10-Q

United States

Securities and Exchange Commission

Washington, DC 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 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 July 31, 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 June 30, 2017 and December 31, 2016	1
	Consolidated Statements of Income (Unaudited) For the Three and Six Months Ended June 30, 2017 and 2016	2
	Consolidated Statements of Comprehensive Income (Unaudited) For the Three and Six Months Ended June 30, 2017 and 2016	3
	Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) For the Six Months Ended June 30, 2017	4
	Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 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	45
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	66
Item 4.	Controls and Procedures	68
Part II.	Other Information
Item 1.	Legal Proceedings	68
Item 1A.	Risk Factors	69
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3.	Defaults Upon Senior Securities	69
Item 4.	Mine Safety Disclosures	69
Item 5.	Other Information	69
Item 6.	Exhibits	70
Signatures		71

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ASB BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands, except par values)	June 30, 2017			December 31, 2016*
Assets
Cash and due from banks	$	10,657		$	10,862
Interest-earning deposits with banks		42,654			35,862
Total cash and cash equivalents		53,311			46,724
Securities available for sale (amortized cost of $96,979 at June 30, 2017 and $102,482 at December 31, 2016)		95,935			99,909
Securities held to maturity (estimated fair value of $3,782 at June 30, 2017 and $3,875 at December 31, 2016)		3,615			3,672
Investment in Federal Home Loan Bank stock, at cost		1,566			2,829
Loans held for sale		4,097			7,145
Loans receivable (net of deferred loan fees of $178 at June 30, 2017 and $241 at December 31, 2016)		613,603			603,582
Allowance for loan losses		(6,659	)		(6,544	)
Loans receivable, net		606,944			597,038
Premises and equipment, net		10,854			11,122
Foreclosed real estate		5,034			5,069
Deferred income tax assets, net		3,274			3,863
Bank owned life insurance		10,355			10,185
Other assets		6,403			8,267
Total assets	$	801,388		$	795,823
Liabilities
Noninterest-bearing deposits	$	136,712		$	123,999
Interest-bearing deposits		540,735			523,624
Total deposits		677,447			647,623
Overnight and short-term borrowings		311			392
Federal Home Loan Bank advances		20,000			50,000
Accounts payable and other liabilities		7,363			6,671
Total liabilities		705,121			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 June 30, 2017 and December 31, 2016		38			38
Additional paid-in capital		20,533			20,170
Retained earnings		80,292			77,306
Accumulated other comprehensive loss, net of tax		(886	)		(1,865	)
Unearned Employee Stock Ownership Plan (ESOP) shares		(2,669	)		(2,824	)
Unearned equity incentive plan shares		(661	)		(1,310	)
Stock-based deferral plan shares		(380	)		(378	)
Total shareholders’ equity		96,267			91,137
Total liabilities and shareholders’ equity	$	801,388		$	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 June 30,				Six Months Ended June 30,
(Dollars in thousands, except per share data)	2017		2016		2017		2016
Interest and dividend income
Loans, including fees	$	6,466	$	6,120	$	12,760	$	12,143
Securities		527		560		1,047		1,148
Other earning assets		121		75		230		141
Total interest and dividend income		7,114		6,755		14,037		13,432
Interest expense
Deposits		422		362		812		716
Overnight and short-term borrowings		-		2		-		2
Federal Home Loan Bank advances		179		490		605		980
Total interest expense		601		854		1,417		1,698
Net interest income		6,513		5,901		12,620		11,734
Provision for loan losses		75		104		132		503
Net interest income after provision for loan losses		6,438		5,797		12,488		11,231
Noninterest income
Mortgage banking income		375		396		820		709
Deposit and other service charge income		699		734		1,433		1,397
Income from debit card services		422		472		851		907
Gain on sale of investment securities, net		-		716		27		1,172
Other noninterest income		261		158		572		340
Total noninterest income		1,757		2,476		3,703		4,525
Noninterest expenses
Salaries and employee benefits		3,377		3,271		6,608		6,584
Occupancy expense, net		374		438		804		872
Foreclosed property expenses		122		64		160		107
Data processing fees		603		648		1,220		1,315
Federal deposit insurance premiums		62		90		125		203
Advertising		107		131		208		233
Professional and outside services		182		223		402		543
Merger-related expenses		520		-		520		-
Other noninterest expenses		915		772		1,803		1,541
Total noninterest expenses		6,262		5,637		11,850		11,398
Income before income tax provision		1,933		2,636		4,341		4,358
Income tax provision		781		940		1,355		1,541
Net income	$	1,152	$	1,696	$	2,986	$	2,817
Net income per common share – Basic	$	0.33	$	0.47	$	0.86	$	0.78
Net income per common share – Diluted	$	0.31	$	0.45	$	0.80	$	0.75

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 June 30,						Six Months Ended June 30,
(Dollars in thousands)	2017			2016			2017			2016
Comprehensive Income
Net income	$	1,152		$	1,696		$	2,986		$	2,817
Other comprehensive income
Unrealized holding gains on securities available for sale:
Reclassification of securities gains recognized in net income		-			(716	)		(27	)		(1,172	)
Deferred income tax benefit		-			262			10			429
Gains arising during the period		1,155			1,837			1,556			3,344
Deferred income tax expense		(415	)		(673	)		(560	)		(1,225	)
Unrealized holding gains adjustment, net of tax		740			710			979			1,376
Defined Benefit Pension Plans:
Net periodic pension cost		(60	)		(174	)		(118	)		(347	)
Net pension gain		60			174			118			347
Total other comprehensive income		740			710			979			1,376
Comprehensive income	$	1,892		$	2,406		$	3,965		$	4,193

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)	Six Months Ended June 30, 2017
Common stock
December 31, 2016	$	38
June 30, 2017	$	38
Additional paid-in capital
December 31, 2016	$	20,170
ESOP shares allocated		485
Stock-based compensation expense		527
Vesting of restricted stock		(649	)
June 30, 2017	$	20,533
Retained earnings
December 31, 2016	$	77,306
Net income		2,986
June 30, 2017	$	80,292
Accumulated other comprehensive income (loss), net of tax
December 31, 2016	$	(1,865	)
Other comprehensive income		979
June 30, 2017	$	(886	)
Unearned ESOP shares
December 31, 2016	$	(2,824	)
ESOP shares allocated		155
June 30, 2017	$	(2,669	)
Unearned equity incentive plan shares
December 31, 2016	$	(1,310	)
Vesting of restricted stock		649
June 30, 2017	$	(661	)
Stock-based deferral plan shares
December 31, 2016	$	(378	)
Stock-based deferral plan shares purchased		(2	)
June 30, 2017	$	(380	)
Total shareholders’ equity
December 31, 2016	$	91,137
Net income		2,986
Other comprehensive income		979
ESOP shares allocated		640
Stock-based compensation expense		527
Stock-based deferral plan shares purchased		(2	)
June 30, 2017	$	96,267

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)

	Six Months Ended June 30,
(Dollars in thousands)	2017			2016
Operating Activities
Net income	$	2,986		$	2,817
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		132			503
Provision for losses on foreclosed properties		23			18
Depreciation		386			391
Gain on sale of foreclosed real estate		(16	)		-
Increase in cash surrender value of bank owned life insurance		(170	)		(10	)
Deferred income tax expense (benefit)		39			(110	)
Net amortization of premiums on securities		926			1,112
Gain on sale of investment securities		(27	)		(1,172	)
Net amortization of deferred fees on loans		117			52
Mortgage loans originated for sale		(28,534	)		(25,196	)
Proceeds from sale of mortgage loans		32,402			28,600
Gain on sale of mortgage loans		(820	)		(709	)
ESOP compensation expense		640			387
Stock-based compensation expense		527			529
Excess tax benefits from equity awards		(228	)		(136	)
Decrease in income tax receivable		1,378			209
Decrease in interest receivable		56			340
Net change in other assets and liabilities		1,350			1,156
Net cash provided by operating activities		11,167			8,781
Investing Activities
Purchases of securities available for sale		(1,179	)		(16,833	)
Proceeds from sales of securities available for sale		1,194			50,150
Principal repayments on mortgage-backed and asset-backed securities		4,646			5,866
Redemption (purchase) of FHLB stock		1,263			(22	)
Net increase in loans receivable		(10,155	)		(30,391	)
Additions to foreclosed real estate		(2	)		-
Net proceeds from sales of foreclosed real estate		30			840
Purchases of premises and equipment		(119	)		(251	)
Net proceeds from sales of fixed and other assets		1			-
Purchases of bank owned life insurance		-			(10,000	)
Net cash used in investing activities		(4,321	)		(641	)

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)

	Six Months Ended June 30,
(Dollars in thousands)	2017			2016
Financing Activities
Net increase in deposits	$	29,824		$	9,781
Net repayments of Federal Home Loan Bank advances		(30,000	)		-
Net proceeds from (repayments of) overnight and short-term borrowings		(81	)		123
Stock-based deferral plan shares purchased		(2	)		(20	)
Proceeds from the exercise of stock options		-			79
Excess tax benefits from equity awards		-			136
Common stock repurchased		-			(79	)
Net cash (used in) provided by financing activities		(259	)		10,020
Net increase in cash and cash equivalents		6,587			18,160
Cash and cash equivalents at beginning of period		46,724			33,401
Cash and cash equivalents at end of period	$	53,311		$	51,561
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest on deposits, advances and other borrowings	$	1,471		$	1,697
Income taxes		214			1,240
Non-cash investing and financing transactions:
Transfers from loans to foreclosed real estate	$	-		$	5
Net unsettled security purchases		-			6,456
Increase in unrealized gains and losses on securities available for sale		1,556			3,344
Decrease in deferred income taxes resulting from other comprehensive income		(550	)		(796	)

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 and six months ended June 30, 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.

As described in more detail in note 8 to the consolidated financial statements, on May 1, 2017, the Parent 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, pursuant to which the Parent will merge with and into First Bancorp (the “Merger”), and the Bank will merge with and into First Bank. The parties anticipate closing the Merger during the fourth quarter of 2017.

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

7

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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

8

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

history, types of credit currently in use, and recent credit inquiries. To the extent that the loan is secured by collateral, the value of the collateral is also evaluated. Common risks to each class of non-commercial loans include general economic conditions within the Bank’s markets, such as unemployment and potential declines in collateral values, and the personal circumstances of the borrowers.

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

Residential Mortgage and Non-Commercial Construction and Land Development loans are to individuals and are typically secured by 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.

9

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.

10

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.

11

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.

12

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 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:

(Dollars in thousands)	Beginning Balance			OCI Before Reclassification			Amount Reclassified			Net OCI		Ending Balance
Three Months Ended June 30, 2017
Unrealized loss on securities	$	(1,408	)	$	740		$	-		$	740	$	(668	)
Benefit plan liability		(218	)		(38	)		38			-		(218	)
Accumulated other comprehensive income (loss), net of tax	$	(1,626	)	$	702		$	38		$	740	$	(886	)
Three Months Ended June 30, 2016
Unrealized gain on securities	$	931		$	1,164		$	(454	)	$	710	$	1,641
Benefit plan liability		(5,326	)		(110	)		110			-		(5,326	)
Accumulated other comprehensive income (loss), net of tax	$	(4,395	)	$	1,054		$	(344	)	$	710	$	(3,685	)

13

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(Dollars in thousands)	Beginning Balance			OCI Before Reclassification			Amount Reclassified			Net OCI		Ending Balance
Six Months Ended June 30, 2017
Unrealized loss on securities	$	(1,647	)	$	996		$	(17	)	$	979	$	(668	)
Benefit plan liability		(218	)		(76	)		76			-		(218	)
Accumulated other comprehensive income (loss), net of tax	$	(1,865	)	$	920		$	59		$	979	$	(886	)
Six Months Ended June 30, 2016
Unrealized gain on securities	$	265		$	2,119		$	(743	)	$	1,376	$	1,641
Benefit plan liability		(5,326	)		(220	)		220			-		(5,326	)
Accumulated other comprehensive income (loss), net of tax	$	(5,061	)	$	1,899		$	(523	)	$	1,376	$	(3,685	)

The Company’s reclassifications out of accumulated OCI are as follows:

Details About Accumulated Other Comprehensive Income Components	Amount Reclassified From Accumulated Other Comprehensive Income						Affected Line Item In The Statement Where Net Income Is Presented
(Dollars in thousands)	Three Months Ended June 30, 2017			Three Months Ended June 30, 2016
Reclassification of securities gains recognized in net income	$	-		$	(716	)	Gain on sale of investment securities
Deferred income tax expense		-			262		Income tax provision
Total reclassifications for the period	$	-		$	(454	)	Net of tax
Net periodic pension benefit	$	60		$	174		Salaries and employee benefits
Deferred income tax expense		(22	)		(64	)	Income tax provision
Total reclassifications for the period	$	38		$	110		Net of tax

14

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Details About Accumulated Other Comprehensive Income Components	Amount Reclassified From Accumulated Other Comprehensive Income						Affected Line Item In The Statement Where Net Income Is Presented
(Dollars in thousands)	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016
Reclassification of securities gains recognized in net income	$	(27	)	$	(1,172	)	Gain on sale of investment securities
Deferred income tax expense		10			429		Income tax provision
Total reclassifications for the period	$	(17	)	$	(743	)	Net of tax
Net periodic pension benefit	$	118		$	347		Salaries and employee benefits
Deferred income tax expense		(42	)		(127	)	Income tax provision
Total reclassifications for the period	$	76		$	220		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.

15

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Pension Plan – Prior to November 2016, the Bank had a qualified defined benefit pension plan.  The Bank recognized the overfunded or underfunded status of the plan as an asset or liability in its consolidated balance sheets and recognized changes in the funded status in the year in which the change occurred 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. 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.

In addition, the Bank currently has a non-qualified pension plan, which is an unfunded plan.  The Bank 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 six 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.

16

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 June 30,						Six Months Ended June 30,
(Dollars in thousands, except per share data)	2017			2016			2017			2016
Numerator:
Net income	$	1,152		$	1,696		$	2,986		$	2,817
Denominator:
Weighted average common shares outstanding		3,788,025			3,985,922			3,788,025			3,985,698
Less: Weighted average unvested restricted shares		(41,017	)		(81,313	)		(48,972	)		(89,229	)
Less: Weighted average unallocated ESOP shares		(270,828	)		(302,160	)		(274,697	)		(306,062	)
Weighted average common shares used to compute net income per common share – Basic		3,476,180			3,602,449			3,464,356			3,590,407
Add: Effect of dilutive securities		283,834			140,009			267,424			140,909
Weighted average common shares used to compute net income per common share – Diluted		3,760,014			3,742,458			3,731,780			3,731,316
Net income per common share – Basic	$	0.33		$	0.47		$	0.86		$	0.78
Net income per common share – Diluted	$	0.31		$	0.45		$	0.80		$	0.75

For the three and six months ended June 30, 2017 and 2016, 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.

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 during the first quarter of 2017.  The adoption also increased the weighted average common shares on a diluted basis by 50,589 shares and 46,797 shares for the three- and six-month periods ended June 30, 2017, respectively.

17

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.  The Company adopted the new guidance on a prospective basis in the first quarter of 2017, and upon adoption, the Company elected to estimate forfeitures of equity-based awards.  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.

18

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.

Accounting Standards Update ASU 2017-09 – In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718):  Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. ASU 2017-09 is effective for all entities for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017.  Early adoption is permitted.  The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date.  ASU 2017-09 is currently not applicable to the Company; however, it will evaluate the new guidance to determine the impact on the Company's consolidated financial statements upon modification of any share-based payment awards.

19

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
June 30, 2017
U.S. Government Sponsored Enterprise (GSE) and agency securities due -
Within 1 year	$	1,004	$	-	$	(1	)	$	1,003
After 1 year but within 5 years		1,072		-		(5	)		1,067
Asset-backed securities issued by the Small Business Administration (SBA)		3,746		29		(5	)		3,770
Residential mortgage-backed securities issued by GSEs (1)		36,156		97		(524	)		35,729
State and local government securities due -
After 10 years		54,216		599		(1,224	)		53,591
Mutual funds		785		-		(10	)		775
Total	$	96,979	$	725	$	(1,769	)	$	95,935
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 June 30, 2017 and December 31, 2016 or during the six- and twelve-month periods, respectively, then ended.

20

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
June 30, 2017
U.S. GSE and agency securities due -
Within 1 year	$	1,001	$	2	$	-	$	1,003
Residential mortgage-backed securities issued by GSEs (1)		172		14		-		186
State and local government securities due -
After 1 year but within 5 years		973		65		-		1,038
After 5 years but within 10 years		1,469		86		-		1,555
Total	$	3,615	$	167	$	-	$	3,782
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 June 30, 2017 and December 31, 2016 or during the six- and twelve-month periods, respectively, then ended.

21

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 June 30, 2017 and December 31, 2016. The total number of securities with unrealized losses at June 30, 2017 and December 31, 2016 were 41 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.

	June 30, 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	$	2,070	$	(6	)	$	-	$	-		$	2,070	$	(6	)
Asset-backed SBA		-		-			975		(5	)		975		(5	)
Residential mortgage-backed GSE (1)		6,631		(53	)		23,054		(471	)		29,685		(524	)
State and local government		14,590		(543	)		11,566		(681	)		26,156		(1,224	)
Mutual funds		785		(10	)		-		-			785		(10	)
Total temporarily impaired securities	$	24,076	$	(612	)	$	35,595	$	(1,157	)	$	59,671	$	(1,769	)

(1) Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at June 30, 2017 or during the six-month period then ended.

22

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)	June 30, 2017		December 31, 2016
Pledged to Federal Reserve Discount Window	$	7,007	$	8,264
Pledged to repurchase agreements for commercial customers		1,067		840

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

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2017		2016		2017		2016
Interest income from taxable securities	$	140	$	213	$	272	$	434
Interest income from tax-exempt securities		387		347		775		714
Total interest income from securities	$	527	$	560	$	1,047	$	1,148

23

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 June 30,					Six Months Ended June 30,
(Dollars in thousands)	2017		2016			2017		2016
Proceeds from sales of securities	$	-	$	31,902		$	1,194	$	50,150
Gross realized gains from sales of securities		-		746			27		1,216
Gross realized losses from sales of securities		-		(30	)		-		(44	)

3. LOANS RECEIVABLE

Loans receivable by segment and class follow:

(Dollars in thousands)	June 30, 2017			December 31, 2016
Commercial:
Commercial construction and land development	$	22,342		$	27,813
Commercial mortgage		246,475			241,125
Commercial and industrial		27,088			23,819
Total commercial		295,905			292,757
Non-commercial:
Non-commercial construction and land development		24,005			20,801
Residential mortgage		211,667			200,590
Revolving mortgage		64,591			66,870
Consumer		17,613			22,805
Total non-commercial		317,876			311,066
Total loans receivable		613,781			603,823
Less: Deferred loan fees		(178	)		(241	)
Total loans receivable net of deferred loan fees		613,603			603,582
Less: Allowance for loan losses		(6,659	)		(6,544	)
Loans receivable, net	$	606,944		$	597,038

24

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

3. LOANS RECEIVABLE (Continued)

Loans receivable by segment, class, and grade follow:

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total Loans
June 30, 2017
Commercial:
Commercial construction and land development	$	22,221	$	121	$	-	$	-	$	-	$	22,342
Commercial mortgage		237,934		7,808		733		-		-		246,475
Commercial and industrial		26,196		691		201		-		-		27,088
Total commercial		286,351		8,620		934		-		-		295,905
Non-commercial:
Non-commercial construction and land development		24,005		-		-		-		-		24,005
Residential mortgage		205,955		5,139		573		-		-		211,667
Revolving mortgage		61,266		2,878		447		-		-		64,591
Consumer		17,099		441		73		-		-		17,613
Total non-commercial		308,325		8,458		1,093		-		-		317,876
Total loans receivable	$	594,676	$	17,078	$	2,027	$	-	$	-	$	613,781
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

25

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

3. LOANS RECEIVABLE (Continued)

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

	Past Due
(Dollars in thousands)	31-89 Days		90 Days Or More		Total		Current		Total Loans
June 30, 2017
Commercial:
Commercial construction and land development	$	-	$	-	$	-	$	22,342	$	22,342
Commercial mortgage		-		-		-		246,475		246,475
Commercial and industrial		-		53		53		27,035		27,088
Total commercial		-		53		53		295,852		295,905
Non-commercial:
Non-commercial construction and land development		-		-		-		24,005		24,005
Residential mortgage		6		176		182		211,485		211,667
Revolving mortgage		257		211		468		64,123		64,591
Consumer		77		31		108		17,505		17,613
Total non-commercial		340		418		758		317,118		317,876
Total loans receivable	$	340	$	471	$	811	$	612,970	$	613,781
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

26

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

3. LOANS RECEIVABLE (Continued)

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

	June 30, 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	$	53	$	-	$	63	$	-
Total commercial		53		-		63		-
Non-commercial:
Residential mortgage		176		-		626		-
Revolving mortgage		293		-		323		-
Consumer		31		-		-		-
Total non-commercial		500		-		949		-
Total loans receivable	$	553	$	-	$	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 $16.8 million at June 30, 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)	June 30, 2017			December 31, 2016
Director and executive officer loans, beginning of period	$	3,356		$	3,530
New loans		115			191
Repayments of loans		(247	)		(365	)
Director and executive officer loans, end of period	$	3,224		$	3,356

27

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4. ALLOWANCE FOR LOAN LOSSES

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

	Three Months Ended June 30, 2017									Six Months Ended June 30, 2017
(Dollars in thousands)	Commercial			Non- Commercial			Total			Commercial			Non- Commercial			Total
Balance at beginning of period	$	3,989		$	2,584		$	6,573		$	3,968		$	2,576		$	6,544
Provision for loan losses		53			22			75			61			71			132
Charge-offs		-			(43	)		(43	)		-			(96	)		(96	)
Recoveries		13			41			54			26			53			79
Balance at end of period	$	4,055		$	2,604		$	6,659		$	4,055		$	2,604		$	6,659
	Three Months Ended June 30, 2016									Six Months Ended June 30, 2016
(Dollars in thousands)	Commercial			Non- Commercial			Total			Commercial			Non- Commercial			Total
Balance at beginning of period	$	4,179		$	2,543		$	6,722		$	3,710		$	2,579		$	6,289
Provision for loan losses		26			78			104			490			13			503
Charge-offs		(224	)		(36	)		(260	)		(224	)		(44	)		(268	)
Recoveries		5			12			17			10			49			59
Balance at end of period	$	3,986		$	2,597		$	6,583		$	3,986		$	2,597		$	6,583

28

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4. ALLOWANCE FOR LOAN LOSSES (Continued)

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

	Allowance For Loan Losses						Total Loans Receivable
(Dollars in thousands)	Loans Individually Evaluated For Impairment		Loans Collectively Evaluated		Total		Loans Individually Evaluated For Impairment		Loans Collectively Evaluated		Total
June 30, 2017
Commercial:
Commercial construction and land development	$	-	$	241	$	241	$	-	$	22,342	$	22,342
Commercial mortgage		-		3,451		3,451		142		246,333		246,475
Commercial and industrial		4		359		363		201		26,887		27,088
Total commercial		4		4,051		4,055		343		295,562		295,905
Non-commercial:
Non-commercial construction and land development		-		212		212		-		24,005		24,005
Residential mortgage		13		1,392		1,405		1,605		210,062		211,667
Revolving mortgage		81		738		819		338		64,253		64,591
Consumer		-		168		168		-		17,613		17,613
Total non-commercial		94		2,510		2,604		1,943		315,933		317,876
Total loans receivable	$	98	$	6,561	$	6,659	$	2,286	$	611,495	$	613,781
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

29

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4. ALLOWANCE FOR LOAN LOSSES (Continued)

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

			Recorded Investment
(Dollars in thousands)	Unpaid Principal Balance		With A Recorded Allowance		With No Recorded Allowance		Total		Related Recorded Allowance
June 30, 2017
Commercial:
Commercial mortgage	$	142	$	-	$	143	$	143	$	-
Commercial and industrial		290		148		53		201		4
Total commercial		432		148		196		344		4
Non-commercial:
Residential mortgage		1,623		708		896		1,604		13
Revolving mortgage		354		81		257		338		81
Total non-commercial		1,977		789		1,153		1,942		94
Total impaired loans	$	2,409	$	937	$	1,349	$	2,286	$	98
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

30

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4. ALLOWANCE FOR LOAN LOSSES (Continued)

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

	Three Months Ended June 30, 2017				Three Months Ended June 30, 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		48		1		3,344		32
Commercial and industrial		202		2		226		-
Total commercial		250		3		3,696		32
Non-commercial:
Residential mortgage		1,612		13		2,997		14
Revolving mortgage		339		-		85		-
Total non-commercial		1,951		13		3,082		14
Total loans receivable	$	2,201	$	16	$	6,778	$	46
	Six Months Ended June 30, 2017				Six Months Ended June 30, 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		1,463		32		3,496		64
Commercial and industrial		205		4		235		-
Total commercial		1,668		36		3,857		64
Non-commercial:
Residential mortgage		1,769		26		2,942		28
Revolving mortgage		320		-		89		-
Total non-commercial		2,089		26		3,031		28
Total loans receivable	$	3,757	$	62	$	6,888	$	92

The Bank did not restructure any loans during the three months ended June 30, 2017 and June 30, 2016, or during the six months ended June 30, 2017 and June 30, 2016. There were no loans modified as TDRs within the preceding twelve months that stopped performing during the three months or six months ended June 30, 2017 and June 30, 2016.

31

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4. ALLOWANCE FOR LOAN LOSSES (Continued)

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

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

(Dollars in thousands)	June 30, 2017		December 31, 2016
Nonperforming restructured loans	$	11	$	13
Performing restructured loans		1,576		4,543
Total	$	1,587	$	4,556

As of June 30, 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 $930,000 and $953,000, respectively, of foreclosed residential real estate property included in foreclosed real estate.

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 approximately $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 June 30,				Six Months Ended June 30,
(Dollars in thousands)	2017		2016		2017		2016
Non-Qualified Defined Benefit Plan
Components of Net Periodic Benefit Costs:
Interest cost	$	6	$	14	$	13	$	28
Amortization of net loss		60		11		118		23
Net periodic pension cost	$	66	$	25	$	131	$	51

32

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

5. BENEFIT PLANS (Continued)

	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2017		2016			2017		2016
Qualified Defined Benefit Plan
Components of Net Periodic Benefit Costs:
Interest cost	$	-	$	237		$	-	$	472
Expected return on plan assets		-		(202	)		-		(401	)
Amortization of net loss		-		163			-		324
Net periodic pension cost	$	-	$	198		$	-	$	395

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:

	June 30, 2017
Allocated ESOP shares, December 31, 2016		141,710
ESOP shares committed to be released during the period		15,565
ESOP shares withdrawn during the period		(7,792	)
Unallocated ESOP shares		266,914
Total ESOP shares		416,397
Fair value of unallocated ESOP shares (dollars in thousands)	$	11,731

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.

33

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

5. BENEFIT PLANS (Continued)

Coincident to the closing of the Merger, as described in more detail in note 8 to the consolidated financial statements, the ESOP requires that the ESOP loan be paid in full from the sale of unallocated Parent shares of stock held by the ESOP. The remaining unallocated Parent shares held by the ESOP, net of allocation of previously forfeited shares as required by the ESOP, are to be allocated among the accounts of all participants, as defined by the ESOP, who were employed by the Bank on the date immediately preceding the closing date of the Merger in proportion to the opening balances in their ESOP participant accounts as of the first day of the current Valuation Period, as defined by the ESOP.

Total expense recognized in connection with the ESOP follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2017		2016		2017		2016
ESOP expense	$	372	$	194	$	640	$	387

2012 Equity Incentive Plan - The Parent’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 Parent 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 and six months ended June 30, 2017 were $263,000 and $527,000, respectively, and were $262,000 and $529,000, respectively, for the same periods of 2016.

34

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

5. BENEFIT PLANS (Continued)

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 June 30, 2017		41,017		$	15.78

There were no restricted stock awards granted or forfeited during the six-month periods ended June 30, 2017 and 2016.

At June 30, 2017, unrecognized compensation expense, adjusted for expected forfeitures, was $380,000 related to restricted stock.  The weighted-average period over which compensation cost related to unvested awards is expected to be recognized was 0.66 years at June 30, 2017.

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 June 30, 2017		60,355		443,900		$	16.04		5.75	$	12,392
Options exercisable at June 30, 2017				339,400		$	15.92		5.70	$	9,514

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 six-month period ended June 30, 2017. There were 5,000 stock options exercised during the six-month period ended June 30, 2016, and there were no stock options granted or forfeited during the same period.

At June 30, 2017, the Company had $331,000 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 1.06 years at June 30, 2017. There were 339,400 options vested and exercisable at June 30, 2017.

35

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

6. COMMITMENTS AND CONTINGENCIES

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

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

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

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

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

(Dollars in thousands)	June 30, 2017		December 31, 2016
Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit	$	196,229	$	190,213
Commitments under standby letters of credit		163		604
Total	$	196,392	$	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.

36

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

6. COMMITMENTS AND CONTINGENCIES (Continued)

Interest Rate Risk - The Bank’s profitability depends to a large extent on its net interest income, which is the difference between interest income from loans and investments and interest expense on deposits and borrowings. Like most financial institutions, the Bank’s interest income and interest expense are significantly affected by changes in market interest rates and other economic factors beyond its control. The Bank’s interest-earning assets consist primarily of long-term, fixed-rate mortgage loans, adjustable rate mortgage loans, 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. Management believes that such routine legal proceedings taken together are immaterial to our financial condition or results of operations.  Any non-routine legal proceedings are described in Item 3 of the Parent’s Annual Report on Form 10-K for the year ended December 31, 2016. 

As previously described, on May 1, 2017, the Parent and First Bancorp entered into the Merger Agreement, pursuant to which, upon satisfaction of the conditions set forth in the Merger Agreement, the Parent will merge with and into First Bancorp, with First Bancorp being the surviving corporation and the Parent ceasing to be a separate entity.  The announcement of the Merger has triggered two lawsuits filed by purported shareholders.

On July 14, 2017, a purported shareholder filed a lawsuit in the United States District Court, Western District of North Carolina, against the Parent and members of the Parent’s board of directors. The lawsuit alleges inadequate disclosures in the Parent’s proxy statement/prospectus and violations of the Securities Exchange Act of 1934. The lawsuit seeks, among other remedies, to enjoin the Merger or, in the event the Merger is completed, rescission of the Merger or rescissory damages; to direct defendants to account for unspecified damages; and costs of the lawsuit, including attorneys’ and experts’ fees.

On July 19, 2017, another purported shareholder filed a lawsuit in the United States District Court, Western District of North Carolina, against the Parent, members of the Parent’s board of directors, and First Bancorp.  This lawsuit make nearly identical allegations as are made in the lawsuit described in the preceding paragraph and asks for identical remedies.

As of the date of this filing, the Parent cannot reasonably predict the outcome of either of the above-described lawsuits or, in the event of an adverse outcome, the potential loss or range of possible loss relating to either lawsuit.

37

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 June 30, 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.

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

38

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

7. FAIR VALUE MEASUREMENTS (Continued)

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.

39

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 June 30, 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.

40

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

7. FAIR VALUE MEASUREMENTS (Continued)

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

	Fair Value Measurement Using								Total
(Dollars in thousands)	Level 1		Level 2		Level 3		Estimated Fair Value		Carrying Amount In Balance Sheet
June 30, 2017
Financial assets:
Cash and cash equivalents	$	53,311	$	-	$	-	$	53,311	$	53,311
Securities available for sale		775		95,160		-		95,935		95,935
Securities held to maturity		-		3,782		-		3,782		3,615
Investments in FHLB stock		-		-		1,566		1,566		1,566
Loans held for sale		-		4,201		-		4,201		4,097
Loans receivable, net		-		-		604,515		604,515		606,944
Accrued interest receivable		-		-		2,272		2,272		2,272
Deferred compensation assets		1,449		-		-		1,449		1,449
Financial liabilities:
Demand deposits		-		-		540,972		540,972		540,972
Time deposits		-		-		135,318		135,318		136,475
Repurchase agreements		-		-		311		311		311
Federal Home Loan Bank Advances		-		-		20,291		20,291		20,000
Deferred compensation liabilities		1,452		-		-		1,452		1,452
Accrued interest payable		-		-		66		66		66
Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit		-		-		-		-		-
Commitments under standby letters of credit		-		-		-		-		-

41

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		-		-		-		-		-

42

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

7. FAIR VALUE MEASUREMENTS (Continued)

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Below is a table that presents information about certain assets and liabilities measured at fair value on a recurring basis. There were no transfers to or from Levels 1 and 2 during the six months ended June 30, 2017 and June 30, 2016.

(Dollars in thousands)	Fair Value Measurement Using						Total		Assets/ Liabilities Measured At Fair Value
Description	Level 1		Level 2		Level 3		Carrying Amount In Balance Sheets
June 30, 2017
Securities available for sale:
U.S. GSE and agency securities	$	-	$	2,070	$	-	$	2,070	$	2,070
Asset-backed SBA securities		-		3,770		-		3,770		3,770
Residential mortgage-backed securities issued by GSEs		-		35,729		-		35,729		35,729
State and local government securities		-		53,591		-		53,591		53,591
Mutual funds		775		-		-		775		775
Total	$	775	$	95,160	$	-	$	95,935	$	95,935
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

43

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		Assets/ Liabilities Measured At Fair Value (1)
Description	Level 1		Level 2		Level 3		Carrying Amount In Balance Sheets (1)
June 30, 2017
Impaired loans	$	-	$	-	$	400	$	400	$	400
Foreclosed properties		-		-		1,768		1,768		1,768
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 six-month periods ended June 30, 2017 and June 30, 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)
June 30, 2017
Impaired loans	$	400	Discounted appraisals (2)	Collateral discounts (3)		0%-25% (19 %)
Foreclosed properties		1,768	Discounted appraisals (2)	Collateral discounts (3)		0%-22% (7%)
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.

44

ASB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

8. BUSINESS COMBINATIONS

On May 1, 2017, the Parent entered into the Merger Agreement with First Bancorp, pursuant to which the Parent will merge with and into First Bancorp and the Bank will merge with and into First Bank.  As of May 1, 2017, the aggregate merger consideration had a total value of approximately $175 million, or $43.12 per share.  As of June 30, 2017, the aggregate merger consideration had a total value of approximately $181 million, or $44.70 per share.

Subject to the terms and conditions of the Merger Agreement, the Parent'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 Parent's common stock.  The total merger consideration will be prorated as necessary to ensure that 10% of the total outstanding shares of the Parent's common stock will be exchanged for cash, and 90% of the total outstanding shares of the Parent'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 Parent'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 Parent 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 Parent'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.

The forgoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is qualified in its entirety be reference to the Merger Agreement, which is incorporated as Exhibit 2.1 to this Quarterly Report on Form 10-Q.

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;

45

• 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;

• 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- and six-month periods ended June 30, 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

46

require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect our earnings. See notes 1 and 4 included in the consolidated financial statements.

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

Pension Plan. The Company 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 June 30, 2017 and our operating performance for the three- and six-month periods ended June 30, 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.

47

Comparison of Financial Condition at June 30, 2017 and December 31, 2016

The following table provides the changes in our significant asset and liability categories at June 30, 2017 compared to December 31, 2016.

(Dollars in thousands)	June 30, 2017			December 31, 2016			$ Change			% Change
Interest-earning assets:
Interest-earning deposits with banks and overnight and short-term investments	$	42,654		$	35,862		$	6,792			18.9	%
Investment securities		99,550			103,581			(4,031	)		-3.9	%
Investments held at cost		1,566			2,829			(1,263	)		-44.6	%
Loans held for sale		4,097			7,145			(3,048	)		-42.7	%
Loans receivable, net of deferred fees		613,603			603,582			10,021			1.7	%
Total interest-earning assets		761,470			752,999			8,471			1.1	%
Noninterest-earning assets:
Cash and due from banks		10,657			10,862			(205	)		-1.9	%
Allowance for loan losses		(6,659	)		(6,544	)		(115	)		-1.8	%
Premises and equipment, net of accumulated depreciation		10,854			11,122			(268	)		-2.4	%
Foreclosed real estate		5,034			5,069			(35	)		-0.7	%
Deferred income tax assets, net of deferred income tax liabilities		3,274			3,863			(589	)		-15.2	%
Bank owned life insurance		10,355			10,185			170			1.7	%
Other assets		6,403			8,267			(1,864	)		-22.5	%
Total noninterest-earning assets		39,918			42,824			(2,906	)		-6.8	%
Total assets	$	801,388		$	795,823		$	5,565			0.7	%
Interest-bearing liabilities:
Interest-bearing deposits	$	540,735		$	523,624		$	17,111			3.3	%
Overnight and short-term borrowings		311			392			(81	)		-20.7	%
Federal Home Loan Bank advances		20,000			50,000			(30,000	)		-60.0	%
Total interest-bearing liabilities		561,046			574,016			(12,970	)		-2.3	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		136,712			123,999			12,713			10.3	%
Accounts payable and other liabilities		7,363			6,671			692			10.4	%
Total noninterest-bearing liabilities		144,075			130,670			13,405			10.3	%
Total liabilities		705,121			704,686			435			0.1	%
Total equity		96,267			91,137			5,130			5.6	%
Total liabilities and equity	$	801,388		$	795,823		$	5,565			0.7	%
Cash and cash equivalents	$	53,311		$	46,724		$	6,587			14.1	%
Total core deposits (excludes certificate accounts)		540,972			516,125			24,847			4.8	%
Total certificates of deposit		136,475			131,498			4,977			3.8	%
Total deposits		677,447			647,623			29,824			4.6	%
Total funding liabilities		697,758			698,015			(257	)		0.0	%

48

Assets. Total assets increased $5.6 million, or 0.7%, to $801.4 million at June 30, 2017 from $795.8 million at December 31, 2016. Cash and cash equivalents increased $6.6 million, or 14.1%, to $53.3 million at June 30, 2017 from $46.7 million at December 31, 2016, primarily attributable to deposit growth. Investment securities decreased $4.0 million, or 3.9%, to $99.6 million at June 30, 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 $10.0 million, or 1.7%, to $613.6 million at June 30, 2017 from $603.6 million at December 31, 2016 as new loan originations, primarily residential mortgage and commercial and industrial loan originations, exceeded loan repayments, prepayments and foreclosures.

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2017		2016		2017		2016
Loans originated:
Commercial:
Commercial mortgage	$	17,480	$	17,928	$	34,966	$	44,477
Construction and land development		2,065		8,605		2,065		13,383
Commercial and industrial		5,845		10,319		18,535		14,005
Non-commercial:
Residential mortgage		17,197		19,076		35,075		34,714
Construction and land development		14,385		10,601		25,985		20,647
Revolving mortgage		6,511		5,276		11,076		11,417
Consumer		209		105		358		190
Total loans originated	$	63,692	$	71,910	$	128,060	$	138,833
Loan principal payments, prepayments and payoffs	$	41,086	$	52,633	$	89,232	$	82,845
Residential mortgage loans sold	$	15,390	$	15,538	$	32,402	$	28,600

Nonperforming Assets. Nonperforming assets totaled $5.7 million, or 0.71% of total assets, at June 30, 2017 compared to $6.3 million, or 0.79% of total assets, at December 31, 2016. Nonperforming assets included $553,000 in nonperforming loans and $5.2 million in foreclosed real estate and repossessed assets at June 30, 2017 compared to $1.0 million and $5.3 million, respectively, at December 31, 2016.

Nonperforming loans decreased $459,000 to $553,000, or 0.09% of total loans, at June 30, 2017 compared to $1.0 million, or 0.17% of total loans, at December 31, 2016. Residential mortgage nonperforming loans decreased $450,000, and revolving nonperforming loans decreased $30,000 for the first six months of 2017, which were partially offset by an increase of $31,000 in consumer nonperforming loans. Performing troubled debt restructurings (“TDRs”) decreased $3.0 million, or 65.3%, when comparing the same periods. Total performing TDRs and nonperforming assets decreased $3.5 million, or 32.5%, to $7.3 million, or 0.91% of total assets, at June 30, 2017 from $10.8 million, or 1.36% of total assets, at December 31, 2016.

At June 30, 2017, nonperforming loans included four revolving home equity loans that totaled $293,000, one residential mortgage loan in the amount of $176,000, three commercial and industrial loans that totaled $53,000 and one consumer loan in the amount of $31,000. As of June 30, 2017, the nonperforming loans had specific reserves totaling $82,000. TDRs were $1.6 million at June 30, 2017 and $4.6 million at December 31, 2016. The decrease in TDRs was primarily attributable to a $2.9 million payoff during the second quarter of 2017. There were no additions to TDRs during the three months ended June 30, 2017. At June 30, 2017, all of the $1.6 million in TDRs were performing in accordance with their restructured terms, with the exception of $11,000, which TDR was not performing according to its restructured terms and was included as nonaccruing loans.

49

Foreclosed real estate at June 30, 2017 included seven properties with a total recorded amount of $5.0 million compared to ten properties with a total recorded amount of $5.1 million at December 31, 2016. During the six months ended June 30, 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 $23,000 in additional loss provisions on foreclosed real estate during the first six months of 2017 and $2,000 in capital additions during the period.

Liabilities. Total deposits increased $29.8 million, or 4.6%, to $677.4 million at June 30, 2017 from $647.6 million at December 31, 2016. During the six months ended June 30, 2017, we continued our focus on core deposit growth, from which we exclude certificates of deposit. Core deposits increased $24.9 million, or 4.8%, to $541.0 million at June 30, 2017 from $516.1 million at December 31, 2016.

Commercial checking and money market accounts increased $10.4 million, or 6.7%, to $165.7 million at June 30, 2017 from $155.3 million at December 31, 2016, reflecting expanded sources of lower cost funding. Our continued 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 $5.0 million, or 3.8%, to $136.5 million at June 30, 2017 from $131.5 million at December 31, 2016, which included an $8.1 million increase in brokered deposits since December 31, 2016. Accounts payable and other liabilities increased $692,000, or 10.4%, to $7.4 million at June 30, 2017 from $6.7 million at December 31, 2016. The increase in accounts payable and other liabilities at June 30, 2017 was primarily attributable to escrow payments made by borrowers.

Results of Operations for the Three Months Ended June 30, 2017 and 2016

Overview. Net income was $1.2 million, or $0.31 per diluted common share, for the quarter ended June 30, 2017 compared to net income of $1.7 million, or $0.45 per diluted common share, for the quarter ended June 30, 2016. Net interest income increased $612,000, which was the result of a $359,000 increase in total interest and dividend income and a $253,000 decrease in interest expense. The provision for loan losses was $75,000 for the second quarter of 2017 compared to $104,000 for the same period of 2016, primarily due to continued improvement in asset quality during the quarter. Noninterest income decreased $719,000 and noninterest expenses increased $625,000 during the second quarter of 2017 compared to the second quarter of 2016. Noninterest income decreased for the second quarter of 2017 primarily due to a decrease in gains realized from the sale of investment securities. The increase in noninterest expenses was primarily attributable to $520,000 in merger-related expenses incurred during the second quarter of 2017 and a $106,000 increase in compensation expenses during the quarter. The income tax provision decreased $159,000 for the quarter ended June 30, 2017 compared to the same quarter of 2016.

	Three Months Ended June 30,
(Dollars in thousands)	2017		2016		$ Change			% Change
Interest and dividend income	$	7,114	$	6,755	$	359			5.3	%
Interest expense		601		854		(253	)		-29.6	%
Net interest income		6,513		5,901		612			10.4	%
Provision for loan losses		75		104		(29	)		-27.9	%
Net interest income after provision for loan losses		6,438		5,797		641			11.1	%
Noninterest income		1,757		2,476		(719	)		-29.0	%
Noninterest expenses		6,262		5,637		625			11.1	%
Income before income tax provision		1,933		2,636		(703	)		-26.7	%
Income tax provision		781		940		(159	)		-16.9	%
Net income		1,152		1,696		(544	)		-32.1	%

50

Net Interest Income.  Net interest income increased by $612,000, or 10.4%, to $6.5 million for the three months ended June 30, 2017 compared to $5.9 million for the three months ended June 30, 2016. Total interest and dividend income increased $359,000, or 5.3%, to $7.1 million for the three months ended June 30, 2017 from $6.8 million for the three months ended June 30, 2016, primarily as a result of a 15 basis point increase in the average yield on loans and an increase of $9.8 million in average loan balances. Interest on investment securities decreased $33,000, attributable to a $17.0 million decrease in the average balance of investment securities primarily to fund loan growth, which was partially offset by a 31 basis point increase in the average yield earned on the investment portfolio. Interest expense decreased $253,000, or 29.6%, to $601,000 for the three months ended June 30, 2017 from $854,000 for the three months ended June 30, 2016, 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 point 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 $13.1 million, or 11.0%, which contributed to minimizing deposit interest expense while deposit funding grew.

Interest income on loans increased $346,000, or 5.7%, to $6.5 million during the three months ended June 30, 2017, primarily due to a 15 basis point increase in the average yield on loans and a $9.8 million increase, or 1.6%, in average outstanding loans.  Loan originations decreased $8.2 million for the three months ended June 30, 2017 compared to the three months ended June 30, 2016, primarily due to lower originations of commercial loans. Loan principal repayments decreased $11.5 million to $41.1 million for the three months ended June 30, 2017 from $52.6 million for the three months ended June 30, 2016. The average balance of the investment portfolio decreased $17.0 million, or 14.5%, to $100.5 million for the three months ended June 30, 2017, as cash flows received from security maturities and repayments provided funding for other purposes.

Provision for Loan Losses. The provision for loan losses was $75,000 for the three months ended June 30, 2017 compared to $104,000 for the three months ended June 30, 2016. The decrease in the provision for loan losses for the second quarter of 2017 was primarily due to continued improvement in asset quality. The allowance for loan losses totaled $6.7 million, or 1.09% of total loans, at June 30, 2017 compared to $6.6 million, or 1.09% of total loans, at December 31, 2016. We charged off $43,000 in loans during the three months ended June 30, 2017 compared to $260,000 during the three months ended June 30, 2016.

Noninterest Income. Noninterest income decreased $719,000, or 29.0%, to $1.8 million for the three months ended June 30, 2017 from $2.5 million for the three months ended June 30, 2016. Factors that contributed to the decrease in noninterest income included a decrease of $716,000 in gains realized from the sale of investment securities, which was partially offset by an increase of $73,000 in income from an investment in bank owned life insurance.

Noninterest Expenses.  Noninterest expenses increased $625,000, or 11.1%, to $6.3 million for the three months ended June 30, 2017 from $5.6 million for the three months ended June 30, 2016. The increase for the second quarter of 2017 was primarily due to $520,000 in merger-related expenses, increases of $106,000 in compensation expenses and $58,000 in foreclosed property expenses, which were partially offset by a decrease of $64,000 in net occupancy expense. The increase in compensation and employee benefits was primarily attributable to higher ESOP expenses of $178,000 and higher salary expenses of $65,000, which were partially offset by a decrease of $158,000 in pension expenses.

51

Income Tax Provision. Income tax provision decreased $159,000 to $781,000 for the three months ended June 30, 2017 from $940,000 for the three months ended June 30, 2016, primarily due to a decrease in pre-tax income. The effective tax rate was 40.40% for the three months ended June 30, 2017 compared to 35.66% for the three months ended June 30, 2016, with the increase primarily resulting from an increase in nondeductible merger-related expenses and a decrease in favorable permanent tax differences relative to the size of the pre-tax income in 2017 compared to 2016.

Results of Operations for the Six Months Ended June 30, 2017 and 2016

Overview. Net income was $3.0 million, or $0.80 per diluted common share, for the six months ended June 30, 2017, compared to $2.8 million, or $0.75 per diluted common share, for the six months ended June 30, 2016. Income before income taxes decreased $17,000 in 2017, primarily due to a $1.1 million decrease in gains realized in 2016 from the sale of investment securities and an increase of $520,000 in merger-related expenses, which were partially offset by an $886,000 increase in net interest income, a $323,000 increase in noninterest income excluding securities gains and a $371,000 decrease in the provision for loan losses.

	Six Months Ended June 30,
(Dollars in thousands)	2017		2016		$ Change			% Change
Interest and dividend income	$	14,037	$	13,432	$	605			4.5	%
Interest expense		1,417		1,698		(281	)		-16.5	%
Net interest income		12,620		11,734		886			7.6	%
Provision for loan losses		132		503		(371	)		-73.8	%
Net interest income after provision for loan losses		12,488		11,231		1,257			11.2	%
Noninterest income		3,703		4,525		(822	)		-18.2	%
Noninterest expenses		11,850		11,398		452			4.0	%
Income before income tax provision		4,341		4,358		(17	)		-0.4	%
Income tax provision		1,355		1,541		(186	)		-12.1	%
Net income		2,986		2,817		169			6.0	%

Net Interest Income. Net interest income increased by $886,000, or 7.6%, to $12.6 million for the six months ended June 30, 2017 compared to $11.7 million for the six months ended June 30, 2016. Interest income on loans increased $617,000, primarily resulting from a 12 basis point increase in the average yield on loans and a $14.0 million increase in average loan balances. Interest on investment securities decreased $101,000, attributable to a $20.2 million decrease in the average balance of investment securities to fund loan growth, which was partially offset by a 31 basis point increase in the average yield earned on the investment portfolio. Interest expense decreased $281,000, or 16.5%, for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. The lower interest expense was primarily due to the repayment of $30.0 million in Federal Home Loan Bank advances that matured in March 2017, which was partially offset by a 3 basis point rate increase on total interest-bearing deposits and $27.2 million higher average balances of interest-bearing deposits. For the same comparable six-month periods, average noninterest-bearing deposits grew $12.3 million, or 10.5%, which provided deposit funding growth without adding deposit interest expense.

52

Provision for Loan Losses. The Company recorded a provision for loan losses in the amount of $132,000 for the six months ended June 30, 2017 compared to $503,000 for the six months ended June 30, 2016. The Company charged off $96,000 in loans for the first six months of 2017 compared to $268,000 for the first six months of 2016. The decrease in the six-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 six months of 2017.

Noninterest Income.  Noninterest income decreased $822,000, or 18.2%, to $3.7 million for the six months ended June 30, 2017 from $4.5 million for the six months ended June 30, 2016. The decrease in noninterest income during the 2017 period was primarily due to a $1.1 million decrease in gains realized from the sale of investment securities, which was partially offset by increases of $160,000 in income from investments in bank owned life insurance and $111,000 in mortgage banking income. The increase in mortgage banking income was attributable to higher volumes of residential mortgage loans originated and sold during the 2017 period.

Noninterest Expenses. Noninterest expenses increased $452,000, or 4.0%, to $11.9 million for the six months ended June 30, 2017 from $11.4 million for the six months ended June 30, 2016. The higher 2017 noninterest expenses were primarily attributable to merger-related expenses of $520,000, increases of $253,000 in ESOP expense and $146,000 in debit card expenses, which were partially offset by a $315,000 reduction in pension plan expenses related to termination of the qualified pension plan during the fourth quarter of 2016 and a decrease of $141,000 in professional and outside services.

Income Tax Provision. Income tax expense decreased by $186,000 for the six months ended June 30, 2017 compared to the six months ended June 30, 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 effective tax rate, excluding the income tax benefit discussed above, was 36.47% for the six months ended June 30, 2017 compared to 35.36% for the six months ended June 30, 2016, with the increase primarily resulting from an increase in nondeductible merger-related expenses, which was partially offset by a reduction in the state income tax rate to 3% from 4% compared to the first six months of 2016.

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%.

53

	For The Three Months Ended June 30,
	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	$	42,479		$	106		1.00	%	$	31,763		$	39		0.49	%
Loans receivable		613,900			6,466		4.22	%		604,138			6,120		4.07	%
Investment securities		59,580			407		3.63	%		55,884			367		3.49	%
Mortgage-backed and similar securities		40,961			120		1.18	%		61,660			193		1.26	%
Other interest-earning assets		1,566			15		3.84	%		2,888			36		5.01	%
Total interest-earning assets		758,486			7,114		3.83	%		756,333			6,755		3.65	%
Allowance for loan losses		(6,636	)							(6,661	)
Noninterest-earning assets		46,198								37,931
Total assets	$	798,048							$	787,603
Liabilities and equity
NOW accounts	$	164,906			52		0.13	%	$	158,014			52		0.13	%
Money market accounts		178,853			93		0.21	%		167,415			72		0.17	%
Savings accounts		60,347			14		0.09	%		52,960			13		0.10	%
Certificates of deposit		138,586			263		0.76	%		131,665			225		0.69	%
Total interest-bearing deposits		542,692			422		0.31	%		510,054			362		0.29	%
Overnight and short-term borrowings		544			-		0.00	%		1,631			2		0.49	%
Federal Home Loan Bank advances		20,000			179		3.59	%		50,000			490		3.94	%
Total interest-bearing liabilities		563,236			601		0.43	%		561,685			854		0.61	%
Noninterest-bearing deposits		132,533								119,413
Other noninterest-bearing liabilities		6,581								12,857
Total liabilities		702,350								693,955
Total equity		95,698								93,648
Total liabilities and equity	$	798,048							$	787,603
Net interest income				$	6,513							$	5,901
Interest rate spread							3.40	%							3.04	%
Net interest margin							3.51	%							3.20	%
Average interest-earning assets to average interest-bearing liabilities		134.67	%							134.65	%

(1) Certain amounts for prior periods were reclassified to conform to the June 30, 2017 presentation. The reclassifications had no effect on net income or equity as previously reported.

54

	For The Six Months Ended June 30,
	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	$	42,491		$	186		0.88	%	$	28,023		$	71		0.51	%
Loans receivable		612,764			12,760		4.20	%		598,739			12,143		4.08	%
Investment securities		59,243			815		3.67	%		57,048			756		3.52	%
Mortgage-backed and similar securities		42,241			232		1.11	%		64,600			392		1.22	%
Other interest-earning assets		2,077			44		4.27	%		2,887			70		4.88	%
Total interest-earning assets		758,816			14,037		3.80	%		751,297			13,432		3.66	%
Allowance for loan losses		(6,609	)							(6,534	)
Noninterest-earning assets		46,809								37,610
Total assets	$	799,016							$	782,373
Liabilities and equity
NOW accounts	$	163,735			101		0.12	%	$	157,252			103		0.13	%
Money market accounts		175,324			173		0.20	%		169,152			147		0.17	%
Savings accounts		60,515			29		0.10	%		51,282			24		0.09	%
Certificates of deposit		137,181			509		0.75	%		131,860			442		0.67	%
Total interest-bearing deposits		536,755			812		0.31	%		509,546			716		0.28	%
Overnight and short-term borrowings		605			-		0.00	%		1,175			2		0.34	%
Federal Home Loan Bank advances		32,155			605		3.79	%		50,000			980		3.94	%
Total interest-bearing liabilities		569,515			1,417		0.50	%		560,721			1,698		0.61	%
Noninterest-bearing deposits		128,770								116,503
Other noninterest-bearing liabilities		6,463								12,618
Total liabilities		704,748								689,842
Total equity		94,268								92,531
Total liabilities and equity	$	799,016							$	782,373
Net interest income				$	12,620							$	11,734
Interest rate spread							3.30	%							3.05	%
Net interest margin							3.42	%							3.21	%
Average interest-earning assets to average interest-bearing liabilities		133.24	%							133.99	%

(1) Certain amounts for prior periods were reclassified to conform to the June 30, 2017 presentation. The reclassifications had no effect on net income or equity as previously reported.

55

Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior period volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior period rate). The net column represents the sum of the volume and rate columns. Changes attributable to changes in both rate and volume have been allocated proportionally based on the absolute dollar amounts of change in each.

	Three Months Ended June 30, 2017 Compared To The Three Months Ended June 30, 2016									Six Months Ended June 30, 2017 Compared To The Six Months Ended June 30, 2016
	Increase (Decrease) Due To:									Increase (Decrease) Due To:
(Dollars in thousands)	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Interest-earning deposits with banks	$	17		$	50		$	67		$	48		$	67		$	115
Loans receivable		100			246			346			288			329			617
Investment securities		25			15			40			30			29			59
Mortgage-backed and similar securities		(61	)		(12	)		(73	)		(126	)		(34	)		(160	)
Other interest-earning assets		(14	)		(7	)		(21	)		(18	)		(8	)		(26	)
Total interest-earning assets		67			292			359			222			383			605
Interest expense:
NOW accounts		2			(2	)		-			4			(6	)		(2	)
Money market accounts		5			16			21			6			20			26
Savings accounts		2			(1	)		1			4			1			5
Certificates of deposit		12			26			38			18			49			67
Total interest-bearing deposits		21			39			60			32			64			96
Overnight and short-term borrowings		(1	)		(1	)		(2	)		(1	)		(1	)		(2	)
Federal Home Loan Bank advances		(272	)		(39	)		(311	)		(337	)		(38	)		(375	)
Total interest-bearing liabilities		(252	)		(1	)		(253	)		(306	)		25			(281	)
Net increase in interest income	$	319		$	293		$	612		$	528		$	358		$	886

The interest rate component reflects the net interest margin expansion.  The growth in loans has led to favorable changes in the volume component and overall net interest income levels in 2017 compared to 2016.

56

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 andwe 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.

57

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

(Dollars in thousands)	June 30, 2017			December 31, 2016			$ Change			% Change
Nonperforming loans:
Nonaccruing loans (1)
Commercial:
Commercial and industrial	$	53		$	63		$	(10	)		-15.9	%
Total commercial		53			63			(10	)		-15.9	%
Non-commercial:
Residential mortgage		176			626			(450	)		-71.9	%
Revolving mortgage		293			323			(30	)		-9.3	%
Consumer		31			-			31			n/a
Total non-commercial		500			949			(449	)		-47.3	%
Total nonaccruing loans (1)		553			1,012			(459	)		-45.4	%
Total loans past due 90 or more days and still accruing		-			-			-			0.0	%
Total nonperforming loans		553			1,012			(459	)		-45.4	%
Foreclosed real estate		5,034			5,069			(35	)		-0.7	%
Repossessed assets		132			190			(58	)		-30.5	%
Total nonperforming assets		5,719			6,271			(552	)		-8.8	%
Performing troubled debt restructurings (2)		1,576			4,543			(2,967	)		-65.3	%
Performing troubled debt restructurings and total nonperforming assets	$	7,295		$	10,814			(3,519	)		-32.5	%
Allowance for loan losses	$	6,659		$	6,544
Total loans	$	613,603		$	603,582
Allowance as a percentage of total loans		1.09	%		1.08	%
Allowance as a percentage of nonperforming loans		1,204.16	%		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		0.71	%		0.79	%
Performing troubled debt restructurings and total nonperforming assets to total assets		0.91	%		1.36	%

(1) Nonaccruing loans include nonaccruing troubled debt restructurings.

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

58

We periodically modify loans byallowing 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 $1.6 million at June 30, 2017 and $4.6 million at December 31, 2016. There were no loans restructured during the three- and six-month periods ended June 30, 2017. The decrease in TDRs was primarily attributable to a $2.9 million payoff during the second quarter of 2017. At June 30, 2017, one TDR in the amount of $11,000 of the total $1.6 million of TDRs was not performing according to its restructured terms and was 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 $8,000 and $22,000 for the three- and six-month periods ended June 30, 2017, respectively, compared to $43,000 and $89,000 for the three- and six-month periods ended June 30, 2016, respectively. Interest income of $16,000 and $62,000 related to impaired loans was recognized for the three- and six-month periods ended June 30, 2017, respectively, compared to $46,000 and $92,000, respectively, for the same periods of 2016.

At June 30, 2017, our nonaccruing loans of $553,000, 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 $469,000 as of June 30, 2017.

At June 30, 2017, our performing TDRs of $1.6 million included the following:

● 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 June 30, 2017.

Performing TDRs significantly decreased due to a $2.9 million payoff during the second quarter of 2017.

59

Foreclosed properties consisted of the following at the dates indicated.

	June 30, 2017				December 31, 2016
(Dollars in thousands)	Number		Amount		Number		Amount
By foreclosed loan type:
Commercial construction and land development		5	$	4,104		8	$	4,116
Residential mortgage		2		930		2		953
Total		7	$	5,034		10	$	5,069

An analysis of foreclosed real estate follows:

(Dollars in thousands)	Six Months Ended June 30, 2017
Beginning balance	$	5,069
Capitalized cost		2
Loss provisions		(23	)
Gain on sale of foreclosed properties		16
Net proceeds from sales of foreclosed properties		(30	)
Ending balance	$	5,034

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 six months ended June 30, 2017, there were no units sold. As of June 30, 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.

60

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

(Dollars in thousands)	June 30, 2017		December 31, 2016		$ Change			% Change
Adversely classified loans:
Substandard	$	2,027	$	2,581	$	(554	)		-21.5	%
Doubtful		-		-		-			0.0	%
Total adversely classified loans		2,027		2,581		(554	)		-21.5	%
Special mention loans		17,078		21,247		(4,169	)		-19.6	%
Total classified and special mention loans		19,105		23,828		(4,723	)		-19.8	%
Total other classified and special mention assets		-		-		-			0.0	%
Total classified and special mention assets	$	19,105	$	23,828	$	(4,723	)		-19.8	%

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

At June 30, 2017, substandard loans totaling $2.0 million included $553,000 in nonaccruing loans that were previously discussed as nonperforming loans. The remaining $1.5 million in performing substandard loans included the following:

● Commercial Mortgage Loans

○ Two loans to related borrowers and one loan to an unrelated borrower, all on commercial properties located in western North Carolina with an aggregate balance of $733,000 as of June 30, 2017.

● Residential Mortgage Loans

○ Six loans to multiple unrelated borrowers for one-to-four family residential properties with an aggregate balance of $551,000 as of June 30, 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.

61

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

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

Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At June 30, 2017, cash and cash equivalents totaled $53.3 million, including $42.7 million in interest-bearing deposits in other banks, of which $37.6 million was on deposit with the Federal Reserve Bank. Investment securities totaling $95.9 million at June 30, 2017 classified as available-for-sale provided an additional source of liquidity. In addition, at June 30, 2017, we had the ability to borrow a total of approximately $113.4 million from the Federal Home Loan Bank of Atlanta and approximately $6.7 million from the Federal Reserve Bank’s discount window. At June 30, 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 June 30, 2017, we had $196.2 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 June 30, 2017 totaled $78.5 million, or 57.5%, 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.

62

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

			Payments Due By Period
(Dollars in thousands)	Total		Less Than One Year		One To Three Years		Three To Five Years		More Than Five Years
At June 30, 2017
Long-term debt obligations	$	20,000	$	10,000	$	10,000	$	-	$	-
Operating lease obligations		1,462		239		478		449		296
Total	$	21,462	$	10,239	$	10,478	$	449	$	296
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 June 30, 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. Prior to entering into the Merger Agreement, to help us better manage our capital, we repurchased shares of our common stock and considered other capital deployment measures as regulations permitted.

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.

63

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 June 30, 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.

64

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.
June 30, 2017
Common equity tier I capital	$	97,149		16.17	%	$	27,035		4.50	%	$	39,050		6.50	%
Tier I leverage capital		97,149		12.15	%		31,975		4.00	%		39,968		5.00	%
Tier I risk-based capital		97,149		16.17	%		36,046		6.00	%		48,062		8.00	%
Total risk-based capital		103,808		17.28	%		48,062		8.00	%		60,077		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.
June 30, 2017
Common equity tier I capital	$	91,453		15.23	%	$	27,020		4.50	%	$	39,028		6.50	%
Tier I leverage capital		91,453		11.47	%		31,903		4.00	%		39,879		5.00	%
Tier I risk-based capital		91,453		15.23	%		36,026		6.00	%		48,035		8.00	%
Total risk-based capital		98,112		16.34	%		48,035		8.00	%		60,044		10.00	%
NC Savings Bank capital		98,112		12.27	%		39,992		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

65

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

For the six months ended June 30, 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 adjustmore 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.

66

Based on the results of our internal simulation model, which management believes accurately reflects the extraordinary stress currently existing in the financial markets with respect to potential margin compression resulting from our difficulty in reducing our costs of funds further in the current competitive pricing environment, our earnings may be adversely affected if interest rates were to further decline. Such a decline could result from, among other things, the Federal Reserve Board’s purchase of government securities and/or mortgage-backed securities in an effort to further stimulate the national economy. Although the current rate environment remains stable, we continue to carefully monitor, through our Asset/Liability Committee management process, the competitive landscape related to interest rates as well as various economic indicators in order to best position ourselves with respect to changing interest rates.

The following table reflects the estimated effects of changes in interest rates on the present value of our equity and on our projected net interest income over the next twelve months.

	As Of June 30, 2017								Over The Next Twelve Months Ending June 30, 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	$	103,636	$	(31,334	)		-23.22	%	$	25,169	$	(1,855	)		-6.86	%
200		116,362		(18,608	)		-13.79	%		25,990		(1,034	)		-3.83	%
100		126,308		(8,662	)		-6.42	%		26,624		(400	)		-1.48	%
0		134,970		-			0.00	%		27,024		-			0.00	%
(100)		131,474		(3,496	)		-2.59	%		24,761		(2,263	)		-8.37	%

67

Item 4. Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

Management of the Company has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, changes in the Company’s internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act during the quarter ended June 30, 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 June 30, 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

From time to time, we are party to routine legal proceedings within our normal course of business. Management believes that such routine legal proceedings taken together are immaterial to our financial condition or results of operations.  Any non-routine legal proceedings are described in Item 3 of the Parent’s Annual Report on Form 10-K for the year ended December 31, 2016.

As previously described, on May 1, 2017, the Parent and First Bancorp entered into the Merger Agreement, pursuant to which, upon satisfaction of the conditions set forth in the Merger Agreement, the Parent will merge with and into First Bancorp, with First Bancorp being the surviving corporation and the Parent ceasing to be a separate entity.  The announcement of the Merger has triggered two lawsuits filed by purported shareholders.

On July 14, 2017, a purported shareholder filed a lawsuit in the United States District Court, Western District of North Carolina, against the Parent and members of the Parent’s board of directors. The lawsuit alleges inadequate disclosures in the Parent’s proxy statement/prospectus and violations of the Securities Exchange Act of 1934. The lawsuit seeks, among other remedies, to enjoin the Merger or, in the event the Merger is completed, rescission of the Merger or rescissory damages; to direct defendants to account for unspecified damages; and costs of the lawsuit, including attorneys’ and experts’ fees.

On July 19, 2017, another purported shareholder filed a lawsuit in the United States District Court, Western District of North Carolina, against the Parent, members of the Parent’s board of directors, and First Bancorp.  This lawsuit make nearly identical allegations as are made in the lawsuit described in the preceding paragraph and asks for identical remedies.

As of the date of this filing, the Parent cannot reasonably predict the outcome of either of the above-described lawsuits or, in the event of an adverse outcome, the potential loss or range of possible loss relating to either lawsuit.

68

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.

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

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

The following table sets forth information as of June 30, 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.

69

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 June 30, 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.

70

SIGNATURES

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

		ASB BANCORP, INC.
		Registrant
August 8, 2017	By:	/s/ SUZANNE S. DEFERIE
		Suzanne S. DeFerie
		President and Chief Executive Officer
		(Principal Executive Officer)
August 8, 2017	By:	/s/ KIRBY A. TYNDALL
		Kirby A. Tyndall
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

71

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Suzanne S. DeFerie, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of ASB Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 8, 2017	/s/ SUZANNE S. DEFERIE
	Suzanne S. DeFerie
	President and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Kirby A. Tyndall, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of ASB Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 8, 2017	/s/ KIRBY A. TYNDALL
	Kirby A. Tyndall
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

EX-32.0

Exhibit 32.0

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

To my knowledge, this Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 of ASB Bancorp, Inc. (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in this Report fairly presents, in all material respects, the consolidated financial condition and results of operations of ASB Bancorp, Inc.

August 8, 2017	By:	/s/ SUZANNE S. DEFERIE
		Suzanne S. DeFerie
		President and Chief Executive Officer
		(Principal Executive Officer)

August 8, 2017	By:	/s/ KIRBY A. TYNDALL
		Kirby A. Tyndall
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2017	Jul. 31, 2017
Document And Entity Information [Abstract]
Entity Registrant Name	ASB Bancorp Inc
Entity Central Index Key	0001520300
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		3,788,025
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q2
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2017

XML

CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016	[1]
Assets
Cash and due from banks	$ 10,657	$ 10,862
Interest-earning deposits with banks	42,654	35,862
Total cash and cash equivalents	53,311	46,724
Securities available for sale (amortized cost of $96,979 at June 30, 2017 and $102,482 at December 31, 2016)	95,935	99,909
Securities held to maturity (estimated fair value of $3,782 at June 30, 2017 and $3,875 at December 31, 2016)	3,615	3,672
Investment in Federal Home Loan Bank stock, at cost	1,566	2,829
Loans held for sale	4,097	7,145
Loans receivable (net of deferred loan fees of $178 at June 30, 2017 and $241 at December 31, 2016)	613,603	603,582
Allowance for loan losses	(6,659)	(6,544)
Loans receivable, net	606,944	597,038
Premises and equipment, net	10,854	11,122
Foreclosed real estate	5,034	5,069
Deferred income tax assets, net	3,274	3,863
Bank owned life insurance	10,355	10,185
Other assets	6,403	8,267
Total assets	801,388	795,823
Liabilities
Noninterest-bearing deposits	136,712	123,999
Interest-bearing deposits	540,735	523,624
Total deposits	677,447	647,623
Overnight and short-term borrowings	311	392
Federal Home Loan Bank advances	20,000	50,000
Accounts payable and other liabilities	7,363	6,671
Total liabilities	705,121	704,686
Shareholders' Equity
Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued	0	0
Common stock, $0.01 par value; 60,000,000 shares authorized; 3,788,025 shares issued at June 30, 2017 and December 31, 2016	38	38
Additional paid-in capital	20,533	20,170
Retained earnings	80,292	77,306
Accumulated other comprehensive loss, net of tax	(886)	(1,865)
Unearned Employee Stock Ownership Plan (ESOP) shares	(2,669)	(2,824)
Unearned equity incentive plan shares	(661)	(1,310)
Stock-based deferral plan shares	(380)	(378)
Total shareholders' equity	96,267	91,137
Total liabilities and shareholders' equity	$ 801,388	$ 795,823

[1] Derived from audited consolidated financial statements.

XML

CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016	[1]
Assets
Amortized cost of securities available for sale	$ 96,979	$ 102,482
Estimated fair value of securities held to maturity	3,782	3,875
Deferred loan fees on loans receivable	$ 178	$ 241
Shareholders' Equity
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized (in shares)	10,000,000	10,000,000
Preferred stock, shares issued (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	60,000,000	60,000,000
Common stock, shares issued (in shares)	3,788,025	3,788,025

[1] Derived from audited consolidated financial statements.

XML

CONSOLIDATED STATEMENTS OF INCOME (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Interest and dividend income
Loans, including fees	$ 6,466	$ 6,120	$ 12,760	$ 12,143
Securities	527	560	1,047	1,148
Other earning assets	121	75	230	141
Total interest and dividend income	7,114	6,755	14,037	13,432
Interest expense
Deposits	422	362	812	716
Overnight and short-term borrowings	0	2	0	2
Federal Home Loan Bank advances	179	490	605	980
Total interest expense	601	854	1,417	1,698
Net interest income	6,513	5,901	12,620	11,734
Provision for loan losses	75	104	132	503
Net interest income after provision for loan losses	6,438	5,797	12,488	11,231
Noninterest income
Mortgage banking income	375	396	820	709
Deposit and other service charge income	699	734	1,433	1,397
Income from debit card services	422	472	851	907
Gain on sale of investment securities, net	0	716	27	1,172
Other noninterest income	261	158	572	340
Total noninterest income	1,757	2,476	3,703	4,525
Noninterest expenses
Salaries and employee benefits	3,377	3,271	6,608	6,584
Occupancy expense, net	374	438	804	872
Foreclosed property expenses	122	64	160	107
Data processing fees	603	648	1,220	1,315
Federal deposit insurance premiums	62	90	125	203
Advertising	107	131	208	233
Professional and outside services	182	223	402	543
Merger-related expenses	520	0	520	0
Other noninterest expenses	915	772	1,803	1,541
Total noninterest expenses	6,262	5,637	11,850	11,398
Income before income tax provision	1,933	2,636	4,341	4,358
Income tax provision	781	940	1,355	1,541
Net income	$ 1,152	$ 1,696	$ 2,986	$ 2,817
Net income per common share - Basic (in dollars per share)	$ 0.33	$ 0.47	$ 0.86	$ 0.78
Net income per common share - Diluted (in dollars per share)	$ 0.31	$ 0.45	$ 0.80	$ 0.75

XML

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Comprehensive Income
Net income	$ 1,152	$ 1,696	$ 2,986	$ 2,817
Unrealized holding gains on securities available for sale:
Reclassification of securities gains recognized in net income	0	(716)	(27)	(1,172)
Deferred income tax benefit	0	262	10	429
Gains arising during the period	1,155	1,837	1,556	3,344
Deferred income tax expense	(415)	(673)	(560)	(1,225)
Unrealized holding gains adjustment, net of tax	740	710	979	1,376
Defined Benefit Pension Plans:
Net periodic pension cost	(60)	(174)	(118)	(347)
Net pension gain	60	174	118	347
Total other comprehensive income	740	710	979	1,376
Comprehensive income	$ 1,892	$ 2,406	$ 3,965	$ 4,193

XML

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) - USD ($) $ in Thousands	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss), Net of Tax [Member]	Unearned ESOP Shares [Member]	Unearned Equity Incentive Plan Shares [Member]	Stock-Based Deferral Plan Shares [Member]	Total
Beginning balance at Dec. 31, 2015				$ (5,061)
Increase (Decrease) in Shareholders' Equity [Roll Forward]
Net income								$ 2,817
Other comprehensive income								1,376
Ending balance at Jun. 30, 2016				(3,685)
Beginning balance at Mar. 31, 2016				(4,395)
Increase (Decrease) in Shareholders' Equity [Roll Forward]
Net income								1,696
Other comprehensive income								710
Ending balance at Jun. 30, 2016				(3,685)
Beginning balance at Dec. 31, 2016	$ 38	$ 20,170	$ 77,306	(1,865)	$ (2,824)	$ (1,310)	$ (378)	91,137	[1]
Increase (Decrease) in Shareholders' Equity [Roll Forward]
Net income			2,986					2,986
Other comprehensive income				979				979
ESOP shares allocated		485			155			640
Stock-based compensation expense		527						527
Vesting of restricted stock		(649)				649
Stock-based deferral plan shares purchased							(2)	(2)
Ending balance at Jun. 30, 2017	38	20,533	80,292	(886)	(2,669)	(661)	(380)	96,267
Beginning balance at Mar. 31, 2017				(1,626)
Increase (Decrease) in Shareholders' Equity [Roll Forward]
Net income								1,152
Other comprehensive income								740
Ending balance at Jun. 30, 2017	$ 38	$ 20,533	$ 80,292	$ (886)	$ (2,669)	$ (661)	$ (380)	$ 96,267

[1] Derived from audited consolidated financial statements.

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2017		Jun. 30, 2016
Operating Activities
Net income	$ 2,986		$ 2,817
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	132		503
Provision for losses on foreclosed properties	23		18
Depreciation	386		391
Gain on sale of foreclosed real estate	(16)		0
Increase in cash surrender value of bank owned life insurance	(170)		(10)
Deferred income tax expense (benefit)	39		(110)
Net amortization of premiums on securities	926		1,112
Gain on sale of investment securities	(27)		(1,172)
Net amortization of deferred fees on loans	117		52
Mortgage loans originated for sale	(28,534)		(25,196)
Proceeds from sale of mortgage loans	32,402		28,600
Gain on sale of mortgage loans	(820)		(709)
ESOP compensation expense	640		387
Stock-based compensation expense	527		529
Excess tax benefits from equity awards	(228)		(136)
Decrease in income tax receivable	1,378		209
Decrease in interest receivable	56		340
Net change in other assets and liabilities	1,350		1,156
Net cash provided by operating activities	11,167		8,781
Investing Activities
Purchases of securities available for sale	(1,179)		(16,833)
Proceeds from sales of securities available for sale	1,194		50,150
Principal repayments on mortgage-backed and asset-backed securities	4,646		5,866
Redemption (purchase) of FHLB stock	1,263		(22)
Net increase in loans receivable	(10,155)		(30,391)
Additions to foreclosed real estate	(2)		0
Net proceeds from sales of foreclosed real estate	30		840
Purchases of premises and equipment	(119)		(251)
Net proceeds from sales of fixed and other assets	1		0
Purchases of bank owned life insurance	0		(10,000)
Net cash used in investing activities	(4,321)		(641)
Financing Activities
Net increase in deposits	29,824		9,781
Net repayments of Federal Home Loan Bank advances	(30,000)		0
Net proceeds from (repayments of) overnight and short-term borrowings	(81)		123
Stock-based deferral plan shares purchased	(2)		(20)
Proceeds from the exercise of stock options	0		79
Excess tax benefits from equity awards	0		136
Common stock repurchased	0		(79)
Net cash (used in) provided by financing activities	(259)		10,020
Net increase in cash and cash equivalents	6,587		18,160
Cash and cash equivalents at beginning of period	46,724	[1]	33,401
Cash and cash equivalents at end of period	53,311		51,561
Cash paid for:
Interest on deposits, advances and other borrowings	1,471		1,697
Income taxes	214		1,240
Non-cash investing and financing transactions:
Transfers from loans to foreclosed real estate	0		5
Net unsettled security purchases	0		6,456
Increase in unrealized gains and losses on securities available for sale	1,556		3,344
Decrease in deferred income taxes resulting from other comprehensive income	$ (550)		$ (796)

[1] Derived from audited consolidated financial statements.

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2017

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 and six months ended June 30, 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.

As described in more detail in note 8 to the consolidated financial statements, on May 1, 2017, the Parent 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, pursuant to which the Parent will merge with and into First Bancorp (the “Merger”), and the Bank will merge with and into First Bank. The parties anticipate closing the Merger during the fourth quarter of 2017.

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.

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.

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.

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.

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.

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 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:

(Dollars in thousands)	Beginning Balance			OCI Before Reclassification			Amount Reclassified			Net OCI		Ending Balance
Three Months Ended June 30, 2017
Unrealized loss on securities	$	(1,408	)	$	740		$	-		$	740	$	(668	)
Benefit plan liability		(218	)		(38	)		38			-		(218	)
Accumulated other comprehensive income (loss), net of tax	$	(1,626	)	$	702		$	38		$	740	$	(886	)
Three Months Ended June 30, 2016
Unrealized gain on securities	$	931		$	1,164		$	(454	)	$	710	$	1,641
Benefit plan liability		(5,326	)		(110	)		110			-		(5,326	)
Accumulated other comprehensive income (loss), net of tax	$	(4,395	)	$	1,054		$	(344	)	$	710	$	(3,685	)

(Dollars in thousands)	Beginning Balance			OCI Before Reclassification			Amount Reclassified			Net OCI		Ending Balance
Six Months Ended June 30, 2017
Unrealized loss on securities	$	(1,647	)	$	996		$	(17	)	$	979	$	(668	)
Benefit plan liability		(218	)		(76	)		76			-		(218	)
Accumulated other comprehensive income (loss), net of tax	$	(1,865	)	$	920		$	59		$	979	$	(886	)
Six Months Ended June 30, 2016
Unrealized gain on securities	$	265		$	2,119		$	(743	)	$	1,376	$	1,641
Benefit plan liability		(5,326	)		(220	)		220			-		(5,326	)
Accumulated other comprehensive income (loss), net of tax	$	(5,061	)	$	1,899		$	(523	)	$	1,376	$	(3,685	)

The Company’s reclassifications out of accumulated OCI are as follows:

Details About Accumulated Other Comprehensive Income Components	Amount Reclassified From Accumulated Other Comprehensive Income						Affected Line Item In The Statement Where Net Income Is Presented
(Dollars in thousands)	Three Months Ended June 30, 2017			Three Months Ended June 30, 2016
Reclassification of securities gains recognized in net income	$	-		$	(716	)	Gain on sale of investment securities
Deferred income tax expense		-			262		Income tax provision
Total reclassifications for the period	$	-		$	(454	)	Net of tax
Net periodic pension benefit	$	60		$	174		Salaries and employee benefits
Deferred income tax expense		(22	)		(64	)	Income tax provision
Total reclassifications for the period	$	38		$	110		Net of tax

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)	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016
Reclassification of securities gains recognized in net income	$	(27	)	$	(1,172	)	Gain on sale of investment securities
Deferred income tax expense		10			429		Income tax provision
Total reclassifications for the period	$	(17	)	$	(743	)	Net of tax
Net periodic pension benefit	$	118		$	347		Salaries and employee benefits
Deferred income tax expense		(42	)		(127	)	Income tax provision
Total reclassifications for the period	$	76		$	220		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.

Pension Plan – Prior to November 2016, the Bank had a qualified defined benefit pension plan.  The Bank recognized the overfunded or underfunded status of the plan as an asset or liability in its consolidated balance sheets and recognized changes in the funded status in the year in which the change occurred 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. 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.

In addition, the Bank currently has a non-qualified pension plan, which is an unfunded plan.  The Bank 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 six 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.

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 June 30,						Six Months Ended June 30,
(Dollars in thousands, except per share data)	2017			2016			2017			2016
Numerator:
Net income	$	1,152		$	1,696		$	2,986		$	2,817
Denominator:
Weighted average common shares outstanding		3,788,025			3,985,922			3,788,025			3,985,698
Less: Weighted average unvested restricted shares		(41,017	)		(81,313	)		(48,972	)		(89,229	)
Less: Weighted average unallocated ESOP shares		(270,828	)		(302,160	)		(274,697	)		(306,062	)
Weighted average common shares used to compute net income per common share – Basic		3,476,180			3,602,449			3,464,356			3,590,407
Add: Effect of dilutive securities		283,834			140,009			267,424			140,909
Weighted average common shares used to compute net income per common share – Diluted		3,760,014			3,742,458			3,731,780			3,731,316
Net income per common share – Basic	$	0.33		$	0.47		$	0.86		$	0.78
Net income per common share – Diluted	$	0.31		$	0.45		$	0.80		$	0.75

For the three and six months ended June 30, 2017 and 2016, 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.

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 during the first quarter of 2017.  The adoption also increased the weighted average common shares on a diluted basis by 50,589 shares and 46,797 shares for the three- and six-month periods ended June 30, 2017, respectively.

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.  The Company adopted the new guidance on a prospective basis in the first quarter of 2017, and upon adoption, the Company elected to estimate forfeitures of equity-based awards.  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.

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.

Accounting Standards Update ASU 2017-09 – In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718):  Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. ASU 2017-09 is effective for all entities for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017.  Early adoption is permitted.  The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date.  ASU 2017-09 is currently not applicable to the Company; however, it will evaluate the new guidance to determine the impact on the Company's consolidated financial statements upon modification of any share-based payment awards.

XML

INVESTMENT SECURITIES

6 Months Ended

Jun. 30, 2017

INVESTMENT SECURITIES [Abstract]

INVESTMENT SECURITIES

2. INVESTMENT SECURITIES

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

Type And Maturity Group (Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
June 30, 2017
U.S. Government Sponsored Enterprise (GSE) and agency securities due -
Within 1 year	$	1,004	$	-	$	(1	)	$	1,003
After 1 year but within 5 years		1,072		-		(5	)		1,067
Asset-backed securities issued by the Small Business Administration (SBA)		3,746		29		(5	)		3,770
Residential mortgage-backed securities issued by GSEs (1)		36,156		97		(524	)		35,729
State and local government securities due -
After 10 years		54,216		599		(1,224	)		53,591
Mutual funds		785		-		(10	)		775
Total	$	96,979	$	725	$	(1,769	)	$	95,935
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 June 30, 2017 and December 31, 2016 or during the six- and twelve-month periods, respectively, then ended.

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

Type And Maturity Group (Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
June 30, 2017
U.S. GSE  and agency securities due -
Within 1 year	$	1,001	$	2	$	-	$	1,003
Residential mortgage-backed securities issued by GSEs (1)		172		14		-		186
State and local government securities due -
After 1 year but within 5 years		973		65		-		1,038
After 5 years but within 10 years		1,469		86		-		1,555
Total	$	3,615	$	167	$	-	$	3,782
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 June 30, 2017 and December 31, 2016 or during the six- and twelve-month periods, respectively, then ended.

The following tables show investment gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2017 and December 31, 2016. The total number of securities with unrealized losses at June 30, 2017 and December 31, 2016 were 41 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.

	June 30, 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	$	2,070	$	(6	)	$	-	$	-		$	2,070	$	(6	)
Asset-backed SBA		-		-			975		(5	)		975		(5	)
Residential mortgage-backed GSE (1)		6,631		(53	)		23,054		(471	)		29,685		(524	)
State and local government		14,590		(543	)		11,566		(681	)		26,156		(1,224	)
Mutual funds		785		(10	)		-		-			785		(10	)
Total temporarily impaired securities	$	24,076	$	(612	)	$	35,595	$	(1,157	)	$	59,671	$	(1,769	)

(1) Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at June 30, 2017 or during the six-month period then ended.

	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)	June 30, 2017		December 31, 2016
Pledged to Federal Reserve Discount Window	$	7,007	$	8,264
Pledged to repurchase agreements for commercial customers		1,067		840

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

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2017		2016		2017		2016
Interest income from taxable securities	$	140	$	213	$	272	$	434
Interest income from tax-exempt securities		387		347		775		714
Total interest income from securities	$	527	$	560	$	1,047	$	1,148

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

	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2017		2016			2017		2016
Proceeds from sales of securities	$	-	$	31,902		$	1,194	$	50,150
Gross realized gains from sales of securities		-		746			27		1,216
Gross realized losses from sales of securities		-		(30	)		-		(44	)

XML

LOANS RECEIVABLE

6 Months Ended

Jun. 30, 2017

LOANS RECEIVABLE [Abstract]

LOANS RECEIVABLE

3. LOANS RECEIVABLE

Loans receivable by segment and class follow:

(Dollars in thousands)	June 30, 2017			December 31, 2016
Commercial:
Commercial construction and land development	$	22,342		$	27,813
Commercial mortgage		246,475			241,125
Commercial and industrial		27,088			23,819
Total commercial		295,905			292,757
Non-commercial:
Non-commercial construction and land development		24,005			20,801
Residential mortgage		211,667			200,590
Revolving mortgage		64,591			66,870
Consumer		17,613			22,805
Total non-commercial		317,876			311,066
Total loans receivable		613,781			603,823
Less: Deferred loan fees		(178	)		(241	)
Total loans receivable net of deferred loan fees		613,603			603,582
Less: Allowance for loan losses		(6,659	)		(6,544	)
Loans receivable, net	$	606,944		$	597,038

Loans receivable by segment, class, and grade follow:

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total Loans
June 30, 2017
Commercial:
Commercial construction and land development	$	22,221	$	121	$	-	$	-	$	-	$	22,342
Commercial mortgage		237,934		7,808		733		-		-		246,475
Commercial and industrial		26,196		691		201		-		-		27,088
Total commercial		286,351		8,620		934		-		-		295,905
Non-commercial:
Non-commercial construction and land development		24,005		-		-		-		-		24,005
Residential mortgage		205,955		5,139		573		-		-		211,667
Revolving mortgage		61,266		2,878		447		-		-		64,591
Consumer		17,099		441		73		-		-		17,613
Total non-commercial		308,325		8,458		1,093		-		-		317,876
Total loans receivable	$	594,676	$	17,078	$	2,027	$	-	$	-	$	613,781
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

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

	Past Due
(Dollars in thousands)	31-89 Days		90 Days Or More		Total		Current		Total Loans
June 30, 2017
Commercial:
Commercial construction and land development	$	-	$	-	$	-	$	22,342	$	22,342
Commercial mortgage		-		-		-		246,475		246,475
Commercial and industrial		-		53		53		27,035		27,088
Total commercial		-		53		53		295,852		295,905
Non-commercial:
Non-commercial construction and land development		-		-		-		24,005		24,005
Residential mortgage		6		176		182		211,485		211,667
Revolving mortgage		257		211		468		64,123		64,591
Consumer		77		31		108		17,505		17,613
Total non-commercial		340		418		758		317,118		317,876
Total loans receivable	$	340	$	471	$	811	$	612,970	$	613,781
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

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

	June 30, 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	$	53	$	-	$	63	$	-
Total commercial		53		-		63		-
Non-commercial:
Residential mortgage		176		-		626		-
Revolving mortgage		293		-		323		-
Consumer		31		-		-		-
Total non-commercial		500		-		949		-
Total loans receivable	$	553	$	-	$	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 $16.8 million at June 30, 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)	June 30, 2017			December 31, 2016
Director and executive officer loans, beginning of period	$	3,356		$	3,530
New loans		115			191
Repayments of loans		(247	)		(365	)
Director and executive officer loans, end of period	$	3,224		$	3,356

XML

ALLOWANCE FOR LOAN LOSSES

6 Months Ended

Jun. 30, 2017

ALLOWANCE FOR LOAN LOSSES [Abstract]

ALLOWANCE FOR LOAN LOSSES

4. ALLOWANCE FOR LOAN LOSSES

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

	Three Months Ended June 30, 2017									Six Months Ended June 30, 2017
(Dollars in thousands)	Commercial			Non- Commercial			Total			Commercial			Non- Commercial			Total
Balance at beginning of period	$	3,989		$	2,584		$	6,573		$	3,968		$	2,576		$	6,544
Provision for loan losses		53			22			75			61			71			132
Charge-offs		-			(43	)		(43	)		-			(96	)		(96	)
Recoveries		13			41			54			26			53			79
Balance at end of period	$	4,055		$	2,604		$	6,659		$	4,055		$	2,604		$	6,659
	Three Months Ended June 30, 2016									Six Months Ended June 30, 2016
(Dollars in thousands)	Commercial			Non- Commercial			Total			Commercial			Non- Commercial			Total
Balance at beginning of period	$	4,179		$	2,543		$	6,722		$	3,710		$	2,579		$	6,289
Provision for loan losses		26			78			104			490			13			503
Charge-offs		(224	)		(36	)		(260	)		(224	)		(44	)		(268	)
Recoveries		5			12			17			10			49			59
Balance at end of period	$	3,986		$	2,597		$	6,583		$	3,986		$	2,597		$	6,583

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

	Allowance For Loan Losses						Total Loans Receivable
(Dollars in thousands)	Loans Individually Evaluated For Impairment		Loans Collectively Evaluated		Total		Loans Individually Evaluated For Impairment		Loans Collectively Evaluated		Total
June 30, 2017
Commercial:
Commercial construction and land development	$	-	$	241	$	241	$	-	$	22,342	$	22,342
Commercial mortgage		-		3,451		3,451		142		246,333		246,475
Commercial and industrial		4		359		363		201		26,887		27,088
Total commercial		4		4,051		4,055		343		295,562		295,905
Non-commercial:
Non-commercial construction and land development		-		212		212		-		24,005		24,005
Residential mortgage		13		1,392		1,405		1,605		210,062		211,667
Revolving mortgage		81		738		819		338		64,253		64,591
Consumer		-		168		168		-		17,613		17,613
Total non-commercial		94		2,510		2,604		1,943		315,933		317,876
Total loans receivable	$	98	$	6,561	$	6,659	$	2,286	$	611,495	$	613,781
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

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

			Recorded Investment
(Dollars in thousands)	Unpaid Principal Balance		With A Recorded Allowance		With No Recorded Allowance		Total		Related Recorded Allowance
June 30, 2017
Commercial:
Commercial mortgage	$	142	$	-	$	143	$	143	$	-
Commercial and industrial		290		148		53		201		4
Total commercial		432		148		196		344		4
Non-commercial:
Residential mortgage		1,623		708		896		1,604		13
Revolving mortgage		354		81		257		338		81
Total non-commercial		1,977		789		1,153		1,942		94
Total impaired loans	$	2,409	$	937	$	1,349	$	2,286	$	98
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

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

	Three Months Ended June 30, 2017				Three Months Ended June 30, 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		48		1		3,344		32
Commercial and industrial		202		2		226		-
Total commercial		250		3		3,696		32
Non-commercial:
Residential mortgage		1,612		13		2,997		14
Revolving mortgage		339		-		85		-
Total non-commercial		1,951		13		3,082		14
Total loans receivable	$	2,201	$	16	$	6,778	$	46
	Six Months Ended June 30, 2017				Six Months Ended June 30, 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		1,463		32		3,496		64
Commercial and industrial		205		4		235		-
Total commercial		1,668		36		3,857		64
Non-commercial:
Residential mortgage		1,769		26		2,942		28
Revolving mortgage		320		-		89		-
Total non-commercial		2,089		26		3,031		28
Total loans receivable	$	3,757	$	62	$	6,888	$	92

The Bank did not restructure any loans during the three months ended June 30, 2017 and June 30, 2016, or during the six months ended June 30, 2017 and June 30, 2016. There were no loans modified as TDRs within the preceding twelve months that stopped performing during the three months or six months ended June 30, 2017 and June 30, 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)	June 30, 2017		December 31, 2016
Nonperforming restructured loans	$	11	$	13
Performing restructured loans		1,576		4,543
Total	$	1,587	$	4,556

As of June 30, 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 $930,000 and $953,000, respectively, of foreclosed residential real estate property included in foreclosed real estate.

XML

BENEFIT PLANS

6 Months Ended

Jun. 30, 2017

BENEFIT PLANS [Abstract]

BENEFIT PLANS

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 approximately $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 June 30,				Six Months Ended June 30,
(Dollars in thousands)	2017		2016		2017		2016
Non-Qualified Defined Benefit Plan
Components of Net Periodic Benefit Costs:
Interest cost	$	6	$	14	$	13	$	28
Amortization of net loss		60		11		118		23
Net periodic pension cost	$	66	$	25	$	131	$	51

	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2017		2016			2017		2016
Qualified Defined Benefit Plan
Components of Net Periodic Benefit Costs:
Interest cost	$	-	$	237		$	-	$	472
Expected return on plan assets		-		(202	)		-		(401	)
Amortization of net loss		-		163			-		324
Net periodic pension cost	$	-	$	198		$	-	$	395

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:

	June 30, 2017
Allocated ESOP shares, December 31, 2016		141,710
ESOP shares committed to be released during the period		15,565
ESOP shares withdrawn during the period		(7,792	)
Unallocated ESOP shares		266,914
Total ESOP shares		416,397
Fair value of unallocated ESOP shares (dollars in thousands)	$	11,731

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.

Coincident to the closing of the Merger, as described in more detail in note 8 to the consolidated financial statements, the ESOP requires that the ESOP loan be paid in full from the sale of unallocated Parent shares of stock held by the ESOP.  The remaining unallocated Parent shares held by the ESOP, net of allocation of previously forfeited shares as required by the ESOP, are to be allocated among the accounts of all participants, as defined by the ESOP, who were employed by the Bank on the date immediately preceding the closing date of the Merger in proportion to the opening balances in their ESOP participant accounts as of the first day of the current Valuation Period, as defined by the ESOP.

Total expense recognized in connection with the ESOP follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2017		2016		2017		2016
ESOP expense	$	372	$	194	$	640	$	387

2012 Equity Incentive Plan - The Parent’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 Parent 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 and six months ended June 30, 2017 were $263,000 and $527,000, respectively, and were $262,000 and $529,000, respectively, for the same periods of 2016.

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 June 30, 2017		41,017		$	15.78

There were no restricted stock awards granted or forfeited during the six-month periods ended June 30, 2017 and 2016.

At June 30, 2017, unrecognized compensation expense, adjusted for expected forfeitures, was $380,000 related to restricted stock.  The weighted-average period over which compensation cost related to unvested awards is expected to be recognized was 0.66 years at June 30, 2017.

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 June 30, 2017		60,355		443,900		$	16.04		5.75	$	12,392
Options exercisable at June 30, 2017				339,400		$	15.92		5.70	$	9,514

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 six-month period ended June 30, 2017. There were 5,000 stock options exercised during the six-month period ended June 30, 2016, and there were no stock options granted or forfeited during the same period.

At June 30, 2017, the Company had $331,000 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 1.06 years at June 30, 2017. There were 339,400 options vested and exercisable at June 30, 2017.

XML

COMMITMENTS AND CONTINGENCIES

6 Months Ended

Jun. 30, 2017

COMMITMENTS AND CONTINGENCIES [Abstract]

COMMITMENTS AND CONTINGENCIES

6. COMMITMENTS AND CONTINGENCIES

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

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

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

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

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

(Dollars in thousands)	June 30, 2017		December 31, 2016
Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit	$	196,229	$	190,213
Commitments under standby letters of credit		163		604
Total	$	196,392	$	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. Management believes that such routine legal proceedings taken together are immaterial to our financial condition or results of operations.  Any non-routine legal proceedings are described in Item 3 of the Parent’s Annual Report on Form 10-K for the year ended December 31, 2016. 

As previously described, on May 1, 2017, the Parent and First Bancorp entered into the Merger Agreement, pursuant to which, upon satisfaction of the conditions set forth in the Merger Agreement, the Parent will merge with and into First Bancorp, with First Bancorp being the surviving corporation and the Parent ceasing to be a separate entity.  The announcement of the Merger has triggered two lawsuits filed by purported shareholders.

On July 14, 2017, a purported shareholder filed a lawsuit in the United States District Court, Western District of North Carolina, against the Parent and members of the Parent’s board of directors. The lawsuit alleges inadequate disclosures in the Parent’s proxy statement/prospectus and violations of the Securities Exchange Act of 1934. The lawsuit seeks, among other remedies, to enjoin the Merger or, in the event the Merger is completed, rescission of the Merger or rescissory damages; to direct defendants to account for unspecified damages; and costs of the lawsuit, including attorneys’ and experts’ fees.

On July 19, 2017, another purported shareholder filed a lawsuit in the United States District Court, Western District of North Carolina, against the Parent, members of the Parent’s board of directors, and First Bancorp.  This lawsuit make nearly identical allegations as are made in the lawsuit described in the preceding paragraph and asks for identical remedies.

As of the date of this filing, the Parent cannot reasonably predict the outcome of either of the above-described lawsuits or, in the event of an adverse outcome, the potential loss or range of possible loss relating to either lawsuit.

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.

XML

FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2017

FAIR VALUE MEASUREMENTS [Abstract]

FAIR VALUE MEASUREMENTS

7. FAIR VALUE MEASUREMENTS

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

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

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

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.

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 June 30, 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.

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

	Fair Value Measurement Using								Total
(Dollars in thousands)	Level 1		Level 2		Level 3		Estimated Fair Value		Carrying Amount In Balance Sheet
June 30, 2017
Financial assets:
Cash and cash equivalents	$	53,311	$	-	$	-	$	53,311	$	53,311
Securities available for sale		775		95,160		-		95,935		95,935
Securities held to maturity		-		3,782		-		3,782		3,615
Investments in FHLB stock		-		-		1,566		1,566		1,566
Loans held for sale		-		4,201		-		4,201		4,097
Loans receivable, net		-		-		604,515		604,515		606,944
Accrued interest receivable		-		-		2,272		2,272		2,272
Deferred compensation assets		1,449		-		-		1,449		1,449
Financial liabilities:
Demand deposits		-		-		540,972		540,972		540,972
Time deposits		-		-		135,318		135,318		136,475
Repurchase agreements		-		-		311		311		311
Federal Home Loan Bank Advances		-		-		20,291		20,291		20,000
Deferred compensation liabilities		1,452		-		-		1,452		1,452
Accrued interest payable		-		-		66		66		66
Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit		-		-		-		-		-
Commitments under standby letters of credit		-		-		-		-		-

	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		-		-		-		-		-

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Below is a table that presents information about certain assets and liabilities measured at fair value on a recurring basis. There were no transfers to or from Levels 1 and 2 during the six months ended June 30, 2017 and June 30, 2016.

(Dollars in thousands)	Fair Value Measurement Using						Total		Assets/ Liabilities Measured At Fair Value
Description	Level 1		Level 2		Level 3		Carrying Amount In Balance Sheets
June 30, 2017
Securities available for sale:
U.S. GSE and agency securities	$	-	$	2,070	$	-	$	2,070	$	2,070
Asset-backed SBA securities		-		3,770		-		3,770		3,770
Residential mortgage-backed securities issued by GSEs		-		35,729		-		35,729		35,729
State and local government securities		-		53,591		-		53,591		53,591
Mutual funds		775		-		-		775		775
Total	$	775	$	95,160	$	-	$	95,935	$	95,935
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

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		Assets/ Liabilities Measured At Fair Value (1)
Description	Level 1		Level 2		Level 3		Carrying Amount In Balance Sheets (1)
June 30, 2017
Impaired loans	$	-	$	-	$	400	$	400	$	400
Foreclosed properties		-		-		1,768		1,768		1,768
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 six-month periods ended June 30, 2017 and June 30, 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)
June 30, 2017
Impaired loans	$	400	Discounted appraisals (2)	Collateral discounts (3)		0%-25% (19 %)
Foreclosed properties		1,768	Discounted appraisals (2)	Collateral discounts (3)		0%-22% (7%)
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.

XML

BUSINESS COMBINATIONS

6 Months Ended

Jun. 30, 2017

BUSINESS COMBINATIONS [Abstract]

BUSINESS COMBINATIONS

8. BUSINESS COMBINATIONS

On May 1, 2017, the Parent entered into the Merger Agreement with First Bancorp, pursuant to which the Parent will merge with and into First Bancorp and the Bank will merge with and into First Bank.  As of May 1, 2017, the aggregate merger consideration had a total value of approximately $175 million, or $43.12 per share.  As of June 30, 2017, the aggregate merger consideration had a total value of approximately $181 million, or $44.70 per share.

Subject to the terms and conditions of the Merger Agreement, the Parent'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 Parent's common stock.  The total merger consideration will be prorated as necessary to ensure that 10% of the total outstanding shares of the Parent's common stock will be exchanged for cash, and 90% of the total outstanding shares of the Parent'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 Parent'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 Parent 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 Parent'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.

The forgoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is qualified in its entirety be reference to the Merger Agreement, which is incorporated as Exhibit 2.1 to this Quarterly Report on Form 10-Q.

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Jun. 30, 2017

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract]

Organization

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.

As described in more detail in note 8 to the consolidated financial statements, on May 1, 2017, the Parent 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, pursuant to which the Parent will merge with and into First Bancorp (the “Merger”), and the Bank will merge with and into First Bank. The parties anticipate closing the Merger during the fourth quarter of 2017.

Principles of Consolidation

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

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

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.

Loans

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.

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.

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

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.

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 – 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.

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

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 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 – 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:

(Dollars in thousands)	Beginning Balance			OCI Before Reclassification			Amount Reclassified			Net OCI		Ending Balance
Three Months Ended June 30, 2017
Unrealized loss on securities	$	(1,408	)	$	740		$	-		$	740	$	(668	)
Benefit plan liability		(218	)		(38	)		38			-		(218	)
Accumulated other comprehensive income (loss), net of tax	$	(1,626	)	$	702		$	38		$	740	$	(886	)
Three Months Ended June 30, 2016
Unrealized gain on securities	$	931		$	1,164		$	(454	)	$	710	$	1,641
Benefit plan liability		(5,326	)		(110	)		110			-		(5,326	)
Accumulated other comprehensive income (loss), net of tax	$	(4,395	)	$	1,054		$	(344	)	$	710	$	(3,685	)

(Dollars in thousands)	Beginning Balance			OCI Before Reclassification			Amount Reclassified			Net OCI		Ending Balance
Six Months Ended June 30, 2017
Unrealized loss on securities	$	(1,647	)	$	996		$	(17	)	$	979	$	(668	)
Benefit plan liability		(218	)		(76	)		76			-		(218	)
Accumulated other comprehensive income (loss), net of tax	$	(1,865	)	$	920		$	59		$	979	$	(886	)
Six Months Ended June 30, 2016
Unrealized gain on securities	$	265		$	2,119		$	(743	)	$	1,376	$	1,641
Benefit plan liability		(5,326	)		(220	)		220			-		(5,326	)
Accumulated other comprehensive income (loss), net of tax	$	(5,061	)	$	1,899		$	(523	)	$	1,376	$	(3,685	)

The Company’s reclassifications out of accumulated OCI are as follows:

Details About Accumulated Other Comprehensive Income Components	Amount Reclassified From Accumulated Other Comprehensive Income						Affected Line Item In The Statement Where Net Income Is Presented
(Dollars in thousands)	Three Months Ended June 30, 2017			Three Months Ended June 30, 2016
Reclassification of securities gains recognized in net income	$	-		$	(716	)	Gain on sale of investment securities
Deferred income tax expense		-			262		Income tax provision
Total reclassifications for the period	$	-		$	(454	)	Net of tax
Net periodic pension benefit	$	60		$	174		Salaries and employee benefits
Deferred income tax expense		(22	)		(64	)	Income tax provision
Total reclassifications for the period	$	38		$	110		Net of tax

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)	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016
Reclassification of securities gains recognized in net income	$	(27	)	$	(1,172	)	Gain on sale of investment securities
Deferred income tax expense		10			429		Income tax provision
Total reclassifications for the period	$	(17	)	$	(743	)	Net of tax
Net periodic pension benefit	$	118		$	347		Salaries and employee benefits
Deferred income tax expense		(42	)		(127	)	Income tax provision
Total reclassifications for the period	$	76		$	220		Net of tax

Income Taxes

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.

Pension Plan

Pension Plan – Prior to November 2016, the Bank had a qualified defined benefit pension plan.  The Bank recognized the overfunded or underfunded status of the plan as an asset or liability in its consolidated balance sheets and recognized changes in the funded status in the year in which the change occurred 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. 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.

In addition, the Bank currently has a non-qualified pension plan, which is an unfunded plan.  The Bank 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")

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

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 six 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.

Net Income Per Common Share

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 June 30,						Six Months Ended June 30,
(Dollars in thousands, except per share data)	2017			2016			2017			2016
Numerator:
Net income	$	1,152		$	1,696		$	2,986		$	2,817
Denominator:
Weighted average common shares outstanding		3,788,025			3,985,922			3,788,025			3,985,698
Less: Weighted average unvested restricted shares		(41,017	)		(81,313	)		(48,972	)		(89,229	)
Less: Weighted average unallocated ESOP shares		(270,828	)		(302,160	)		(274,697	)		(306,062	)
Weighted average common shares used to compute net income per common share – Basic		3,476,180			3,602,449			3,464,356			3,590,407
Add: Effect of dilutive securities		283,834			140,009			267,424			140,909
Weighted average common shares used to compute net income per common share – Diluted		3,760,014			3,742,458			3,731,780			3,731,316
Net income per common share – Basic	$	0.33		$	0.47		$	0.86		$	0.78
Net income per common share – Diluted	$	0.31		$	0.45		$	0.80		$	0.75

For the three and six months ended June 30, 2017 and 2016, 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.

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 during the first quarter of 2017.  The adoption also increased the weighted average common shares on a diluted basis by 50,589 shares and 46,797 shares for the three- and six-month periods ended June 30, 2017, respectively.

Reclassifications

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

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.  The Company adopted the new guidance on a prospective basis in the first quarter of 2017, and upon adoption, the Company elected to estimate forfeitures of equity-based awards.  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.

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.

Accounting Standards Update ASU 2017-09 – In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718):  Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. ASU 2017-09 is effective for all entities for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017.  Early adoption is permitted.  The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date.  ASU 2017-09 is currently not applicable to the Company; however, it will evaluate the new guidance to determine the impact on the Company's consolidated financial statements upon modification of any share-based payment awards.

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

6 Months Ended

Jun. 30, 2017

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract]

Changes in Components of Company's Accumulated Other Comprehensive Loss, Net of Income Taxes

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

(Dollars in thousands)	Beginning Balance			OCI Before Reclassification			Amount Reclassified			Net OCI		Ending Balance
Three Months Ended June 30, 2017
Unrealized loss on securities	$	(1,408	)	$	740		$	-		$	740	$	(668	)
Benefit plan liability		(218	)		(38	)		38			-		(218	)
Accumulated other comprehensive income (loss), net of tax	$	(1,626	)	$	702		$	38		$	740	$	(886	)
Three Months Ended June 30, 2016
Unrealized gain on securities	$	931		$	1,164		$	(454	)	$	710	$	1,641
Benefit plan liability		(5,326	)		(110	)		110			-		(5,326	)
Accumulated other comprehensive income (loss), net of tax	$	(4,395	)	$	1,054		$	(344	)	$	710	$	(3,685	)

(Dollars in thousands)	Beginning Balance			OCI Before Reclassification			Amount Reclassified			Net OCI		Ending Balance
Six Months Ended June 30, 2017
Unrealized loss on securities	$	(1,647	)	$	996		$	(17	)	$	979	$	(668	)
Benefit plan liability		(218	)		(76	)		76			-		(218	)
Accumulated other comprehensive income (loss), net of tax	$	(1,865	)	$	920		$	59		$	979	$	(886	)
Six Months Ended June 30, 2016
Unrealized gain on securities	$	265		$	2,119		$	(743	)	$	1,376	$	1,641
Benefit plan liability		(5,326	)		(220	)		220			-		(5,326	)
Accumulated other comprehensive income (loss), net of tax	$	(5,061	)	$	1,899		$	(523	)	$	1,376	$	(3,685	)

Reclassification out of Accumulated Other Comprehensive Income

The Company’s reclassifications out of accumulated OCI are as follows:

Details About Accumulated Other Comprehensive Income Components	Amount Reclassified From Accumulated Other Comprehensive Income						Affected Line Item In The Statement Where Net Income Is Presented
(Dollars in thousands)	Three Months Ended June 30, 2017			Three Months Ended June 30, 2016
Reclassification of securities gains recognized in net income	$	-		$	(716	)	Gain on sale of investment securities
Deferred income tax expense		-			262		Income tax provision
Total reclassifications for the period	$	-		$	(454	)	Net of tax
Net periodic pension benefit	$	60		$	174		Salaries and employee benefits
Deferred income tax expense		(22	)		(64	)	Income tax provision
Total reclassifications for the period	$	38		$	110		Net of tax

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)	Six Months Ended June 30, 2017			Six Months Ended June 30, 2016
Reclassification of securities gains recognized in net income	$	(27	)	$	(1,172	)	Gain on sale of investment securities
Deferred income tax expense		10			429		Income tax provision
Total reclassifications for the period	$	(17	)	$	(743	)	Net of tax
Net periodic pension benefit	$	118		$	347		Salaries and employee benefits
Deferred income tax expense		(42	)		(127	)	Income tax provision
Total reclassifications for the period	$	76		$	220		Net of tax

Net Income per Common Share

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

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands, except per share data)	2017			2016			2017			2016
Numerator:
Net income	$	1,152		$	1,696		$	2,986		$	2,817
Denominator:
Weighted average common shares outstanding		3,788,025			3,985,922			3,788,025			3,985,698
Less: Weighted average unvested restricted shares		(41,017	)		(81,313	)		(48,972	)		(89,229	)
Less: Weighted average unallocated ESOP shares		(270,828	)		(302,160	)		(274,697	)		(306,062	)
Weighted average common shares used to compute net income per common share – Basic		3,476,180			3,602,449			3,464,356			3,590,407
Add: Effect of dilutive securities		283,834			140,009			267,424			140,909
Weighted average common shares used to compute net income per common share – Diluted		3,760,014			3,742,458			3,731,780			3,731,316
Net income per common share – Basic	$	0.33		$	0.47		$	0.86		$	0.78
Net income per common share – Diluted	$	0.31		$	0.45		$	0.80		$	0.75

XML

INVESTMENT SECURITIES (Tables)

6 Months Ended

Jun. 30, 2017

INVESTMENT SECURITIES [Abstract]

Securities Available for Sale

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

Type And Maturity Group (Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
June 30, 2017
U.S. Government Sponsored Enterprise (GSE) and agency securities due -
Within 1 year	$	1,004	$	-	$	(1	)	$	1,003
After 1 year but within 5 years		1,072		-		(5	)		1,067
Asset-backed securities issued by the Small Business Administration (SBA)		3,746		29		(5	)		3,770
Residential mortgage-backed securities issued by GSEs (1)		36,156		97		(524	)		35,729
State and local government securities due -
After 10 years		54,216		599		(1,224	)		53,591
Mutual funds		785		-		(10	)		775
Total	$	96,979	$	725	$	(1,769	)	$	95,935
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 June 30, 2017 and December 31, 2016 or during the six- and twelve-month periods, respectively, then ended.

Securities Held to Maturity

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

Type And Maturity Group (Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
June 30, 2017
U.S. GSE  and agency securities due -
Within 1 year	$	1,001	$	2	$	-	$	1,003
Residential mortgage-backed securities issued by GSEs (1)		172		14		-		186
State and local government securities due -
After 1 year but within 5 years		973		65		-		1,038
After 5 years but within 10 years		1,469		86		-		1,555
Total	$	3,615	$	167	$	-	$	3,782
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 June 30, 2017 and December 31, 2016 or during the six- and twelve-month periods, respectively, then ended.

Investment Gross Unrealized Losses and Fair Value

The following tables show investment gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2017 and December 31, 2016. The total number of securities with unrealized losses at June 30, 2017 and December 31, 2016 were 41 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.

	June 30, 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	$	2,070	$	(6	)	$	-	$	-		$	2,070	$	(6	)
Asset-backed SBA		-		-			975		(5	)		975		(5	)
Residential mortgage-backed GSE (1)		6,631		(53	)		23,054		(471	)		29,685		(524	)
State and local government		14,590		(543	)		11,566		(681	)		26,156		(1,224	)
Mutual funds		785		(10	)		-		-			785		(10	)
Total temporarily impaired securities	$	24,076	$	(612	)	$	35,595	$	(1,157	)	$	59,671	$	(1,769	)

(1) Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at June 30, 2017 or during the six-month period then ended.

	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

Investment securities pledged as collateral follows:

(Dollars in thousands)	June 30, 2017		December 31, 2016
Pledged to Federal Reserve Discount Window	$	7,007	$	8,264
Pledged to repurchase agreements for commercial customers		1,067		840

Interest Income from Taxable and Tax-Exempt Securities Recognized in Interest and Dividend Income

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

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2017		2016		2017		2016
Interest income from taxable securities	$	140	$	213	$	272	$	434
Interest income from tax-exempt securities		387		347		775		714
Total interest income from securities	$	527	$	560	$	1,047	$	1,148

Proceeds and Gross Realized Gains and Losses from Sales of Securities Recognized in Net Income

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

	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2017		2016			2017		2016
Proceeds from sales of securities	$	-	$	31,902		$	1,194	$	50,150
Gross realized gains from sales of securities		-		746			27		1,216
Gross realized losses from sales of securities		-		(30	)		-		(44	)

XML

LOANS RECEIVABLE (Tables)

6 Months Ended

Jun. 30, 2017

LOANS RECEIVABLE [Abstract]

Loans Receivable by Segment and Class

Loans receivable by segment and class follow:

(Dollars in thousands)	June 30, 2017			December 31, 2016
Commercial:
Commercial construction and land development	$	22,342		$	27,813
Commercial mortgage		246,475			241,125
Commercial and industrial		27,088			23,819
Total commercial		295,905			292,757
Non-commercial:
Non-commercial construction and land development		24,005			20,801
Residential mortgage		211,667			200,590
Revolving mortgage		64,591			66,870
Consumer		17,613			22,805
Total non-commercial		317,876			311,066
Total loans receivable		613,781			603,823
Less: Deferred loan fees		(178	)		(241	)
Total loans receivable net of deferred loan fees		613,603			603,582
Less: Allowance for loan losses		(6,659	)		(6,544	)
Loans receivable, net	$	606,944		$	597,038

Loans Receivable by Segment, Class, and Grade

Loans receivable by segment, class, and grade follow:

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Total Loans
June 30, 2017
Commercial:
Commercial construction and land development	$	22,221	$	121	$	-	$	-	$	-	$	22,342
Commercial mortgage		237,934		7,808		733		-		-		246,475
Commercial and industrial		26,196		691		201		-		-		27,088
Total commercial		286,351		8,620		934		-		-		295,905
Non-commercial:
Non-commercial construction and land development		24,005		-		-		-		-		24,005
Residential mortgage		205,955		5,139		573		-		-		211,667
Revolving mortgage		61,266		2,878		447		-		-		64,591
Consumer		17,099		441		73		-		-		17,613
Total non-commercial		308,325		8,458		1,093		-		-		317,876
Total loans receivable	$	594,676	$	17,078	$	2,027	$	-	$	-	$	613,781
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

Loans Receivable by Segment, Class, and Delinquency Status

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

	Past Due
(Dollars in thousands)	31-89 Days		90 Days Or More		Total		Current		Total Loans
June 30, 2017
Commercial:
Commercial construction and land development	$	-	$	-	$	-	$	22,342	$	22,342
Commercial mortgage		-		-		-		246,475		246,475
Commercial and industrial		-		53		53		27,035		27,088
Total commercial		-		53		53		295,852		295,905
Non-commercial:
Non-commercial construction and land development		-		-		-		24,005		24,005
Residential mortgage		6		176		182		211,485		211,667
Revolving mortgage		257		211		468		64,123		64,591
Consumer		77		31		108		17,505		17,613
Total non-commercial		340		418		758		317,118		317,876
Total loans receivable	$	340	$	471	$	811	$	612,970	$	613,781
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

Recorded Investment in Loans by Segment and Class Not Accruing Interest or 90 Days or More Past Due and Still Accruing Interest

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

	June 30, 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	$	53	$	-	$	63	$	-
Total commercial		53		-		63		-
Non-commercial:
Residential mortgage		176		-		626		-
Revolving mortgage		293		-		323		-
Consumer		31		-		-		-
Total non-commercial		500		-		949		-
Total loans receivable	$	553	$	-	$	1,012	$	-

Loans Made to Directors and Executive Officers

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)	June 30, 2017			December 31, 2016
Director and executive officer loans, beginning of period	$	3,356		$	3,530
New loans		115			191
Repayments of loans		(247	)		(365	)
Director and executive officer loans, end of period	$	3,224		$	3,356

XML

ALLOWANCE FOR LOAN LOSSES (Tables)

6 Months Ended

Jun. 30, 2017

ALLOWANCE FOR LOAN LOSSES [Abstract]

Allowance for Loan Losses by Segment

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

	Three Months Ended June 30, 2017									Six Months Ended June 30, 2017
(Dollars in thousands)	Commercial			Non- Commercial			Total			Commercial			Non- Commercial			Total
Balance at beginning of period	$	3,989		$	2,584		$	6,573		$	3,968		$	2,576		$	6,544
Provision for loan losses		53			22			75			61			71			132
Charge-offs		-			(43	)		(43	)		-			(96	)		(96	)
Recoveries		13			41			54			26			53			79
Balance at end of period	$	4,055		$	2,604		$	6,659		$	4,055		$	2,604		$	6,659
	Three Months Ended June 30, 2016									Six Months Ended June 30, 2016
(Dollars in thousands)	Commercial			Non- Commercial			Total			Commercial			Non- Commercial			Total
Balance at beginning of period	$	4,179		$	2,543		$	6,722		$	3,710		$	2,579		$	6,289
Provision for loan losses		26			78			104			490			13			503
Charge-offs		(224	)		(36	)		(260	)		(224	)		(44	)		(268	)
Recoveries		5			12			17			10			49			59
Balance at end of period	$	3,986		$	2,597		$	6,583		$	3,986		$	2,597		$	6,583

Ending Balances of Loans and Related Allowance

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

	Allowance For Loan Losses						Total Loans Receivable
(Dollars in thousands)	Loans Individually Evaluated For Impairment		Loans Collectively Evaluated		Total		Loans Individually Evaluated For Impairment		Loans Collectively Evaluated		Total
June 30, 2017
Commercial:
Commercial construction and land development	$	-	$	241	$	241	$	-	$	22,342	$	22,342
Commercial mortgage		-		3,451		3,451		142		246,333		246,475
Commercial and industrial		4		359		363		201		26,887		27,088
Total commercial		4		4,051		4,055		343		295,562		295,905
Non-commercial:
Non-commercial construction and land development		-		212		212		-		24,005		24,005
Residential mortgage		13		1,392		1,405		1,605		210,062		211,667
Revolving mortgage		81		738		819		338		64,253		64,591
Consumer		-		168		168		-		17,613		17,613
Total non-commercial		94		2,510		2,604		1,943		315,933		317,876
Total loans receivable	$	98	$	6,561	$	6,659	$	2,286	$	611,495	$	613,781
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

Impaired Loans and Related Allowance

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

			Recorded Investment
(Dollars in thousands)	Unpaid Principal Balance		With A Recorded Allowance		With No Recorded Allowance		Total		Related Recorded Allowance
June 30, 2017
Commercial:
Commercial mortgage	$	142	$	-	$	143	$	143	$	-
Commercial and industrial		290		148		53		201		4
Total commercial		432		148		196		344		4
Non-commercial:
Residential mortgage		1,623		708		896		1,604		13
Revolving mortgage		354		81		257		338		81
Total non-commercial		1,977		789		1,153		1,942		94
Total impaired loans	$	2,409	$	937	$	1,349	$	2,286	$	98
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

Average Recorded Investment in Impaired Loans and Interest Income Recognized on Impaired Loans

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

	Three Months Ended June 30, 2017				Three Months Ended June 30, 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		48		1		3,344		32
Commercial and industrial		202		2		226		-
Total commercial		250		3		3,696		32
Non-commercial:
Residential mortgage		1,612		13		2,997		14
Revolving mortgage		339		-		85		-
Total non-commercial		1,951		13		3,082		14
Total loans receivable	$	2,201	$	16	$	6,778	$	46
	Six Months Ended June 30, 2017				Six Months Ended June 30, 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		1,463		32		3,496		64
Commercial and industrial		205		4		235		-
Total commercial		1,668		36		3,857		64
Non-commercial:
Residential mortgage		1,769		26		2,942		28
Revolving mortgage		320		-		89		-
Total non-commercial		2,089		26		3,031		28
Total loans receivable	$	3,757	$	62	$	6,888	$	92

Loans That Were Considered to Be TDRs

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

(Dollars in thousands)	June 30, 2017		December 31, 2016
Nonperforming restructured loans	$	11	$	13
Performing restructured loans		1,576		4,543
Total	$	1,587	$	4,556

XML

BENEFIT PLANS (Tables)

6 Months Ended

Jun. 30, 2017

BENEFIT PLANS [Abstract]

Net Periodic Benefit Cost Related to Defined Benefit Plans

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

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2017		2016		2017		2016
Non-Qualified Defined Benefit Plan
Components of Net Periodic Benefit Costs:
Interest cost	$	6	$	14	$	13	$	28
Amortization of net loss		60		11		118		23
Net periodic pension cost	$	66	$	25	$	131	$	51

	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2017		2016			2017		2016
Qualified Defined Benefit Plan
Components of Net Periodic Benefit Costs:
Interest cost	$	-	$	237		$	-	$	472
Expected return on plan assets		-		(202	)		-		(401	)
Amortization of net loss		-		163			-		324
Net periodic pension cost	$	-	$	198		$	-	$	395

Employee Stock Ownership Plan

Shares held by the ESOP include the following:

	June 30, 2017
Allocated ESOP shares, December 31, 2016		141,710
ESOP shares committed to be released during the period		15,565
ESOP shares withdrawn during the period		(7,792	)
Unallocated ESOP shares		266,914
Total ESOP shares		416,397
Fair value of unallocated ESOP shares (dollars in thousands)	$	11,731

As ESOP shares are earned by the participants, the Company recognizes compensation expense equal to the fair value of the earned ESOP shares during the periods in which they become committed to be released.

Total expense recognized in connection with the ESOP follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2017		2016		2017		2016
ESOP expense	$	372	$	194	$	640	$	387

Restricted Stock Award Activity

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 June 30, 2017		41,017		$	15.78

Stock Option Activity

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 June 30, 2017		60,355		443,900		$	16.04		5.75	$	12,392
Options exercisable at June 30, 2017				339,400		$	15.92		5.70	$	9,514

XML

COMMITMENTS AND CONTINGENCIES (Tables)

6 Months Ended

Jun. 30, 2017

COMMITMENTS AND CONTINGENCIES [Abstract]

Commitments to Extend or Originate Credit and Under Standby Letters of Credit

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

(Dollars in thousands)	June 30, 2017		December 31, 2016
Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit	$	196,229	$	190,213
Commitments under standby letters of credit		163		604
Total	$	196,392	$	190,817

XML

FAIR VALUE MEASUREMENTS (Tables)

6 Months Ended

Jun. 30, 2017

FAIR VALUE MEASUREMENTS [Abstract]

Estimated Fair Values and Carrying Amounts of Financial Instruments

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

	Fair Value Measurement Using								Total
(Dollars in thousands)	Level 1		Level 2		Level 3		Estimated Fair Value		Carrying Amount In Balance Sheet
June 30, 2017
Financial assets:
Cash and cash equivalents	$	53,311	$	-	$	-	$	53,311	$	53,311
Securities available for sale		775		95,160		-		95,935		95,935
Securities held to maturity		-		3,782		-		3,782		3,615
Investments in FHLB stock		-		-		1,566		1,566		1,566
Loans held for sale		-		4,201		-		4,201		4,097
Loans receivable, net		-		-		604,515		604,515		606,944
Accrued interest receivable		-		-		2,272		2,272		2,272
Deferred compensation assets		1,449		-		-		1,449		1,449
Financial liabilities:
Demand deposits		-		-		540,972		540,972		540,972
Time deposits		-		-		135,318		135,318		136,475
Repurchase agreements		-		-		311		311		311
Federal Home Loan Bank Advances		-		-		20,291		20,291		20,000
Deferred compensation liabilities		1,452		-		-		1,452		1,452
Accrued interest payable		-		-		66		66		66
Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit		-		-		-		-		-
Commitments under standby letters of credit		-		-		-		-		-

	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		-		-		-		-		-

Assets and Liabilities Recorded at Fair Value on Recurring Basis

Below is a table that presents information about certain assets and liabilities measured at fair value on a recurring basis. There were no transfers to or from Levels 1 and 2 during the six months ended June 30, 2017 and June 30, 2016.

(Dollars in thousands)	Fair Value Measurement Using						Total		Assets/ Liabilities Measured At Fair Value
Description	Level 1		Level 2		Level 3		Carrying Amount In Balance Sheets
June 30, 2017
Securities available for sale:
U.S. GSE and agency securities	$	-	$	2,070	$	-	$	2,070	$	2,070
Asset-backed SBA securities		-		3,770		-		3,770		3,770
Residential mortgage-backed securities issued by GSEs		-		35,729		-		35,729		35,729
State and local government securities		-		53,591		-		53,591		53,591
Mutual funds		775		-		-		775		775
Total	$	775	$	95,160	$	-	$	95,935	$	95,935
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

Assets Recorded at Fair Value on 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		Assets/ Liabilities Measured At Fair Value (1)
Description	Level 1		Level 2		Level 3		Carrying Amount In Balance Sheets (1)
June 30, 2017
Impaired loans	$	-	$	-	$	400	$	400	$	400
Foreclosed properties		-		-		1,768		1,768		1,768
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.

Quantitative Information about Financial and Nonfinancial Assets Measured at Fair Value on Nonrecurring

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

(Dollars in thousands)	Fair Value (1)		Valuation Technique	Unobservable Input	Discount Range (Weighted Average)
June 30, 2017
Impaired loans	$	400	Discounted appraisals (2)	Collateral discounts (3)		0%-25% (19 %)
Foreclosed properties		1,768	Discounted appraisals (2)	Collateral discounts (3)		0%-22% (7%)
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.

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details)	Jun. 30, 2017 Subsidiary
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract]
Number of wholly owned subsidiaries	2

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Allowance for Loan Losses (Details)	6 Months Ended
	Jun. 30, 2017 Methodology
Allowance for Loan Losses [Abstract]
Number of allowance methodologies used to determine whether or not a loan is considered to be impaired	2
Period of average historical losses used in determining estimated loss percentage of loans	3 years
Number of consecutive months or payment cycles of performance after which concern no longer exists as to future collectability of principal and interest	6 months
Period of discovery within which loans determined to be fraudulent are charged off	90 days
Period of receipt of notification from bankruptcy court within which loans to borrowers in bankruptcy are charged off	60 days
Number of days past due after which loans to borrowers in bankruptcy are charged off	120 days
Consumer Loans [Member] | Closed-End Consumer Loans [Member]
Allowance for Loan Losses [Abstract]
Number of cumulative days past due after which loans are charged off	120 days
Consumer Loans [Member] | Open-End Consumer Loans [Member]
Allowance for Loan Losses [Abstract]
Number of cumulative days past due after which loans are charged off	180 days
Residential Loans [Member] | Closed-End Real Estate Loan [Member]
Allowance for Loan Losses [Abstract]
Number of cumulative days past due after which loans are charged off	180 days
Residential Loans [Member] | Open-End Real Estate Loan [Member]
Allowance for Loan Losses [Abstract]
Number of cumulative days past due after which loans are charged off	180 days

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Changes in Components of Company's Accumulated Other Comprehensive Loss, Net of Income Taxes (Details) - USD ($) $ in Thousands		3 Months Ended		6 Months Ended
		Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
AOCI Attributable to Parent, Net of Tax [Roll Forward]
Beginning balance	[1]			$ 91,137
OCI before reclassification		$ 702	$ 1,054	920	$ 1,899
Amount reclassified		38	(344)	59	(523)
Net OCI		740	710	979	1,376
Ending balance		96,267		96,267
Accumulated Other Comprehensive Income (Loss), Net of Tax [Member]
AOCI Attributable to Parent, Net of Tax [Roll Forward]
Beginning balance		(1,626)	(4,395)	(1,865)	(5,061)
Net OCI				979
Ending balance		(886)	(3,685)	(886)	(3,685)
Unrealized (Loss) Gain on Securities [Member]
AOCI Attributable to Parent, Net of Tax [Roll Forward]
Beginning balance		(1,408)	931	(1,647)	265
OCI before reclassification		740	1,164	996	2,119
Amount reclassified		0	(454)	(17)	(743)
Net OCI		740	710	979	1,376
Ending balance		(668)	1,641	(668)	1,641
Benefit Plan Liability [Member]
AOCI Attributable to Parent, Net of Tax [Roll Forward]
Beginning balance		(218)	(5,326)	(218)	(5,326)
OCI before reclassification		(38)	(110)	(76)	(220)
Amount reclassified		38	110	76	220
Net OCI		0	0	0	0
Ending balance		$ (218)	$ (5,326)	$ (218)	$ (5,326)

[1] Derived from audited consolidated financial statements.

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Reclassifications of Accumulated Other Comprehensive Income (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Gain on sale of investment securities	$ 0	$ (716)	$ (27)	$ (1,172)
Salaries and employee benefits	3,377	3,271	6,608	6,584
Income tax provision	781	940	1,355	1,541
Net of tax	(1,152)	(1,696)	(2,986)	(2,817)
Reclassification of Securities Gains Recognized in Net Income [Member] | Reclassification out of Accumulated Other Comprehensive Income [Member]
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Gain on sale of investment securities	0	(716)	(27)	(1,172)
Income tax provision	0	262	10	429
Net of tax	0	(454)	(17)	(743)
Net Periodic Pension Benefit [Member] | Reclassification out of Accumulated Other Comprehensive Income [Member]
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Salaries and employee benefits	60	174	118	347
Income tax provision	(22)	(64)	(42)	(127)
Net of tax	$ 38	$ 110	$ 76	$ 220

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Income Taxes (Details) - North Carolina [Member]	6 Months Ended
	Jun. 30, 2017
Operating Loss Carryforwards [Line Items]
Loss carry forward period	15 years
Remaining loss carry forward period	12 years

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Employee Stock Ownership Plan ("ESOP") and Equity Incentive Plan (Details) - shares	6 Months Ended	12 Months Ended
	Jun. 30, 2017	Dec. 31, 2016
2012 Equity Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares granted (in shares)	0	0
Employee Stock Ownership Plan [Member]
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items]
ESOP minimum annual service hours required	1000 hours
Period used in determination of service hours of full-time employees for participation in ESOP	12 months
ESOP minimum age required to participate	21 years
Annual vesting rate	20.00%
ESOP service years to begin vesting	2 years
ESOP service years to fully vest	6 years
ESOP loan amortization period	15 years

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Net Income per Common Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended			6 Months Ended
	Jun. 30, 2017	Mar. 31, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Numerator [Abstract]
Net income	$ 1,152		$ 1,696	$ 2,986	$ 2,817
Denominator [Abstract]
Weighted average common shares outstanding (in shares)	3,788,025		3,985,922	3,788,025	3,985,698
Less: Weighted average unvested restricted shares (in shares)	(41,017)		(81,313)	(48,972)	(89,229)
Less: Weighted average unallocated ESOP shares (in shares)	(270,828)		(302,160)	(274,697)	(306,062)
Weighted average common shares used to compute net income per common share - Basic (in shares)	3,476,180		3,602,449	3,464,356	3,590,407
Add: Effect of dilutive securities (in shares)	283,834		140,009	267,424	140,909
Weighted average common shares used to compute net income per common share - Diluted (in shares)	3,760,014		3,742,458	3,731,780	3,731,316
Net income per common share - Basic (in dollars per share)	$ 0.33		$ 0.47	$ 0.86	$ 0.78
Net income per common share - Diluted (in dollars per share)	$ 0.31		$ 0.45	$ 0.80	$ 0.75
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Increase in dilutive securities after the adoption (in shares)	283,834		140,009	267,424	140,909
ASU 2016-09 [Member]
Denominator [Abstract]
Add: Effect of dilutive securities (in shares)	50,589	41,359		46,797
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Increase in dilutive securities after the adoption (in shares)	50,589	41,359		46,797
Stock Option [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from the computation of diluted net income per share (in shares)	0		0	0	0
Restricted Stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from the computation of diluted net income per share (in shares)	0		0	0	0

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Recent Accounting Pronouncements (Details) - USD ($) $ in Thousands	3 Months Ended			6 Months Ended
	Jun. 30, 2017	Mar. 31, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Increase in dilutive securities after the adoption (in shares)	283,834		140,009	267,424	140,909
ASU 2016-09 [Member]
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Decrease in income taxes		$ (228)
Increase in dilutive securities after the adoption (in shares)	50,589	41,359		46,797

XML

INVESTMENT SECURITIES, Securities Available For Sale (Details) - USD ($) $ in Thousands		Jun. 30, 2017	Dec. 31, 2016
Schedule of Available-for-sale Securities [Line Items]
Amortized cost		$ 96,979	$ 102,482	[1]
Unrealized gains		725	159
Unrealized losses		(1,769)	(2,732)
Fair value		95,935	99,909	[1]
U.S. Government Sponsored Enterprise (GSE) and Agency Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Within 1 year, amortized cost		1,004	1,011
Within 1 year, unrealized gains		0	0
Within 1 year, unrealized losses		(1)	0
Within 1 year, fair value		1,003	1,011
After 1 year but within 5 years, amortized cost		1,072	1,085
After 1 year but within 5 years, unrealized gains		0	0
After 1 year but within 5 years, unrealized losses		(5)	(7)
After 1 year but within 5 years, fair value		1,067	1,078
Asset-backed Securities Issued by the Small Business Administration (SBA) [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized cost		3,746	4,407
Unrealized gains		29	17
Unrealized losses		(5)	(11)
Fair value		3,770	4,413
Residential Mortgage-backed Securities Issued by GSEs [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized cost	[2]	36,156	40,619
Unrealized gains	[2]	97	88
Unrealized losses	[2]	(524)	(733)
Fair value	[2]	35,729	39,974
State and Local Government Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
After 10 years, amortized cost		54,216	54,583
After 10 years, unrealized gains		599	54
After 10 years, unrealized losses		(1,224)	(1,967)
After 10 years, fair value		53,591	52,670
Mutual Funds [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized cost		785	777
Unrealized gains		0	0
Unrealized losses		(10)	(14)
Fair value		$ 775	$ 763

[1] Derived from audited consolidated financial statements.

[2] Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at June 30, 2017 and December 31, 2016 or during the six- and twelve-month periods, respectively, then ended.

XML

INVESTMENT SECURITIES, Securities Held to Maturity (Details) - USD ($) $ in Thousands		Jun. 30, 2017	Dec. 31, 2016
Schedule of Held-to-maturity Securities [Line Items]
Amortized cost		$ 3,615	$ 3,672	[1]
Unrealized gains		167	203
Unrealized losses		0	0
Fair value		3,782	3,875	[1]
U.S. GSE and Agency Securities [Member]
Schedule of Held-to-maturity Securities [Line Items]
Within 1 year, amortized cost		1,001	1,009
Within 1 year, unrealized gains		2	18
Within 1 year, unrealized losses		0	0
Within 1 year, fair value		1,003	1,027
Residential Mortgage-backed Securities Issued by GSEs [Member]
Schedule of Held-to-maturity Securities [Line Items]
Amortized cost	[2]	172	223
Unrealized gains	[2]	14	17
Unrealized losses	[2]	0	0
Fair value	[2]	186	240
State and Local Government Securities [Member]
Schedule of Held-to-maturity Securities [Line Items]
After 1 year but within 5 years, amortized cost		973
After 1 year but within 5 years, unrealized gains		65
After 1 year but within 5 years, unrealized losses		0
After 1 year but within 5 years, fair value		1,038
After 5 years but within 10 years, amortized cost		1,469	2,440
After 5 years but within 10 years, unrealized gains		86	168
After 5 years but within 10 years, unrealized losses		0	0
After 5 years but within 10 years, fair value		$ 1,555	$ 2,608

[1] Derived from audited consolidated financial statements.

[2] Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at June 30, 2017 and December 31, 2016 or during the six- and twelve-month periods, respectively, then ended.

XML

INVESTMENT SECURITIES, Investment Gross Unrealized Losses and Fair Value (Details) $ in Thousands	Jun. 30, 2017 USD ($) Security		Dec. 31, 2016 USD ($) Security
Securities available for sale in continuous unrealized loss position [Abstract]
Total number of securities with unrealized losses | Security	41		56
Less than 12 months, fair value	$ 24,076		$ 66,118
Less than 12 months, unrealized losses	(612)		(2,540)
12 months or more, fair value	35,595		19,401
12 months or more, unrealized losses	(1,157)		(192)
Total, fair value	59,671		85,519
Total, unrealized losses	(1,769)		(2,732)
U.S. GSE and Agency Securities [Member]
Securities available for sale in continuous unrealized loss position [Abstract]
Less than 12 months, fair value	2,070		2,088
Less than 12 months, unrealized losses	(6)		(7)
12 months or more, fair value	0		0
12 months or more, unrealized losses	0		0
Total, fair value	2,070		2,088
Total, unrealized losses	(6)		(7)
Asset-backed SBA Securities [Member]
Securities available for sale in continuous unrealized loss position [Abstract]
Less than 12 months, fair value	0		1,647
Less than 12 months, unrealized losses	0		(3)
12 months or more, fair value	975		1,049
12 months or more, unrealized losses	(5)		(8)
Total, fair value	975		2,696
Total, unrealized losses	(5)		(11)
Residential Mortgage-backed GSE [Member]
Securities available for sale in continuous unrealized loss position [Abstract]
Less than 12 months, fair value	6,631	[1]	15,274	[2]
Less than 12 months, unrealized losses	(53)	[1]	(549)	[2]
12 months or more, fair value	23,054	[1]	18,352	[2]
12 months or more, unrealized losses	(471)	[1]	(184)	[2]
Total, fair value	29,685	[1]	33,626	[2]
Total, unrealized losses	(524)	[1]	(733)	[2]
State and Local Government Securities [Member]
Securities available for sale in continuous unrealized loss position [Abstract]
Less than 12 months, fair value	14,590		46,333
Less than 12 months, unrealized losses	(543)		(1,967)
12 months or more, fair value	11,566		0
12 months or more, unrealized losses	(681)		0
Total, fair value	26,156		46,333
Total, unrealized losses	(1,224)		(1,967)
Mutual Funds [Member]
Securities available for sale in continuous unrealized loss position [Abstract]
Less than 12 months, fair value	785		776
Less than 12 months, unrealized losses	(10)		(14)
12 months or more, fair value	0		0
12 months or more, unrealized losses	0		0
Total, fair value	785		776
Total, unrealized losses	$ (10)		$ (14)

[1] Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at June 30, 2017 or during the six-month period then ended.

[2] 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.

XML

INVESTMENT SECURITIES, Investment Securities Pledged as Collateral (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Fair value of investment securities pledged as collateral [Abstract]
Pledged to Federal Reserve Discount Window	$ 7,007	$ 8,264
Pledged to repurchase agreements for commercial customers	$ 1,067	$ 840

XML

INVESTMENT SECURITIES, Interest Income from Taxable and Tax-Exempt Securities Recognized in Interest and Dividend Income (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Interest income from taxable and tax-exempt securities recognized in interest and dividend income [Abstract]
Interest income from taxable securities	$ 140	$ 213	$ 272	$ 434
Interest income from tax-exempt securities	387	347	775	714
Total interest income from securities	$ 527	$ 560	$ 1,047	$ 1,148

XML

INVESTMENT SECURITIES, Proceeds and Realized Gains and Losses from Sales of Securities Recognized in Net Income (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Proceeds and gross realized gains from sales of securities recognized in net income [Abstract]
Proceeds from sales of securities	$ 0	$ 31,902	$ 1,194	$ 50,150
Gross realized gains from sales of securities	0	746	27	1,216
Gross realized losses from sales of securities	$ 0	$ (30)	$ 0	$ (44)

XML

LOANS RECEIVABLE, by Segment and Class (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Mar. 31, 2017	Dec. 31, 2016		Jun. 30, 2016	Mar. 31, 2016	Dec. 31, 2015
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total loans receivable	$ 613,781		$ 603,823
Less: Deferred loan fees	(178)		(241)	[1]
Total loans receivable net of deferred loan fees	613,603		603,582	[1]
Less: Allowance for loan losses	(6,659)	$ (6,573)	(6,544)	[1]	$ (6,583)	$ (6,722)	$ (6,289)
Loans receivable, net	606,944		597,038	[1]
Commercial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total loans receivable	295,905		292,757
Less: Allowance for loan losses	(4,055)	(3,989)	(3,968)		(3,986)	(4,179)	(3,710)
Commercial [Member] | Commercial Construction and Land Development [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total loans receivable	22,342		27,813
Less: Allowance for loan losses	(241)		(295)
Commercial [Member] | Commercial Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total loans receivable	246,475		241,125
Less: Allowance for loan losses	(3,451)		(3,346)
Commercial [Member] | Commercial and Industrial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total loans receivable	27,088		23,819
Less: Allowance for loan losses	(363)		(327)
Non-Commercial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total loans receivable	317,876		311,066
Less: Allowance for loan losses	(2,604)	$ (2,584)	(2,576)		$ (2,597)	$ (2,543)	$ (2,579)
Non-Commercial [Member] | Non-Commercial Construction and Land Development [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total loans receivable	24,005		20,801
Less: Allowance for loan losses	(212)		(177)
Non-Commercial [Member] | Residential Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total loans receivable	211,667		200,590
Less: Allowance for loan losses	(1,405)		(1,331)
Non-Commercial [Member] | Revolving Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total loans receivable	64,591		66,870
Less: Allowance for loan losses	(819)		(850)
Non-Commercial [Member] | Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total loans receivable	17,613		22,805
Less: Allowance for loan losses	$ (168)		$ (218)

[1] Derived from audited consolidated financial statements.

XML

LOANS RECEIVABLE, by Segment, Class, and Grade (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	$ 613,781	$ 603,823
Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	594,676	579,995
Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	17,078	21,247
Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	2,027	2,581
Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Loss [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Commercial [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	295,905	292,757
Commercial [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	286,351	280,120
Commercial [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	8,620	11,825
Commercial [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	934	812
Commercial [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Commercial [Member] | Loss [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Commercial [Member] | Commercial Construction and Land Development [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	22,342	27,813
Commercial [Member] | Commercial Construction and Land Development [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	22,221	27,677
Commercial [Member] | Commercial Construction and Land Development [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	121	136
Commercial [Member] | Commercial Construction and Land Development [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Commercial [Member] | Commercial Construction and Land Development [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Commercial [Member] | Commercial Construction and Land Development [Member] | Loss [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Commercial [Member] | Commercial Mortgage [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	246,475	241,125
Commercial [Member] | Commercial Mortgage [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	237,934	229,571
Commercial [Member] | Commercial Mortgage [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	7,808	10,954
Commercial [Member] | Commercial Mortgage [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	733	600
Commercial [Member] | Commercial Mortgage [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Commercial [Member] | Commercial Mortgage [Member] | Loss [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Commercial [Member] | Commercial and Industrial [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	27,088	23,819
Commercial [Member] | Commercial and Industrial [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	26,196	22,872
Commercial [Member] | Commercial and Industrial [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	691	735
Commercial [Member] | Commercial and Industrial [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	201	212
Commercial [Member] | Commercial and Industrial [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Commercial [Member] | Commercial and Industrial [Member] | Loss [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Non-Commercial [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	317,876	311,066
Non-Commercial [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	308,325	299,875
Non-Commercial [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	8,458	9,422
Non-Commercial [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	1,093	1,769
Non-Commercial [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Non-Commercial [Member] | Loss [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Non-Commercial [Member] | Non-Commercial Construction and Land Development [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	24,005	20,801
Non-Commercial [Member] | Non-Commercial Construction and Land Development [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	24,005	20,801
Non-Commercial [Member] | Non-Commercial Construction and Land Development [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Non-Commercial [Member] | Non-Commercial Construction and Land Development [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Non-Commercial [Member] | Non-Commercial Construction and Land Development [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Non-Commercial [Member] | Non-Commercial Construction and Land Development [Member] | Loss [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Non-Commercial [Member] | Residential Mortgage [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	211,667	200,590
Non-Commercial [Member] | Residential Mortgage [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	205,955	193,235
Non-Commercial [Member] | Residential Mortgage [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	5,139	6,200
Non-Commercial [Member] | Residential Mortgage [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	573	1,155
Non-Commercial [Member] | Residential Mortgage [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Non-Commercial [Member] | Residential Mortgage [Member] | Loss [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Non-Commercial [Member] | Revolving Mortgage [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	64,591	66,870
Non-Commercial [Member] | Revolving Mortgage [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	61,266	63,479
Non-Commercial [Member] | Revolving Mortgage [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	2,878	2,829
Non-Commercial [Member] | Revolving Mortgage [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	447	562
Non-Commercial [Member] | Revolving Mortgage [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Non-Commercial [Member] | Revolving Mortgage [Member] | Loss [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Non-Commercial [Member] | Consumer [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	17,613	22,805
Non-Commercial [Member] | Consumer [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	17,099	22,360
Non-Commercial [Member] | Consumer [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	441	393
Non-Commercial [Member] | Consumer [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	73	52
Non-Commercial [Member] | Consumer [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	0	0
Non-Commercial [Member] | Consumer [Member] | Loss [Member]
Financing Receivable, Recorded Investment [Line Items]
Total loans receivable	$ 0	$ 0

XML

LOANS RECEIVABLE, by Segment, Class, and Delinquency (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	$ 811	$ 1,628
Current	612,970	602,195
Total loans receivable	613,781	603,823
Past Due 31-89 Days [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	340	699
Past Due 90 Days or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	471	929
Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	53	63
Current	295,852	292,694
Total loans receivable	295,905	292,757
Commercial [Member] | Past Due 31-89 Days [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	0	0
Commercial [Member] | Past Due 90 Days or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	53	63
Commercial [Member] | Commercial Construction and Land Development [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	0	0
Current	22,342	27,813
Total loans receivable	22,342	27,813
Commercial [Member] | Commercial Construction and Land Development [Member] | Past Due 31-89 Days [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	0	0
Commercial [Member] | Commercial Construction and Land Development [Member] | Past Due 90 Days or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	0	0
Commercial [Member] | Commercial Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	0	0
Current	246,475	241,125
Total loans receivable	246,475	241,125
Commercial [Member] | Commercial Mortgage [Member] | Past Due 31-89 Days [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	0	0
Commercial [Member] | Commercial Mortgage [Member] | Past Due 90 Days or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	0	0
Commercial [Member] | Commercial and Industrial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	53	63
Current	27,035	23,756
Total loans receivable	27,088	23,819
Commercial [Member] | Commercial and Industrial [Member] | Past Due 31-89 Days [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	0	0
Commercial [Member] | Commercial and Industrial [Member] | Past Due 90 Days or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	53	63
Non-Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	758	1,565
Current	317,118	309,501
Total loans receivable	317,876	311,066
Non-Commercial [Member] | Past Due 31-89 Days [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	340	699
Non-Commercial [Member] | Past Due 90 Days or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	418	866
Non-Commercial [Member] | Non-Commercial Construction and Land Development [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	0	0
Current	24,005	20,801
Total loans receivable	24,005	20,801
Non-Commercial [Member] | Non-Commercial Construction and Land Development [Member] | Past Due 31-89 Days [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	0	0
Non-Commercial [Member] | Non-Commercial Construction and Land Development [Member] | Past Due 90 Days or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	0	0
Non-Commercial [Member] | Residential Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	182	919
Current	211,485	199,671
Total loans receivable	211,667	200,590
Non-Commercial [Member] | Residential Mortgage [Member] | Past Due 31-89 Days [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	6	293
Non-Commercial [Member] | Residential Mortgage [Member] | Past Due 90 Days or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	176	626
Non-Commercial [Member] | Revolving Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	468	396
Current	64,123	66,474
Total loans receivable	64,591	66,870
Non-Commercial [Member] | Revolving Mortgage [Member] | Past Due 31-89 Days [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	257	156
Non-Commercial [Member] | Revolving Mortgage [Member] | Past Due 90 Days or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	211	240
Non-Commercial [Member] | Consumer [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	108	250
Current	17,505	22,555
Total loans receivable	17,613	22,805
Non-Commercial [Member] | Consumer [Member] | Past Due 31-89 Days [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	77	250
Non-Commercial [Member] | Consumer [Member] | Past Due 90 Days or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past due	$ 31	$ 0

XML

LOANS RECEIVABLE, Recorded Investment in Loans by Segment and Class Not Accruing Interest or 90 Days or More Past Due and Accruing Interest (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccruing	$ 553	$ 1,012
Past due 90 days or more and still accruing	0	0
Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccruing	53	63
Past due 90 days or more and still accruing	0	0
Commercial [Member] | Commercial and Industrial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccruing	53	63
Past due 90 days or more and still accruing	0	0
Non-Commercial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccruing	500	949
Past due 90 days or more and still accruing	0	0
Non-Commercial [Member] | Residential Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccruing	176	626
Past due 90 days or more and still accruing	0	0
Non-Commercial [Member] | Revolving Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccruing	293	323
Past due 90 days or more and still accruing	0	0
Non-Commercial [Member] | Consumer [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Nonaccruing	31	0
Past due 90 days or more and still accruing	$ 0	$ 0

XML

LOANS RECEIVABLE, Loans Serviced for Others (Details) - USD ($) $ in Millions	Jun. 30, 2017	Dec. 31, 2016
LOANS RECEIVABLE [Abstract]
Loans serviced for Habitat for Humanity of Western North Carolina	$ 16.8	$ 16.7

XML

LOANS RECEIVABLE, Loans Made to Related Parties (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2017	Dec. 31, 2016
Loans made to directors and executive officers [Roll Forward]
Director and executive officer loans, beginning of period	$ 3,356	$ 3,530
New loans	115	191
Repayments of loans	(247)	(365)
Director and executive officer loans, end of period	$ 3,224	$ 3,356

XML

ALLOWANCE FOR LOAN LOSSES, Analysis of Allowance for Loan Losses by Segment (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017		Jun. 30, 2016
Analysis of allowance for loan losses by segment [Roll Forward]
Balance at beginning of period	$ 6,573	$ 6,722	$ 6,544	[1]	$ 6,289
Provision for loan losses	75	104	132		503
Charge-offs	(43)	(260)	(96)		(268)
Recoveries	54	17	79		59
Balance at end of period	6,659	6,583	6,659		6,583
Commercial [Member]
Analysis of allowance for loan losses by segment [Roll Forward]
Balance at beginning of period	3,989	4,179	3,968		3,710
Provision for loan losses	53	26	61		490
Charge-offs	0	(224)	0		(224)
Recoveries	13	5	26		10
Balance at end of period	4,055	3,986	4,055		3,986
Non-Commercial [Member]
Analysis of allowance for loan losses by segment [Roll Forward]
Balance at beginning of period	2,584	2,543	2,576		2,579
Provision for loan losses	22	78	71		13
Charge-offs	(43)	(36)	(96)		(44)
Recoveries	41	12	53		49
Balance at end of period	$ 2,604	$ 2,597	$ 2,604		$ 2,597

[1] Derived from audited consolidated financial statements.

XML

ALLOWANCE FOR LOAN LOSSES, Ending Balances of Loans and Related Allowance by Segment and Class (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Mar. 31, 2017	Dec. 31, 2016		Jun. 30, 2016	Mar. 31, 2016	Dec. 31, 2015
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for loan losses, loans individually evaluated for impairment	$ 98		$ 119
Allowance for loan losses, loans collectively evaluated	6,561		6,425
Allowance for loan losses, total	6,659	$ 6,573	6,544	[1]	$ 6,583	$ 6,722	$ 6,289
Total loans receivable, loans individually evaluated for impairment	2,286		5,519
Total loans receivable, loans collectively evaluated	611,495		598,304
Total loans receivable	613,781		603,823
Commercial [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for loan losses, loans individually evaluated for impairment	4		14
Allowance for loan losses, loans collectively evaluated	4,051		3,954
Allowance for loan losses, total	4,055	3,989	3,968		3,986	4,179	3,710
Total loans receivable, loans individually evaluated for impairment	343		3,106
Total loans receivable, loans collectively evaluated	295,562		289,651
Total loans receivable	295,905		292,757
Commercial [Member] | Commercial Construction and Land Development [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for loan losses, loans individually evaluated for impairment	0		0
Allowance for loan losses, loans collectively evaluated	241		295
Allowance for loan losses, total	241		295
Total loans receivable, loans individually evaluated for impairment	0		0
Total loans receivable, loans collectively evaluated	22,342		27,813
Total loans receivable	22,342		27,813
Commercial [Member] | Commercial Mortgage [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for loan losses, loans individually evaluated for impairment	0		8
Allowance for loan losses, loans collectively evaluated	3,451		3,338
Allowance for loan losses, total	3,451		3,346
Total loans receivable, loans individually evaluated for impairment	142		2,894
Total loans receivable, loans collectively evaluated	246,333		238,231
Total loans receivable	246,475		241,125
Commercial [Member] | Commercial and Industrial [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for loan losses, loans individually evaluated for impairment	4		6
Allowance for loan losses, loans collectively evaluated	359		321
Allowance for loan losses, total	363		327
Total loans receivable, loans individually evaluated for impairment	201		212
Total loans receivable, loans collectively evaluated	26,887		23,607
Total loans receivable	27,088		23,819
Non-Commercial [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for loan losses, loans individually evaluated for impairment	94		105
Allowance for loan losses, loans collectively evaluated	2,510		2,471
Allowance for loan losses, total	2,604	$ 2,584	2,576		$ 2,597	$ 2,543	$ 2,579
Total loans receivable, loans individually evaluated for impairment	1,943		2,413
Total loans receivable, loans collectively evaluated	315,933		308,653
Total loans receivable	317,876		311,066
Non-Commercial [Member] | Non-Commercial Construction and Land Development [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for loan losses, loans individually evaluated for impairment	0		0
Allowance for loan losses, loans collectively evaluated	212		177
Allowance for loan losses, total	212		177
Total loans receivable, loans individually evaluated for impairment	0		0
Total loans receivable, loans collectively evaluated	24,005		20,801
Total loans receivable	24,005		20,801
Non-Commercial [Member] | Residential Mortgage [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for loan losses, loans individually evaluated for impairment	13		22
Allowance for loan losses, loans collectively evaluated	1,392		1,309
Allowance for loan losses, total	1,405		1,331
Total loans receivable, loans individually evaluated for impairment	1,605		2,172
Total loans receivable, loans collectively evaluated	210,062		198,418
Total loans receivable	211,667		200,590
Non-Commercial [Member] | Revolving Mortgage [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for loan losses, loans individually evaluated for impairment	81		83
Allowance for loan losses, loans collectively evaluated	738		767
Allowance for loan losses, total	819		850
Total loans receivable, loans individually evaluated for impairment	338		241
Total loans receivable, loans collectively evaluated	64,253		66,629
Total loans receivable	64,591		66,870
Non-Commercial [Member] | Consumer [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for loan losses, loans individually evaluated for impairment	0		0
Allowance for loan losses, loans collectively evaluated	168		218
Allowance for loan losses, total	168		218
Total loans receivable, loans individually evaluated for impairment	0		0
Total loans receivable, loans collectively evaluated	17,613		22,805
Total loans receivable	$ 17,613		$ 22,805

[1] Derived from audited consolidated financial statements.

XML

ALLOWANCE FOR LOAN LOSSES, Impaired Loans and Related Allowance by Segment and Class (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Financing Receivable, Impaired [Line Items]
Unpaid principal balance	$ 2,409	$ 5,935
Recorded investment, with a recorded allowance	937	3,709
Recorded investment, with no recorded allowance	1,349	1,810
Recorded investment, total	2,286	5,519
Related recorded allowance	98	119
Commercial [Member]
Financing Receivable, Impaired [Line Items]
Unpaid principal balance	432	3,591
Recorded investment, with a recorded allowance	148	3,043
Recorded investment, with no recorded allowance	196	63
Recorded investment, total	344	3,106
Related recorded allowance	4	14
Commercial [Member] | Commercial Mortgage [Member]
Financing Receivable, Impaired [Line Items]
Unpaid principal balance	142	2,894
Recorded investment, with a recorded allowance	0	2,894
Recorded investment, with no recorded allowance	143	0
Recorded investment, total	143	2,894
Related recorded allowance	0	8
Commercial [Member] | Commercial and Industrial [Member]
Financing Receivable, Impaired [Line Items]
Unpaid principal balance	290	697
Recorded investment, with a recorded allowance	148	149
Recorded investment, with no recorded allowance	53	63
Recorded investment, total	201	212
Related recorded allowance	4	6
Non-Commercial [Member]
Financing Receivable, Impaired [Line Items]
Unpaid principal balance	1,977	2,344
Recorded investment, with a recorded allowance	789	666
Recorded investment, with no recorded allowance	1,153	1,747
Recorded investment, total	1,942	2,413
Related recorded allowance	94	105
Non-Commercial [Member] | Residential Mortgage [Member]
Financing Receivable, Impaired [Line Items]
Unpaid principal balance	1,623	2,089
Recorded investment, with a recorded allowance	708	583
Recorded investment, with no recorded allowance	896	1,589
Recorded investment, total	1,604	2,172
Related recorded allowance	13	22
Non-Commercial [Member] | Revolving Mortgage [Member]
Financing Receivable, Impaired [Line Items]
Unpaid principal balance	354	255
Recorded investment, with a recorded allowance	81	83
Recorded investment, with no recorded allowance	257	158
Recorded investment, total	338	241
Related recorded allowance	$ 81	$ 83

XML

ALLOWANCE FOR LOAN LOSSES, Average Recorded Investment in Impaired Loans and Interest Income Recognized on Impaired Loans (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Financing Receivable, Impaired [Line Items]
Average recorded investment	$ 2,201	$ 6,778	$ 3,757	$ 6,888
Interest income recognized	16	46	62	92
Commercial [Member]
Financing Receivable, Impaired [Line Items]
Average recorded investment	250	3,696	1,668	3,857
Interest income recognized	3	32	36	64
Commercial [Member] | Commercial Construction and Land Development [Member]
Financing Receivable, Impaired [Line Items]
Average recorded investment	0	126	0	126
Interest income recognized	0	0	0	0
Commercial [Member] | Commercial Mortgage [Member]
Financing Receivable, Impaired [Line Items]
Average recorded investment	48	3,344	1,463	3,496
Interest income recognized	1	32	32	64
Commercial [Member] | Commercial and Industrial [Member]
Financing Receivable, Impaired [Line Items]
Average recorded investment	202	226	205	235
Interest income recognized	2	0	4	0
Non-Commercial [Member]
Financing Receivable, Impaired [Line Items]
Average recorded investment	1,951	3,082	2,089	3,031
Interest income recognized	13	14	26	28
Non-Commercial [Member] | Residential Mortgage [Member]
Financing Receivable, Impaired [Line Items]
Average recorded investment	1,612	2,997	1,769	2,942
Interest income recognized	13	14	26	28
Non-Commercial [Member] | Revolving Mortgage [Member]
Financing Receivable, Impaired [Line Items]
Average recorded investment	339	85	320	89
Interest income recognized	$ 0	$ 0	$ 0	$ 0

XML

ALLOWANCE FOR LOAN LOSSES, Summary of Recorded Investment in TDRs (Details) - Loan	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
ALLOWANCE FOR LOAN LOSSES [Abstract]
Loans modified as TDRs within the preceding 12 months that stopped performing during the period	0	0	0	0

XML

ALLOWANCE FOR LOAN LOSSES, Loans that were Considered to be TDRs (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Financing Receivable, Modifications [Line Items]
Restructured loans	$ 1,587	$ 4,556
Residential real estate loans in process of foreclosure	119	496
Foreclosed residential real estate property included in foreclosed real estate	930	953
Nonperforming [Member]
Financing Receivable, Modifications [Line Items]
Restructured loans	11	13
Performing [Member]
Financing Receivable, Modifications [Line Items]
Restructured loans	$ 1,576	$ 4,543

XML

BENEFIT PLANS, Net Periodic Benefit Cost Related to Defined Benefit Plans (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Defined Benefit Plan Disclosure [Line Items]
Settlement expense	$ 200		$ 200
Non-Qualified Defined Benefit Plan [Member]
Components of Net Periodic Benefit Costs [Abstract]
Interest cost	6	$ 14	13	$ 28
Amortization of net loss	60	11	118	23
Net periodic pension cost	66	25	131	51
Qualified Defined Benefit Plan [Member]
Components of Net Periodic Benefit Costs [Abstract]
Interest cost	0	237	0	472
Expected return on plan assets	0	(202)	0	(401)
Amortization of net loss	0	163	0	324
Net periodic pension cost	$ 0	$ 198	$ 0	$ 395

XML

BENEFIT PLANS, Employee Stock Ownership Plan (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2016
Shares held by ESOP [Abstract]
ESOP expense			$ 640	$ 387
Employee Stock Ownership Plan [Member]
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items]
ESOP loan amount			$ 4,468
Number of shares purchased (in shares)			446,764
Common stock purchase price (in dollars per share)			$ 10.00
Interest rate on loan	3.25%		3.25%
Term of loan			15 years
Shares held by ESOP [Abstract]
Allocated ESOP shares (in shares)					141,710
ESOP shares committed to be released during the period (in shares)	15,565		15,565
ESOP shares withdrawn during the period (in shares)	(7,792)		(7,792)
Unallocated ESOP shares (in shares)	266,914		266,914
Total ESOP shares (in shares)	416,397		416,397
Fair value of unallocated ESOP shares	$ 11,731		$ 11,731
ESOP expense	$ 372	$ 194	$ 640	$ 387

XML

BENEFIT PLANS, 2012 Equity Incentive Plan (Details) - 2012 Equity Incentive Plan [Member] - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2012
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Maximum number of shares that may be awarded (in shares)	781,837		781,837
Number of shares purchased (in shares)					223,382
Total cost of shares purchased					$ 3,600
Average cost of shares purchased (in dollars per share)					$ 16.12
Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Maximum number of shares that may be awarded (in shares)	223,382		223,382
Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Maximum number of shares that may be awarded (in shares)	558,455		558,455
Restricted Stock and Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share based compensation expense	$ 263	$ 262	$ 527	$ 529

XML

BENEFIT PLANS, Restricted Stock Award Activity (Details) - Restricted Stock [Member] - USD ($) $ / shares in Units, $ in Thousands	6 Months Ended		12 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2016
Restricted Stock Awards, Number of Shares [Roll Forward]
Unvested restricted shares, beginning of period (in shares)	81,313	121,610	121,610
Vested and released to participants (in shares)	(40,296)		(40,297)
Unvested restricted shares, end of period (in shares)	41,017		81,313
Restricted Stock Awards, Weighted Average Grant Date Fair Value [Roll Forward]
Unvested restricted shares, beginning of period (in dollars per share)	$ 15.75	$ 15.75	$ 15.75
Vested and released to participants (in dollars per share)	15.74		15.74
Unvested restricted shares, end of period (in dollars per share)	$ 15.78		$ 15.75
Granted (in shares)	0	0
Forfeited (in shares)	0	0
Compensation Cost Not Yet Recognized [Abstract]
Unrecognized compensation expense, adjusted for expected forfeitures	$ 380
Weighted-average period over which compensation cost related to unvested awards is expected to be recognized	7 months 28 days

XML

BENEFIT PLANS, Stock Option Activity (Details) - Stock Option [Member] - USD ($) $ / shares in Units, $ in Thousands	6 Months Ended		12 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2016	Dec. 31, 2015
Stock Options Available for Granting [Roll Forward]
Outstanding, beginning of period (in shares)	60,355	60,355	60,355
Exercised (in shares)			0
Outstanding, end of period (in shares)	60,355		60,355	60,355
Stock Options Outstanding [Roll Forward]
Outstanding, beginning of period (in shares)	443,900	450,500	450,500
Exercised (in shares)	0	(5,000)	(6,600)
Outstanding, end of period (in shares)	443,900		443,900	450,500
Options exercisable, end of period (in shares)	339,400
Stock Options Outstanding, Weighted Average Exercise Price [Abstract]
Outstanding, beginning of period (in dollars per share)	$ 16.04	$ 16.03	$ 16.03
Exercised (in dollars per share)			15.71
Outstanding, end of period (in dollars per share)	16.04		$ 16.04	$ 16.03
Options exercisable, end of period (in dollars per share)	$ 15.92
Stock Options Outstanding, Remaining Contractual Life [Abstract]
Outstanding	5 years 9 months		6 years 2 months 26 days	7 years 2 months 26 days
Options exercisable	5 years 8 months 12 days
Stock Options Outstanding, Aggregate Intrinsic Value [Abstract]
Outstanding	$ 12,392		$ 6,089	$ 4,473
Options exercisable	$ 9,514
Granted (in shares)	0	0
Forfeited (in shares)	0	0
Compensation Cost Not Yet Recognized [Abstract]
Unrecognized compensation expense	$ 331
Weighted-average period over which compensation cost related to unvested awards is expected to be recognized	1 year 22 days

XML

COMMITMENTS AND CONTINGENCIES, Commitments to Extend or Originate Credit and Under Standby Letters of Credit (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Financial instruments whose contract amounts represent credit risk [Abstract]
Commitments	$ 196,392	$ 190,817
Commitments to Extend or Originate Credit [Member]
Financial instruments whose contract amounts represent credit risk [Abstract]
Commitments	196,229	190,213
Commitments under Standby Letters of Credit [Member]
Financial instruments whose contract amounts represent credit risk [Abstract]
Commitments	$ 163	$ 604

XML

COMMITMENTS AND CONTINGENCIES, Concentrations of Credit Risk and Investment Commitments (Details) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2017 Lawsuit	Dec. 31, 2016 USD ($)	Dec. 31, 2015 USD ($)	Dec. 31, 2014 USD ($)	Dec. 31, 2013 USD ($)	Dec. 31, 2012 USD ($)
Loss contingency [Abstract]
Number of lawsuits filed | Lawsuit	2
Investment commitments						$ 2,000
Investment		$ 300	$ 200	$ 250	$ 350
Product Concentration Risk [Member] | Residential Mortgage [Member] | Residential Real Estate [Member] | Maximum [Member]
Concentration Risk [Line Items]
Percentage of loan to value of real estate pledged as collateral	80.00%
Percentage of loan to value of real estate with private mortgage insurance	95.00%
Product Concentration Risk [Member] | Commercial Mortgage [Member] | Commercial Real Estate [Member] | Maximum [Member]
Concentration Risk [Line Items]
Percentage of loan to value of real estate pledged as collateral	85.00%

XML

FAIR VALUE MEASUREMENTS, Estimated Fair Values and Carrying Amounts of Financial Instruments (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Financial assets [Abstract]
Securities available for sale	$ 95,935	$ 99,909	[1]
Securities held to maturity	3,615	3,672	[1]
Estimated Fair Value [Member]
Financial assets [Abstract]
Cash and cash equivalents	53,311	46,724
Securities available for sale	95,935	99,909
Securities held to maturity	3,782	3,875
Investments in FHLB stock	1,566	2,829
Loans held for sale	4,201	7,299
Loans receivable, net	604,515	595,305
Accrued interest receivable	2,272	2,328
Deferred compensation assets	1,449	1,426
Financial liabilities [Abstract]
Demand deposits	540,972	516,125
Time deposits	135,318	130,397
Repurchase agreements	311	392
Federal Home Loan Bank Advances	20,291	50,717
Deferred compensation liabilities	1,452	1,430
Accrued interest payable	66	120
Estimated Fair Value [Member] | Commitments to Extend or Originate Credit [Member]
Financial instruments whose contract amounts represent credit risk [Abstract]
Commitments	0	0
Estimated Fair Value [Member] | Commitments under Standby Letters of Credit [Member]
Financial instruments whose contract amounts represent credit risk [Abstract]
Commitments	0	0
Estimated Fair Value [Member] | Level 1 [Member]
Financial assets [Abstract]
Cash and cash equivalents	53,311	46,724
Securities available for sale	775	763
Securities held to maturity	0	0
Investments in FHLB stock	0	0
Loans held for sale	0	0
Loans receivable, net	0	0
Accrued interest receivable	0	0
Deferred compensation assets	1,449	1,426
Financial liabilities [Abstract]
Demand deposits	0	0
Time deposits	0	0
Repurchase agreements	0	0
Federal Home Loan Bank Advances	0	0
Deferred compensation liabilities	1,452	1,430
Accrued interest payable	0	0
Estimated Fair Value [Member] | Level 1 [Member] | Commitments to Extend or Originate Credit [Member]
Financial instruments whose contract amounts represent credit risk [Abstract]
Commitments	0	0
Estimated Fair Value [Member] | Level 1 [Member] | Commitments under Standby Letters of Credit [Member]
Financial instruments whose contract amounts represent credit risk [Abstract]
Commitments	0	0
Estimated Fair Value [Member] | Level 2 [Member]
Financial assets [Abstract]
Cash and cash equivalents	0	0
Securities available for sale	95,160	99,146
Securities held to maturity	3,782	3,875
Investments in FHLB stock	0	0
Loans held for sale	4,201	7,299
Loans receivable, net	0	0
Accrued interest receivable	0	0
Deferred compensation assets	0	0
Financial liabilities [Abstract]
Demand deposits	0	0
Time deposits	0	0
Repurchase agreements	0	0
Federal Home Loan Bank Advances	0	0
Deferred compensation liabilities	0	0
Accrued interest payable	0	0
Estimated Fair Value [Member] | Level 2 [Member] | Commitments to Extend or Originate Credit [Member]
Financial instruments whose contract amounts represent credit risk [Abstract]
Commitments	0	0
Estimated Fair Value [Member] | Level 2 [Member] | Commitments under Standby Letters of Credit [Member]
Financial instruments whose contract amounts represent credit risk [Abstract]
Commitments	0	0
Estimated Fair Value [Member] | Level 3 [Member]
Financial assets [Abstract]
Cash and cash equivalents	0	0
Securities available for sale	0	0
Securities held to maturity	0	0
Investments in FHLB stock	1,566	2,829
Loans held for sale	0	0
Loans receivable, net	604,515	595,305
Accrued interest receivable	2,272	2,328
Deferred compensation assets	0	0
Financial liabilities [Abstract]
Demand deposits	540,972	516,125
Time deposits	135,318	130,397
Repurchase agreements	311	392
Federal Home Loan Bank Advances	20,291	50,717
Deferred compensation liabilities	0	0
Accrued interest payable	66	120
Estimated Fair Value [Member] | Level 3 [Member] | Commitments to Extend or Originate Credit [Member]
Financial instruments whose contract amounts represent credit risk [Abstract]
Commitments	0	0
Estimated Fair Value [Member] | Level 3 [Member] | Commitments under Standby Letters of Credit [Member]
Financial instruments whose contract amounts represent credit risk [Abstract]
Commitments	0	0
Total Carrying Amount in Balance Sheet [Member]
Financial assets [Abstract]
Cash and cash equivalents	53,311	46,724
Securities available for sale	95,935	99,909
Securities held to maturity	3,615	3,672
Investments in FHLB stock	1,566	2,829
Loans held for sale	4,097	7,145
Loans receivable, net	606,944	597,038
Accrued interest receivable	2,272	2,328
Deferred compensation assets	1,449	1,426
Financial liabilities [Abstract]
Demand deposits	540,972	516,125
Time deposits	136,475	131,498
Repurchase agreements	311	392
Federal Home Loan Bank Advances	20,000	50,000
Deferred compensation liabilities	1,452	1,430
Accrued interest payable	66	120
Total Carrying Amount in Balance Sheet [Member] | Commitments to Extend or Originate Credit [Member]
Financial instruments whose contract amounts represent credit risk [Abstract]
Commitments	0	0
Total Carrying Amount in Balance Sheet [Member] | Commitments under Standby Letters of Credit [Member]
Financial instruments whose contract amounts represent credit risk [Abstract]
Commitments	$ 0	$ 0

[1] Derived from audited consolidated financial statements.

XML

FAIR VALUE MEASUREMENTS, Assets and Liabilities Recorded at Fair Value On a Recurring Basis (Details) - USD ($) $ in Thousands		Jun. 30, 2017	Dec. 31, 2016
Securities available for sale [Abstract]
Securities available for sale		$ 95,935	$ 99,909	[1]
Asset-backed SBA Securities [Member]
Securities available for sale [Abstract]
Securities available for sale		3,770	4,413
Residential Mortgage-backed Securities Issued by GSEs [Member]
Securities available for sale [Abstract]
Securities available for sale	[2]	35,729	39,974
Mutual Funds [Member]
Securities available for sale [Abstract]
Securities available for sale		775	763
Assets/ Liabilities Measured at Fair Value [Member]
Securities available for sale [Abstract]
Securities available for sale		95,935	99,909
Assets/ Liabilities Measured at Fair Value [Member] | Level 1 [Member]
Securities available for sale [Abstract]
Securities available for sale		775	763
Assets/ Liabilities Measured at Fair Value [Member] | Level 2 [Member]
Securities available for sale [Abstract]
Securities available for sale		95,160	99,146
Assets/ Liabilities Measured at Fair Value [Member] | Level 3 [Member]
Securities available for sale [Abstract]
Securities available for sale		0	0
Total Carrying Amount in Balance Sheets [Member]
Securities available for sale [Abstract]
Securities available for sale		95,935	99,909
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member]
Securities available for sale [Abstract]
Securities available for sale		95,935	99,909
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | U.S. GSE and Agency Securities [Member]
Securities available for sale [Abstract]
Securities available for sale		2,070	2,089
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Asset-backed SBA Securities [Member]
Securities available for sale [Abstract]
Securities available for sale		3,770	4,413
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Residential Mortgage-backed Securities Issued by GSEs [Member]
Securities available for sale [Abstract]
Securities available for sale		35,729	39,974
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | State and Local Government Securities [Member]
Securities available for sale [Abstract]
Securities available for sale		53,591	52,670
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Mutual Funds [Member]
Securities available for sale [Abstract]
Securities available for sale		775	763
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 1 [Member]
Securities available for sale [Abstract]
Securities available for sale		775	763
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 1 [Member] | U.S. GSE and Agency Securities [Member]
Securities available for sale [Abstract]
Securities available for sale		0	0
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 1 [Member] | Asset-backed SBA Securities [Member]
Securities available for sale [Abstract]
Securities available for sale		0	0
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 1 [Member] | Residential Mortgage-backed Securities Issued by GSEs [Member]
Securities available for sale [Abstract]
Securities available for sale		0	0
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 1 [Member] | State and Local Government Securities [Member]
Securities available for sale [Abstract]
Securities available for sale		0	0
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 1 [Member] | Mutual Funds [Member]
Securities available for sale [Abstract]
Securities available for sale		775	763
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 2 [Member]
Securities available for sale [Abstract]
Securities available for sale		95,160	99,146
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 2 [Member] | U.S. GSE and Agency Securities [Member]
Securities available for sale [Abstract]
Securities available for sale		2,070	2,089
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 2 [Member] | Asset-backed SBA Securities [Member]
Securities available for sale [Abstract]
Securities available for sale		3,770	4,413
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 2 [Member] | Residential Mortgage-backed Securities Issued by GSEs [Member]
Securities available for sale [Abstract]
Securities available for sale		35,729	39,974
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 2 [Member] | State and Local Government Securities [Member]
Securities available for sale [Abstract]
Securities available for sale		53,591	52,670
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 2 [Member] | Mutual Funds [Member]
Securities available for sale [Abstract]
Securities available for sale		0	0
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 3 [Member]
Securities available for sale [Abstract]
Securities available for sale		0	0
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 3 [Member] | U.S. GSE and Agency Securities [Member]
Securities available for sale [Abstract]
Securities available for sale		0	0
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 3 [Member] | Asset-backed SBA Securities [Member]
Securities available for sale [Abstract]
Securities available for sale		0	0
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 3 [Member] | Residential Mortgage-backed Securities Issued by GSEs [Member]
Securities available for sale [Abstract]
Securities available for sale		0	0
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 3 [Member] | State and Local Government Securities [Member]
Securities available for sale [Abstract]
Securities available for sale		0	0
Fair Value, Measurements, Recurring [Member] | Assets/ Liabilities Measured at Fair Value [Member] | Level 3 [Member] | Mutual Funds [Member]
Securities available for sale [Abstract]
Securities available for sale		0	0
Fair Value, Measurements, Recurring [Member] | Total Carrying Amount in Balance Sheets [Member]
Securities available for sale [Abstract]
Securities available for sale		95,935	99,909
Fair Value, Measurements, Recurring [Member] | Total Carrying Amount in Balance Sheets [Member] | U.S. GSE and Agency Securities [Member]
Securities available for sale [Abstract]
Securities available for sale		2,070	2,089
Fair Value, Measurements, Recurring [Member] | Total Carrying Amount in Balance Sheets [Member] | Asset-backed SBA Securities [Member]
Securities available for sale [Abstract]
Securities available for sale		3,770	4,413
Fair Value, Measurements, Recurring [Member] | Total Carrying Amount in Balance Sheets [Member] | Residential Mortgage-backed Securities Issued by GSEs [Member]
Securities available for sale [Abstract]
Securities available for sale		35,729	39,974
Fair Value, Measurements, Recurring [Member] | Total Carrying Amount in Balance Sheets [Member] | State and Local Government Securities [Member]
Securities available for sale [Abstract]
Securities available for sale		53,591	52,670
Fair Value, Measurements, Recurring [Member] | Total Carrying Amount in Balance Sheets [Member] | Mutual Funds [Member]
Securities available for sale [Abstract]
Securities available for sale		$ 775	$ 763

[1] Derived from audited consolidated financial statements.

[2] Residential mortgage-backed securities were issued by United States government sponsored enterprises including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company held no private label residential mortgage-backed securities at June 30, 2017 and December 31, 2016 or during the six- and twelve-month periods, respectively, then ended.

XML

FAIR VALUE MEASUREMENTS, Assets and Liabilities Recorded at Fair Value on Nonrecurring Basis (Details) - Fair Value, Measurements, Nonrecurring [Member] - USD ($) $ in Thousands		Jun. 30, 2017	Dec. 31, 2016
Assets/ Liabilities Measured at Fair Value [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Impaired loans	[1]	$ 400	$ 595
Foreclosed properties	[1]	1,768	1,806
Assets/ Liabilities Measured at Fair Value [Member] | Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Impaired loans		0	0
Foreclosed properties		0	0
Assets/ Liabilities Measured at Fair Value [Member] | Level 2 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Impaired loans		0	0
Foreclosed properties		0	0
Assets/ Liabilities Measured at Fair Value [Member] | Level 3 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Impaired loans		400	595
Foreclosed properties		1,768	1,806
Total Carrying Amount in Balance Sheets [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Impaired loans	[1]	400	595
Foreclosed properties	[1]	$ 1,768	$ 1,806

[1] Properties recorded at cost and not market are excluded.

XML

FAIR VALUE MEASUREMENTS, Quantitative Information about Financial and Nonfinancial Assets Measured at Fair Value on Nonrecurring (Details) - Level 3 [Member] - USD ($) $ in Thousands		6 Months Ended	12 Months Ended
		Jun. 30, 2017	Dec. 31, 2016
Impaired Loans [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair value	[1]	$ 404	$ 595
Foreclosed Properties [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair value	[1]	$ 1,768	$ 1,806
Discounted Appraisals [Member] | Impaired Loans [Member] | Minimum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Collateral discounts	[2],[3]	0.00%	0.00%
Discounted Appraisals [Member] | Impaired Loans [Member] | Maximum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Collateral discounts	[2],[3]	25.00%	36.00%
Discounted Appraisals [Member] | Impaired Loans [Member] | Weighted Average [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Collateral discounts	[2],[3]	19.00%	23.00%
Discounted Appraisals [Member] | Foreclosed Properties [Member] | Minimum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Collateral discounts	[2],[3]	0.00%	0.00%
Discounted Appraisals [Member] | Foreclosed Properties [Member] | Maximum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Collateral discounts	[2],[3]	22.00%	22.00%
Discounted Appraisals [Member] | Foreclosed Properties [Member] | Weighted Average [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Collateral discounts	[2],[3]	7.00%	6.00%

[1] Properties recorded at cost and not market are excluded.

[2] Appraisals of collateral may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments.

[3] Fair value is generally based on appraisals of the underlying collateral.

XML

BUSINESS COMBINATIONS (Details) - First Bancorp [Member] - USD ($) $ / shares in Units, $ in Millions		6 Months Ended
	May 01, 2017	Jun. 30, 2017
Business Acquisition [Line Items]
Aggregate merger consideration	$ 175	$ 181
Aggregate merger consideration (in dollars per share)	$ 43.12	$ 44.70
Number of shares of common stock of acquiring entity to be received for each share of common stock (in shares)	1.44
Cash payment to be received for each share of common stock (in dollars per share)	$ 41.90
Percentage of outstanding shares of common stock to be exchanged for cash	10.00%
Percentage of outstanding shares of common stock to be exchanged for shares of common stock of acquiring entity	90.00%
Maximum [Member]
Business Acquisition [Line Items]
Percentage of common stock of acquirer to be issued to shareholders of acquiree in merger consideration	19.90%