ASB Bancorp, Inc. Reports Financial Results For The Second Quarter And Six Months Ended June 30, 2014

ASHEVILLE, N.C., July 28, 2014 /PRNewswire/ -- ASB Bancorp, Inc. (the "Company") (NASDAQ GM: ASBB), the holding company for Asheville Savings Bank, S.S.B. (the "Bank"), announced today its preliminary operating results for the three- and six-month periods ended June 30, 2014. The Company reported net income of $941,000, or $0.21 per diluted share, for the quarter ended June 30, 2014, compared to a net loss of $206,000, or $0.04 per diluted share, for the same quarter of 2013. The second quarter of 2013 included an additional $1.2 million pre-tax write-down of the Bank's largest foreclosed property, which significantly influenced quarterly year-over-year net income and noninterest expense comparisons. For the six months ended June 30, 2014, the Company reported net income of $1.3 million, or $0.30 per diluted share, up 151.9%, compared to net income of $534,000, or $0.11 per diluted share, for the same period of 2013.

Suzanne DeFerie, President and CEO, commented: "The Company's latest quarterly financial results were positively impacted by a $1.3 million reversal of the Company's provision for loan losses due to improved asset quality. Asset quality was also improved during the quarter by the bulk sale of two floors of residential condominium units of the Company's largest longstanding foreclosed property.

"We also demonstrated gains in core deposit growth, and in particular lower-cost core deposits, utilized to fund our lending activity and reduce the Company's cost of funds. Partially reflecting core deposit gains, our net interest margin expanded to 2.82% in the recent quarter compared to 2.65% in the second quarter of 2013. Loans receivable increased 5.1% since the beginning of the year, and new lending activity includes a mix of retail and commercial loans. Our particular focus on commercial lending continues to produce positive results and contributed to year-over-year quarterly growth in our interest income from loans. We are attending to asset quality, while maintaining a clear focus on prudent growth. We have also been focused on reducing exposure to interest rate risk and are better positioning the Company to withstand a rising interest rate environment."

2014 Second Quarter Highlights

• Net income for the second quarter of 2014 was $941,000, or $0.21 per diluted share, compared to a net loss of $206,000, or $0.04 per diluted share, for the second quarter of 2013.
• Net interest income before loan loss provision increased 6.7% to $4.9 million for the three months ended June 30, 2014 from $4.6 million for the three months ended June 30, 2013.
• Interest income from loans increased 7.1% in the second quarter of 2014 compared to the second quarter of 2013, primarily reflecting a $54.6 million increase in average loan balances when comparing the two quarters.
• The Company reduced interest expense by 19.4% in the second quarter of 2014 compared to the second quarter of 2013.
• Net interest margin improved to 2.82% for the second quarter of 2014 compared to 2.65% for the second quarter of 2013.
• The Company recorded a $1.4 million net recovery of loan losses in the second quarter of 2014. The allowance for loan losses declined to 1.22% of total loans at June 30, 2014, from 1.63% at December 31, 2013, and the allowance for loan losses was 283.7% of nonperforming loans at June 30, 2014 compared to 610.4% at December 31, 2013.
• Total ending loan balances increased $16.6 million, or 3.6%, to $472.0 million in the second quarter of 2014. Loans increased $22.8 million, or 5.1%, since December 31, 2013 and $54.2 million, or 13.0%, since June 30, 2013 as new loan originations exceeded loan repayments, prepayments and foreclosures.
• Noninterest expenses decreased to $6.4 million for the second quarter of 2014 from $7.5 million for the second quarter of 2013, primarily due to the 2013 write-down on foreclosed properties related to residential condominium units of a mixed-use property. These residential condominium units were sold during the second quarter of 2014.
• Delinquent and nonperforming loans remained low at 0.48% and 0.43%, respectively, of total loans at June 30, 2014, compared to 0.48% and 0.27%, respectively, of total loans at December 31, 2013.
• Nonperforming assets, including foreclosed properties, decreased to 1.64% of total assets at June 30, 2014 from 2.10% of total assets at December 31, 2013 and 2.42% of total assets at June 30, 2013. The ratio of nonperforming assets to total assets has improved in each of the last four quarters.
• Core deposits, which exclude certificates of deposit, increased $26.5 million, or 6.5%, since December 31, 2013 and $30.4 million, or 7.6%, since June 30, 2013. Noninterest-bearing deposits have increased $14.8 million since December 31, 2013.
• Book value per share increased to $21.06 during the second quarter of 2014 from $20.53 at March 31, 2014 and $20.06 at December 31, 2013.
• Capital remained strong with consolidated regulatory capital ratios of 14.16% Tier 1 leverage capital, 23.69% Tier 1 risk-based capital and 24.94% total risk-based capital.

DeFerie commented: "Our improving core performance and asset quality reflect ongoing initiatives to increase shareholder value through prudent loan, core deposit, and fee income growth. We continue to build a more diversified loan portfolio, while diligently managing interest expense and strengthening asset quality. As disclosed previously, we used a portion of our excess capital to repurchase shares of our common stock, both through open market and privately negotiated transactions. Going forward, we are excited about the potential for increasing net income as we execute our strategic initiatives to build shareholder value."

Income Statement Analysis

Net Interest Income. Net interest income increased by $305,000, or 6.7%, to $4.9 million for the three months ended June 30, 2014 compared to $4.6 million for the three months ended June 30, 2013. Interest expense decreased $213,000, or 19.4%, to $886,000 for the three months ended June 30, 2014 from $1.1 million for the three months ended June 30, 2013, primarily due to a 14 basis point reduction in the average rate paid on interest-bearing liabilities and a decrease of $15.1 million in the average balance of total interest-bearing liabilities. Total interest and dividend income increased $92,000, or 1.6%, to $5.8 million for the three months ended June 30, 2014 from $5.7 million for the three months ended June 30, 2013, primarily as a result of an increase of $54.6 million in average loan balances, which was partially offset by a decrease of 25 basis points in the average yield on loans. The average balance of mortgage-backed and similar securities decreased $92.0 million for the three months ended June 30, 2014, which was partially offset by an increase of 14 basis points in the average yield compared to the same period of 2013.

"Although interest income grew year-over-year in the second quarter of 2014, it did not fully reflect interest income contributions from a meaningful number of commercial loans that closed late in the second quarter of 2014," DeFerie explained. "We believe we have a strong loan pipeline, giving us confidence in our ability to grow interest income as we move through the second half of 2014."

Net interest income increased by $530,000, or 5.8%, to $9.7 million for the six months ended June 30, 2014 compared to $9.2 million for the six months ended June 30, 2013. Interest expense decreased $443,000, or 20.0%, to $1.8 million for the six months ended June 30, 2014 from $2.2 million for the six months ended June 30, 2013, primarily due to a 17 basis point reduction in the average rate paid on interest-bearing deposits and a decrease of $14.3 million in the average balance of total interest-bearing deposits. The lower cost of interest-bearing deposits was primarily attributable to an average rate reduction of 23 basis points on certificates of deposit, as well as a lower average balance of certificates of deposit, and reductions in average rates paid on NOW and money market accounts, which were partially offset by increases in the average balances of NOW, money market and savings accounts as the Company continued its focus on core deposit growth, from which it excludes certificates of deposit. Total interest and dividend income increased $87,000 to $11.5 million for the six months ended June 30, 2014 compared to $11.4 million for the six months ended June 30, 2013. The average balance of total interest-earning assets decreased $7.1 million, which was partially offset by a 6 basis point increase in the average yields on interest-earning assets. Interest income on loans increased $655,000, primarily attributable to a $54.8 million increase in the average balance of loans, partially offset by a 27 basis point reduction in the yield earned on loans in 2014.  Interest on securities decreased $625,000 in 2014 primarily as a result of an $86.4 million decrease in the average balance of mortgage-backed and similar securities, coupled with a 2 basis point reduction in yield earned on these securities.

DeFerie commented: "To fund anticipated lending activity, the Company liquidated certain investment securities and increased levels of available cash. While the timing on the closing of some loans has been slower than expected, we expect to deploy more of the excess cash for lending in the coming periods, and we believe this will further expand the Company's net interest margin and improve profitability."

Noninterest Income.  Noninterest income decreased $968,000, or 38.4%, to $1.6 million for the three months ended June 30, 2014 from $2.5 million for the three months ended June 30, 2013. Factors that contributed to the decrease in noninterest income during the 2014 period were decreases of $603,000 in gains from the sale of investment securities, $347,000 in mortgage banking income and $41,000 in deposit and other service charge income, which were partially offset by an increase of $29,000 in debit card services. The decrease in investment security gains resulted primarily from sales of fewer investment securities at smaller net gains to fund loan growth, and the decrease in mortgage banking income was attributable to lower volumes of mortgage loans sold. The decrease in deposit and other service charge income was primarily the result of lower ATM and deposit overdraft fees. 

Noninterest income decreased $1.4 million to $3.0 million for the six months ended June 30, 2014 from $4.4 million for the six months ended June 30, 2013.  Factors that contributed to the decrease in noninterest income during the 2014 period were decreases of $715,000 in mortgage banking income, $482,000 in securities gains, $174,000 in other income from an investment in a Small Business Investment Company and $86,000 in deposit fees, which were partially offset by $48,000 in higher income from debit card services. The decrease in mortgage banking income was attributable to lower volumes of mortgage loans sold. 

Noninterest Expenses.  Noninterest expenses decreased $1.2 million, or 15.8%, to $6.4 million for the three months ended June 30, 2014 from $7.5 million for the three months ended June 30, 2013. The decrease was primarily attributable to decreases of $1.2 million in foreclosed property expenses, $67,000 in advertising and $54,000 in occupancy expenses, which were partially offset by increases of $168,000 in salaries and employee benefits and $58,000 in professional and outside services.  The increase in salaries and benefits was primarily due to a $380,000 additional expense for accelerated vesting related to the disability of an executive officer participating in the Bank's equity incentive plan, which was partially offset by a net decrease of $212,000 in other employee compensation expenses.  The decrease in foreclosed property expenses related to a $1.2 million write-down in the prior year on the Bank's largest foreclosed property comprised of condominium units compared to a write-down of $133,000 in 2014.  The residential condominium units of this property were sold during the second quarter of 2014. 

Noninterest expenses decreased $651,000, or 5.1%, to $12.2 million for the six months ended June 30, 2014 from $12.9 million for the six months ended June 30, 2013. The lower 2014 noninterest expenses primarily reflected a decrease in foreclosed property expenses of $1.2 million compared to the first six months of 2013, which was partially offset by higher compensation expenses.  As discussed above, compensation expenses in the first six months of 2014 included an increase of $380,000 in equity incentive plan expenses related to accelerated vesting for disability and an increase of $69,000 in other employee benefit plan expenses, which were partially offset by a decrease of $285,000 in employee compensation expenses and expense reductions in most other categories. Compensation expenses in the first six months of 2013 included a $499,000 one-time credit to pension expense resulting from the curtailment of benefits for future service.

Balance Sheet Review

Assets.  Total assets increased $21.5 million, or 2.9%, to $754.5 million at June 30, 2014 from $733.0 million at December 31, 2013. Cash and cash equivalents increased $41.0 million, or 77.7%, to $93.8 million at June 30, 2014 from $52.8 million at December 31, 2013 in anticipation of loan growth. Investment securities decreased $35.7 million, or 18.8%, to $153.9 million at June 30, 2014 from $189.6 million at December 31, 2013, primarily due to the sale of investment securities to fund anticipated loan growth. Loans receivable, net of deferred fees, increased $22.8 million, or 5.1%, to $472.0 million at June 30, 2014 from $449.2 million at December 31, 2013 as new loan originations exceeded loan repayments, prepayments and foreclosures.  

Liabilities.  Total deposits increased $19.9 million, or 3.5%, to $592.7 million at June 30, 2014 from $572.8 million at December 31, 2013. During the six months ended June 30, 2014, the Company continued its focus on core deposit growth, from which it excludes certificates of deposit.  Core deposits increased $26.5 million, or 6.5%, to $432.2 million at June 30, 2014 from $405.7 million at December 31, 2013.

Commercial checking and money market accounts increased $15.9 million to $111.1 million at June 30, 2014 from $95.2 million at December 31, 2013, reflecting expanded sources of lower cost funding.  The addition of deposit relationships in conjunction with new commercial loans significantly contributed to this increase and reflects a commitment to establishing diversified relationships with business clients.

Over the same period, certificates of deposit decreased $6.6 million, or 3.9%, to $160.5 million at June 30, 2014 from $167.1 million at December 31, 2013.  Accounts payable and other liabilities increased $1.3 million, or 15.5%, to $9.7 million at June 30, 2014 from $8.4 million at December 31, 2013.

Asset Quality

Provision for Loan Losses.  The provision for loan losses was a credit of $(1.4) million for the three months ended June 30, 2014 compared to a provision expense of $16,000 for the three months ended June 30, 2013. In the second quarter of 2014, the Bank accessed and modified its loan loss methodology for unimpaired commercial construction and land development, unimpaired residential construction and land development, and unimpaired commercial and industrial loans. This modification resulted in further sub-segmentation of these classes of loans and the related historical charge-off rates. The purpose was to allocate the substantial historical charge-off rates created by three sub-segments of these loan classes against the significantly diminished or nonexistent current balances within these same loan sub-segments reflecting no continued credit exposure to the Bank. Specifically, additional sub-segments were identified where the Bank made (1) loans in excess of $2.5 million to construct commercial mixed-use buildings in small communities with low population growth, (2) speculative loans to construct 1-4 family residences for the greater of 80% of the appraised value of the completed residence or 100% of the actual costs of construction, and (3) loans secured by equity securities that do not have a readily determinable fair value. This change in methodology resulted in a nonrecurring reduction of approximately $1.3 million in the Bank's reserves for loans not considered impaired in the second quarter of 2014.  The allowance for loan losses totaled $5.8 million, or 1.22% of total loans, at June 30, 2014 compared to $7.3 million, or 1.63% of total loans, at December 31, 2013. The Company charged off $56,000 in loans during the three months ended June 30, 2014 compared to $87,000 during the three months ended June 30, 2013.

The Bank recorded a credit to its loan losses in the amount of $(1.5) million for the six months ended June 30, 2014 compared to a provision expense of $128,000 for the six months ended June 30, 2013.  As was the case for the second quarter of 2014, the decrease in the six-month provision for loan losses primarily resulted from a $1.3 million reduction in the Bank's loan loss reserves due to a modification of its loan loss methodology for unimpaired commercial construction and land development, unimpaired residential construction and land development, and unimpaired commercial and industrial loans. Charge-offs were $150,000 for the first six months of 2014 compared to $192,000 for the first six months of 2013.  

Nonperforming assets.  Nonperforming assets totaled $12.4 million, or 1.64% of total assets, at June 30, 2014, compared to $15.4 million, or 2.10% of total assets, at December 31, 2013. Nonperforming assets included $2.0 million in nonperforming loans and $10.4 million in foreclosed real estate at June 30, 2014 compared to $1.2 million and $14.2 million, respectively, at December 31, 2013.

Nonperforming loans increased $837,000 to $2.0 million, or 0.43% of total loans, at June 30, 2014 from $1.2 million, or 0.27% of total loans, at December 31, 2013.  At June 30, 2014, nonperforming loans included seven residential mortgage loans that totaled $627,000, two commercial mortgage loans that totaled $914,000, three revolving home equity loans that totaled $144,000 and five commercial and industrial loans that totaled $342,000.  As of June 30, 2014, the nonperforming loans had specific reserves totaling $132,000.

Foreclosed real estate at June 30, 2014 included 12 properties with a total recorded amount of $10.4 million compared to 11 properties with a total recorded amount of $14.2 million at December 31, 2013. During the six months ended June 30, 2014, three new properties totaling $173,000 were added to foreclosed real estate, while two properties totaling $388,000 were sold.  In addition, the Bank sold 28 of its 44 units in a mixed-use condominium complex for net proceeds of $3.7 million.  The Bank also recorded $269,000 in capital additions and $154,000 in loss provisions during the first six months of 2014. 

The Bank's largest foreclosed property resulted from a loan relationship that had an original purpose of constructing a mixed-use retail, commercial office, and residential condominium project located in western North Carolina. As a result of this foreclosure, the Bank acquired 44 of the 48 condominium units in the building. Following an additional write-down of approximately $630,000 on the loans secured by this collateral in the fourth quarter of 2012, the Bank recorded this foreclosed property in the amount of $9.8 million.  During 2013, the Bank recorded additional write-downs totaling $1.6 million, which resulted in an adjusted recorded amount of $8.2 million at December 31, 2013.  During the three months ended June 30, 2014, the Bank recorded an additional write-down of $133,000 on the property and sold the remaining 26 residential condominium units.  At June 30, 2014, the adjusted recorded amount was $4.6 million for the remaining 8 retail units and 8 office units.

Share Repurchases

On January 30, 2014, the Company's Board of Directors approved an additional 5% stock repurchase plan. During the second quarter of 2014, 134,900 shares of common stock were repurchased at an average cost of $18.74. On July 18, 2014, the Company entered into a privately negotiated stock repurchase agreement to repurchase 392,900 shares of its common stock from one of its large institutional shareholders for an aggregate purchase price of $7,858,000, or $20.00 per share.  The stock repurchased on July 18, 2014 caused the holdings of the Company's largest shareholder to exceed 10%, so on July 24, 2014 the Company entered into a privately negotiated stock repurchase agreement to repurchase 60,000 shares of its common stock from its largest shareholder in order to reduce the shareholder's position to an amount below 10%.

Outlook

DeFerie concluded: "We are pleased with the tremendous gains we have made to improve the Company's balance sheet.  The ongoing strength in our loan portfolio, and asset quality improvements, should enable us to further reduce the cost of managing non-performing assets.  We believe this will have a direct positive impact on future earnings and the Company's ability to deliver increasing value to shareholders.  Our utmost focus remains on enhancing franchise value to benefit our shareholders."

Profile

The Bank is a North Carolina chartered stock savings bank offering traditional financial services through thirteen full-service banking centers located in Buncombe, Madison, McDowell, Henderson, and Transylvania counties in Western North Carolina and a loan production office in Charlotte, North Carolina. Originally chartered in 1936 and headquartered in Asheville, North Carolina, the Bank is locally managed with a focus on fostering strong relationships with its customers, its employees and the communities it serves.  The Bank was recognized as a 2013 North Carolina Best Employer from Business North Carolina magazine and the 2013 #1 Best Bank and #1 Best Bank Services for Small Business from Mountain Xpress newspaper.

This news release, as well as other written communications made from time to time by the Company and its subsidiaries and oral communications made from time to time by authorized officers of the Company, may contain statements relating to the future results of the Company (including certain projections and business trends) that are considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the PSLRA). Such forward-looking statements may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated," "intend" and "potential." For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.

The Company cautions you that a number of important factors could cause actual results to differ materially from those currently anticipated in any forward-looking statement. Such factors include, but are not limited to: prevailing economic and geopolitical conditions; changes in interest rates, loan demand, real estate values and competition; changes in accounting principles, policies, and guidelines; changes in any applicable law, rule, regulation or practice with respect to tax or legal issues; and other economic, competitive, governmental, regulatory and technological factors affecting the Company's operations, pricing, products and services and other factors described in the Company's Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q as filed with the Securities and Exchange Commission. The forward-looking statements are made as of the date of this release, and, except as may be required by applicable law or regulation, the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

Logo - http://photos.prnewswire.com/prnh/20111031/CL96775LOGO

SOURCE ASB Bancorp, Inc.