive Officer)
May 9, 2017	By:	/s/ KIRBY A. TYNDALL
		Kirby A. Tyndall
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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