10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q/A

Amendment No. 1

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

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  x

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  x    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	x  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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

As of September 16, 2011, there were no shares of the Registrant’s common stock outstanding.

Explanatory Note

The purpose of this Amendment No. 1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, initially filed with the Securities and Exchange Commission on September 23, 2011 (the “Form 10-Q”), is to furnish Exhibit 101 to the Form 10-Q as required by Rule 405 of Regulation S-T. Exhibit 101 to this report provides the following items from the Form 10-Q formatted in eXtensible Business Reporting Language (XBRL): (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 Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements, tagged as blocks of text.

No other changes have been made to the Form 10-Q. This Amendment No. 1 to the Form 10-Q speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-Q.

PART II. OTHER INFORMATION

Item 6. Exhibits

3.1	Articles of Incorporation of ASB Bancorp, Inc. *
3.2	Bylaws of ASB Bancorp, Inc. *
4.1	Form of Common Stock Certificate of ASB Bancorp, Inc. *
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, 2011, 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 Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements, tagged as blocks of text. **

* Previously filed.

** Furnished, not filed.

2

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
October 14, 2011	By:	/s/ Suzanne S. DeFerie
		Suzanne S. DeFerie
		President and Chief Executive Officer
		(Principal Executive Officer)
October 14, 2011	By:	/s/ Kirby A. Tyndall
		Kirby A. Tyndall
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

3

XML

Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands	Jun. 30, 2011	Dec. 31, 2010
Consolidated Balance Sheets
Amortized cost of securities available for sale	$ 218,769	$ 176,193
Fair value of securities held to maturity	5,908	6,198
Deferred loan fees on loans receivable	432	420
Loss reserves on foreclosed real estate	$ 1,712	$ 1,299

XML

Consolidated Statements Of Income (Loss) (USD $) In Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Interest and dividend income
Loans, including fees	$ 6,094	$ 7,366	$ 12,287	$ 15,094
Securities	1,387	1,028	2,557	1,962
Other earning assets	21	15	40	31
Total interest and dividend income	7,502	8,409	14,884	17,087
Interest expense
Deposits	1,601	2,332	3,307	4,786
Overnight and short-term borrowings	2	1	4	2
Federal Home Loan Bank advances	602	602	1,198	1,198
Total interest expense	2,205	2,935	4,509	5,986
Net interest income	5,297	5,474	10,375	11,101
Provision for loan losses	424	2,612	1,081	4,471
Net interest income after provision for loan losses	4,873	2,862	9,294	6,630
Noninterest income
Mortgage banking income	161	325	528	535
Deposit and other service charge income	875	982	1,721	1,924
Income from debit card services	318	303	613	565
Gain on sale of investment securities	223	294	223	780
Other noninterest income	351	180	523	338
Total noninterest income	1,928	2,084	3,608	4,142
Noninterest expenses
Salaries and employee benefits	2,526	2,253	5,056	4,837
Occupancy expense, net	775	786	1,528	1,547
Foreclosed property expenses	542	141	634	160
Data processing fees	401	374	819	726
Federal deposit insurance premiums	256	289	510	542
Advertising	259	183	398	425
Professional and outside services	175	197	413	355
Other noninterest expenses	696	857	1,504	1,642
Total noninterest expenses	5,630	5,080	10,862	10,234
Income (loss) before income tax provision	1,171	(134)	2,040	538
Income tax provision (benefit)	429	(48)	713	194
Net income (loss)	$ 742	$ (86)	$ 1,327	$ 344

XML

Document And Entity Information	6 Months Ended
	Jun. 30, 2011	Sep. 16, 2011
Document And Entity Information
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2
Entity Registrant Name	ASB Bancorp Inc
Entity Central Index Key	0001520300
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		0

XML

Allowance For Loan Losses

6 Months Ended

Jun. 30, 2011

Allowance For Loan Losses

Allowance For Loan Losses

5. ALLOWANCE FOR LOAN LOSSES

An analysis of the allowance for loan losses follows:

(in thousands)	Three Months Ended June  30, 2010			Six Months Ended June 30, 2010
Balance at beginning of period	$	9,074		$	8,994
Provision for loan losses		2,612			4,471
Charge-offs		(1,621	)		(3,438	)
Recoveries		32			70
Balance at end of period	$	10,097		$	10,097

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

	Three Months Ended June 30, 2011									Six Months Ended June 30, 2011
(in thousands)	Commercial			Non- Commercial			Total			Commercial			Non- Commercial			Total
Balance at beginning of period	$	7,695		$	4,937		$	12,632		$	7,658		$	5,018		$	12,676
Provision for loan losses		465			(41	)		424			636			445			1,081
Charge-offs		(569	)		(212	)		(781	)		(770	)		(815	)		(1,585	)
Recoveries		17			61			78			84			97			181
Balance at end of period	$	7,608		$	4,745		$	12,353		$	7,608		$	4,745		$	12,353

The Bank's ending balances of loans and the related allowance, by segment and class, follows:

	Allowance for Loan Losses						Total Loans Receivable
(in thousands)	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated		Total		Loans Individually Evaluated for Impairment		Loans Collectively Evaluated		Total
June 30, 2011
Commercial:
Commercial construction and land development	$	561	$	1,114	$	1,675	$	16,009	$	9,937	$	25,946
Commercial mortgage		70		4,715		4,785		2,448		154,317		156,765
Commercial and industrial		508		434		942		1,288		14,897		16,185
Total commercial		1,139		6,263		7,402		19,745		179,151		198,896
Non-commercial:
Non-commercial construction and land development		639		117		756		2,581		4,375		6,956
Residential mortgage		337		1,762		2,099		6,028		169,909		175,937
Revolving mortgage		—		1,080		1,080		—		51,892		51,892
Consumer		—		810		810		—		34,337		34,337
Total non-commercial		976		3,769		4,745		8,609		260,513		269,122
Unallocated						206
Total loans receivable	$	2,115	$	10,032	$	12,353	$	28,354	$	439,664	$	468,018
December 31, 2010
Commercial:
Commercial construction and land development	$	242	$	990	$	1,232	$	16,765	$	11,708	$	28,473
Commercial mortgage		717		4,769		5,486		6,235		158,318		164,553
Commercial and industrial		366		416		782		1,351		16,305		17,656
Total commercial		1,325		6,175		7,500		24,351		186,331		210,682
Non-commercial:
Non-commercial construction and land development		553		196		749		2,601		6,069		8,670
Residential mortgage		449		1,758		2,207		7,290		173,149		180,439
Revolving mortgage		—		1,021		1,021		—		53,432		53,432
Consumer		—		1,041		1,041		—		47,212		47,212
Total non-commercial		1,002		4,016		5,018		9,891		279,862		289,753
Unallocated						158
Total loans receivable	$	2,327	$	10,191	$	12,676	$	34,242	$	466,193	$	500,435

The Bank's impaired loans and the related allowance, by segment and class, follows:

			Recorded Investment
(in thousands)	Unpaid Principal Balance		With a Recorded Allowance		With No Recorded Allowance		Total		Related Recorded Allowance
June 30, 2011
Commercial:
Commercial construction and land development	$	17,986	$	2,791	$	13,218	$	16,009	$	561
Commercial mortgage		3,703		521		1,927		2,448		70
Commercial and										—
industrial		1,512		1,288		—		1,288		508
Total commercial		23,201		4,600		15,145		19,745		1,139
Non-commercial:
Non-commercial										—
construction and										—
land development		2,695		2,466		115		2,581		639
Residential mortgage		6,751		4,002		2,026		6,028		337
Total non-commercial		9,446		6,468		2,141		8,609		976
Total impaired loans	$	32,647	$	11,068	$	17,286	$	28,354	$	2,115
December 31, 2010
Commercial:
Commercial construction and land development	$	19,115	$	3,992	$	12,773	$	16,765	$	242
Commercial mortgage		7,758		3,448		2,787		6,235		717
Commercial and										—
industrial		1,709		1,000		351		1,351		366
Total commercial		28,582		8,440		15,911		24,351		1,325
Non-commercial:
Non-commercial										—
construction and										—
land development		2,696		2,601		—		2,601		553
Residential mortgage		7,673		3,807		3,483		7,290		449
Total non-commercial		10,369		6,408		3,483		9,891		1,002
Total impaired loans	$	38,951	$	14,848	$	19,394	$	34,242	$	2,327

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

	Three Months Ended June 30, 2011				Six Months Ended June 30, 2011				Twelve Months Ended December 31, 2010
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial:
Commercial construction and land development	$	16,215	$	96	$	16,406	$	192	$	17,171	$	195
Commercial mortgage		5,010		26		6,658		58		12,674		322
Commercial and industrial		1,289		3		1,299		11		1,477		67
Total commercial		22,514		125		24,363		261		31,322		584
Non-commercial:
Non-commercial construction and land development		2,582		20		2,589		39		1,414		32
Residential mortgage		6,097		46		6,263		78		7,967		236
Revolving mortgage		17		—		8		—		33		16
Total non-commercial		8,696		66		8,860		117		9,414		284
Total loans receivable	$	31,210	$	191	$	33,223	$	378	$	40,736	$	868

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2011		2010		2011		2010
Average recorded investment in impaired loans	$	31,210	$	42,018	$	33,223	$	41,773
Interest income recognized on impaired loans	$	191	$	273	$	378	$	652

The Bank's loans that were performing under the terms of troubled debt restructurings that were excluded from nonaccruing loans above follow:

(in thousands)	June 30, 2011		December 31, 2010
Performing restructured loans included in impaired loans	$	11,377	$	15,233

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Fair Value Measurements

6 Months Ended

Jun. 30, 2011

Fair Value Measurements

Fair Value Measurements

10. 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 further down in this note. 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. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest, Federal Home Loan Bank Stock and demand deposits. The methodologies for other financial assets and financial liabilities are discussed below:

The carrying amount and estimated fair values of financial instruments follows:

	June 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
(in thousands)	amount		fair value		amount		fair value
Financial assets:
Cash and cash equivalents	$	25,825	$	25,825	$	24,234	$	24,234
Investment securities
Available for sale		220,254		220,254		175,445		175,445
Held to maturity		5,548		5,908		5,948		6,198
Investments held at cost		3,921		3,921		3,970		3,970
Loans held for sale		3,794		3,794		8,386		8,386
Loans receivable, net		455,246		461,386		487,327		491,205
Accrued interest receivable		2,692		2,692		2,519		2,519
Deferred compensation assets		1,432		1,432		1,341		1,341
Financial liabilities:
Demand deposits		338,874		338,874		332,354		332,354
Time deposits		277,589		279,042		287,403		289,881
Advances from Federal Home Loan Bank		60,000		64,978		60,000		64,048
Repurchase agreements		1,040		1,034		1,008		999
Deferred compensation liabilities		1,432		1,432		1,341		1,341
Accrued interest payable		164		164		170		170
Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit		—		—		—		—
Commitments under standby letters of credit		—		—		—		—

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 Bank's entire holdings of a particular financial instrument. Because no highly liquid market exists for a significant portion of the Bank'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. Changes in assumptions could significantly affect the estimates. Estimated fair values were determined as follows:

Investment Securities – Fair values are obtained from a pricing service that uses matrix pricing which are based on quoted prices for securities with similar coupons, ratings, and maturities.

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.

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 the Bank on a "best efforts" basis to buy the loans.

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.

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

Advances from Federal Home Loan Bank – 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.

The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2011 and December 31, 2010. 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 date of these financial statements and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

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

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, corporate debt securities, and residential mortgage 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, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is 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 the Bank's investments in mutual funds are determined by quoted prices and are included as recurring Level 1 assets. The fair values of the Bank's investments in securities issued by U.S. GSE's, asset-backed securities issued by the SBA, residential mortgage-backed securities issued by U.S. GSE's, securities issued by state and local governments, and trust preferred securities 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.

Defined Benefit Plan Assets

The Bank's Nonqualified Defined Benefit Plan had no plan assets because it was not funded. The assets of the Bank's Qualified Defined Benefit Plan, which are invested in interest-bearing depository accounts and money market and debt 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 and debt security mutual funds are determined by quoted prices and are included as recurring Level 1 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 the Bank on a "best efforts" basis to buy the loans. As such, the Bank classifies its mortgages held for sale as nonrecurring Level 2 assets.

Loans

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, and 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 were 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 Bank records the impaired loan 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.

Foreclosed Properties

The Bank's 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. The Bank records its foreclosed properties as nonrecurring Level 3 assets.

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:

(in thousands)	Fair Value Measurement Using						Total
							Carrying
							Amount in		Assets/
							Statement		Liabilities
							of Financial		Measured at
Description	Level 1		Level 2		Level 3		Position		Fair Value
June 30, 2011
Securities available for sale:
U.S. GSE and agency securities	$	—	$	69,137	$	—	$	69,137	$	69,137
Asset-backed SBA securities		—		22,687		—		22,687		22,687
Residential mortgage-backed securities issued by GSE's		—		122,063		—		122,063		122,063
State and local government securities		—		5,682		—		5,682		5,682
Mutual funds		685		—		—		685		685
Total	$	685	$	219,569	$	—	$	220,254	$	220,254
Defined benefit plan assets:
Cash and cash equivalents	$	639	$	—	$	—
Money market mutual funds		264		—		—
Debt security mutual funds		16,359		—		—
Total	$	17,262	$	—	$	—
December 31, 2010
Securities available for sale:
U.S. GSE and agency securities	$	—	$	50,042	$	—	$	50,042	$	50,042
Asset-backed SBA securities		—		16,039		—		16,039		16,039
Residential mortgage-backed securities issued by GSE's		—		105,410		—		105,410		105,410
State and local government securities		—		3,287		—		3,287		3,287
Mutual funds		667		—		—		667		667
Total	$	667	$	174,778	$	—	$	175,445	$	175,445
Defined benefit plan assets:
Cash and cash equivalents	$	148	$	—	$	—
Money market mutual funds		241		—		—
Debt security mutual funds		16,845		—		—
Total	$	17,234	$	—	$	—

There were no transfers to or from Level 1 and 2 during the six months ended June 30, 2011 or the twelve months ended December 31, 2010.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Bank may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. Assets measured at fair value on a nonrecurring basis are included in the table below.

(in thousands)	Fair Value Measurement Using						Total
							Carrying
							Amount in		Assets/
							Statement		Liabilities
							of Financial		Measured at
Description	Level 1		Level 2		Level 3		Position		Fair Value
June 30, 2011
Impaired loans		—		—		14,497		14,497		14,497
Foreclosed properties		—		—		9,518		9,518		9,518
December 31, 2010
Impaired loans		—		—		16,103		16,103		16,103
Foreclosed properties		—		—		10,650		10,650		10,650

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Summary Of Significant Accounting Policies

6 Months Ended

Jun. 30, 2011

Summary Of Significant Accounting Policies

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 complete financial statements and, therefore, should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Prospectus of ASB Bancorp, Inc. (the "Company") filed with the Securities and Exchange Commission (the "SEC") pursuant to Rule 424(b)(3) of the Securities Act of 1933 on August 22, 2011. These financial statements were prepared on a basis consistent with the audited consolidated financial statements previously referenced and included 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, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 or any other future period. The consolidated balance sheet as of December 31, 2010 was derived from the audited annual consolidated financial statements of Asheville Savings Bank.

Organization – Asheville Savings Bank, S.S.B. is a North Carolina-chartered mutual savings bank with one subsidiary (described below). Asheville Savings Bank, S.S.B. and its subsidiary are collectively referred to hereafter as the "Bank." 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 of North Carolina. The Bank is regulated by the Office of the North Carolina Commissioner of Banks ("NCCoB") and the Federal Deposit Insurance Corporation ("FDIC").

Principles of Consolidation – The consolidated financial statements include the accounts of Appalachian Financial Services, Inc., a wholly owned subsidiary of Asheville Savings Bank, S.S.B. Appalachian Financial Services, Inc.'s principal business activity consists of investment activities. For purposes of the consolidated financial statements, all significant intercompany accounts and transactions have been eliminated. The subsidiary is inactive.

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 are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other issues, (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, and (iii) the intent of the Bank 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 Bank 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 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 customers. 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.

Other commercial real estate loans consist primarily of loans secured by multifamily housing. The primary risk associated with multifamily loans is the ability of the income producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in the borrower having to provide rental rate concessions to achieve adequate occupancy rates.

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 1-4 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 result in residential mortgage loan borrowers having 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 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. 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 or 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 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 loans 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. 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, 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 changing economic conditions or declining collateral values. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses and may require the Bank to make adjustments to the allowance for loan losses based upon judgments that differ significantly from those of management.

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

Loans Past Due 90 Days or More, Nonaccruing, Impaired, or Restructured – The Bank's policies related to when loans 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. Under the Bank's cost recovery method, interest income is subsequently recognized 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.

For loans the Bank has restructured with terms that are no more favorable than market terms at the time of the restructuring, including an interest rate equal to or greater than the rate that the Bank is willing to accept at the time of restructuring for a new loan with comparable risk, and the loan is not impaired based on the terms of the restructuring, the Bank designates the loan as restructured for the year in which the restructuring takes place. For years subsequent to the year in which a loan is restructured, the loan may be removed from nonaccrual status and from its restructured designation when the loan has performed according to the modified terms for a sustained period of time, a minimum of six months, the Bank is reasonably assured of repayment, the loan is well secured, and collection of principal and interest under the modified terms is probable.

Impaired loans on which the Bank has granted concessions that modify the amounts and/or timing of contractual principal and interest payments are considered as restructured and are accounted for as such. 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 will be realized 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 – Foreclosed real estate consists of real estate and other assets acquired as a result of customers' loan defaults. Foreclosed real estate is stated at the lower of the related loan balance or the fair value of the property net of the estimated costs of disposal with a charge to the allowance for loan losses upon foreclosure. Any write-downs subsequent to foreclosure are charged against operating earnings. To the extent recoverable, costs relating to the development and improvement of property are capitalized, whereas those costs relating to holding the property are charged to expense.

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

The components of the Bank's accumulated other comprehensive loss, net of income taxes, are as follows:

(in thousands)	June 30, 2011			December 31, 2010
Unrealized gain (loss) on securities	$	891		$	(448	)
Benefit plan liability		(3,192	)		(3,192	)
Accumulated other comprehensive loss, net of tax	$	(2,301	)	$	(3,640	)

Income Taxes – The establishment of provisions for federal and state income taxes is a complex area of accounting, which involves the use of significant judgments and estimates in applying relevant tax statutes. The Bank is subject to audit by federal and state tax authorities, the results of which may produce tax liabilities that differ from the Bank's tax estimates and provisions. The Bank 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.

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.

A significant portion of the recorded deferred tax assets relate to a net operating loss carry forward and a loan loss allowance on which the realization of income tax benefits is dependent on the Bank's ability to generate future taxable income. Because of this dependency, the Bank's management considered the need for a valuation allowance, but determined there was sufficient positive evidence to support their conclusion not to record a valuation allowance. The positive evidence that led the Bank's management to conclude that the income tax benefits of the Bank's deferred tax assets would be realized included (1) the Bank has a sustained history of generating taxable income and realizing the income tax benefits of its deferred tax assets and income tax credits, (2) the Bank's management believes that, based on certain improving credit quality indicators, the credit quality issues that gave rise to the net operating loss carry forward and deferred tax asset related to the loan loss allowance were to a large extent limited to 2010, and provisioning is expected to decline in 2011 and 2012 from the 2010 level, (3) the Bank's management is projecting pretax income in 2011 and 2012, (4) the Bank's management is aware of one or more strategies that, if implemented, could generate future taxable income, and (5) the net operating loss carry forward does not expire in the near term. The Bank's Federal and North Carolina loss carry forward periods are 20 years and 15 years, respectively.

The Bank includes interest and penalties related to income tax liabilities in noninterest expense. The Bank's tax filings for the years ended December 31, 2006 through 2010 are currently open to audit under statutes of limitations by the Internal Revenue Service and the North Carolina Department of Revenue.

Reclassifications – Certain amounts in the prior years' financial statements have been reclassified to conform to the June 30, 2011 presentation. The reclassifications had no effect on net income or equity as previously reported.

New Accounting Standards – In January 2010, new guidance was issued by the FASB requiring improved disclosures about fair value measurements. The guidance requires entities to disclose significant transfers in and out of fair value hierarchy levels, and the reasons for the transfers, and to present information about purchases, sales, issuances and settlements separately in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). Additionally, the guidance clarifies that a reporting entity should provide fair value measurements for each class of assets and liabilities and disclose the inputs and valuation techniques used for fair value measurements using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3). The Bank has applied the new disclosure requirements as of January 1, 2010. The adoption of this guidance did not have a material impact on the Bank's consolidated financial statements.

In July, 2010 Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Loss (ASU 2010-20). In an effort to provide financial statement users with greater transparency about the allowance for loan and lease losses, ASU 2010-20 requires enhanced disclosures regarding the nature of credit risk inherent in the portfolio and how risk is analyzed and assessed in determining the amount of the allowance. Changes in the allowance will also require disclosure. The end-of-period disclosures were effective for the Bank on December 31, 2010 with the exception of disclosures related to troubled debt restructurings which become effective for interim and annual periods ending after June 15, 2011. The disclosures related to activity during a period are effective during 2011. The provisions of ASU 2010-20 have affected disclosures regarding the allowance for loan and lease losses, but will have no impact on financial condition, results of operations or liquidity.

In January 2011, the FASB issued Disclosures about the Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in ASU 2010-20 (ASU 2011-01). The provisions of ASU 2010-20 required the disclosure of more granular information on the nature and extent of troubled debt restructurings and their effect on the allowance for loan and lease losses effective for the Company's reporting period ended March 31, 2011. The amendments in ASU 2011-01 defer the effective date related to these disclosures, enabling creditors to provide such disclosures after the FASB completes their project clarifying the guidance for determining what constitutes a troubled debt restructuring. As the provisions of this ASU only defer the effective date of disclosure requirements related to troubled debt restructurings, the adoption of this ASU had no impact on the Bank's financial statements.

In April 2011, FASB issued A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring (ASU 2011-02), which clarifies when creditors should classify loan modifications as troubled debt restructurings. ASU 2011-02 is effective for interim and annual periods beginning on or after June 15, 2011, and is applied retrospectively to restructurings at the beginning of the year of adoption. The guidance on measuring the impairment of a receivable restructured in a troubled restructuring is effective on a prospective basis. The adoption of the new guidance is not expected to have a significant impact on the Bank's financial statements.

In May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This ASU represents the converged guidance of the FASB and the International Accounting Standards Board (the "Boards") on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term "fair value." The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and International Financial Reporting Standards. The amendments to the Codification in ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The Bank is evaluating the impact of ASU 2011-04 on its consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amends the Codification to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments to the Codification in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Bank is evaluating the impact of ASU 2011-05 on the presentation of its consolidated financial statements.

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Regulatory Capital Requirements

6 Months Ended

Jun. 30, 2011

Regulatory Capital Requirements

Regulatory Capital Requirements

7. REGULATORY CAPITAL REQUIREMENTS

Capital Levels – The Bank is a state-chartered mutual savings bank regulated by the FDIC and the NCCoB. Regulations require the Bank to maintain a minimum leverage ratio of total capital to total assets of four percent, a minimum ratio of qualifying total capital to risk-weighted assets of eight percent, of which at least four percent must be in the form of core capital, and a North Carolina Savings Bank Capital ratio of total adjusted capital to total adjusted assets of five percent.

Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification also are subject to qualitative judgments by the regulators about components, risk weightings and other factors.

As of June 30, 2011, the most recent regulatory reporting period, the Bank was well capitalized under the current regulatory framework. To be categorized as well capitalized, the Bank must maintain minimum total risk-based capital, Tier I leverage ratio, and Tier I risk adjusted capital as set forth in the table below.

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

						Regulatory Requirements
	Actual					Minimum for Capital Adequacy Purposes					Minimum to Be Well Capitalized
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2011
Tier I leverage capital	$	65,753		8.75	%	$	30,059		4.00	%	$	37,573		5.00	%
Tier I risk-based capital		65,753		14.41	%		18,250		4.00	%		27,375		6.00	%
Total risk-based capital		71,554		15.68	%		36,500		8.00	%		45,625		10.00	%
NC Savings Bank capital		78,112		10.34	%		37,761		5.00	%		n/a		n/a
December 31, 2010
Tier I leverage capital	$	63,377		8.36	%	$	30,309		4.00	%	$	37,886		5.00	%
Tier I risk-based capital		63,377		13.04	%		19,434		4.00	%		29,151		6.00	%
Total risk-based capital		69,542		14.31	%		38,868		8.00	%		48,585		10.00	%
NC Savings Bank capital		76,053		10.14	%		37,503		5.00	%		n/a		n/a

A reconciliation of GAAP equity and regulatory capital amounts follows:

(in thousands)	June 30, 2011			December 31, 2010
Total GAAP equity	$	65,547		$	62,881
Less: Accumulated other comprehensive loss, net of tax		(2,301	)		(3,640	)
Less: Disallowed deferred tax assets		2,095			3,144
Tier I capital		65,753			63,377
Unrealized gains on available for sale equity securities		6			—
Allowable portion of allowance for loan losses		5,795			6,165
Total risk-based capital		71,554			69,542
Disallowed portion of allowance for loan losses		6,558			6,511
NC Savings Bank capital	$	78,112		$	76,053

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Benefit Plans

6 Months Ended

Jun. 30, 2011

Benefit Plans

Benefit Plans

8. BENEFIT PLANS

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

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2011			2010			2011			2010
Non-Qualified Defined Benefit Plan
Components of Net Periodic Benefit Costs
Service cost	$	2		$	2		$	3		$	4
Interest cost		16			22			32			52
Amortization of prior service credit		(3	)		(4	)		(6	)		(9	)
Amortization of net loss		5			11			11			26
Net periodic benefit cost	$	20		$	31		$	40		$	73
Qualified Defined Benefit Plan
Components of Net Periodic Benefit Costs
Service cost	$	49		$	38		$	98		$	75
Interest cost		237			221			477			437
Expected return on plan assets		(240	)		(219	)		(482	)		(432	)
Amortization of prior service credit		(18	)		(16	)		(36	)		(32	)
Amortization of net loss		101			66			202			130
Net periodic benefit cost	$	129		$	90		$	259		$	178

Matching contributions to the Bank's defined contribution plan under Section 401(k) of the Internal Revenue Code were as follows for the periods indicated:

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2011		2010		2011		2010
Contributions to defined contribution plan	$	46	$	45	$	93	$	91

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Foreclosed Real Estate

6 Months Ended

Jun. 30, 2011

Foreclosed Real Estate

Foreclosed Real Estate

6. FORECLOSED REAL ESTATE

An analysis of the Bank's foreclosed real estate follows:

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2011			2010			2011			2010
Beginning balance	$	10,506		$	4,090		$	10,650		$	3,699
Transfers from loans		610			4,173			810			4,861
Capitalized cost		18			—			36			63
Loss provision		(543	)		(134	)		(622	)		(145	)
Proceeds from sales of properties, net of gains and losses		(1,073	)		(64	)		(1,356	)		(413	)
Sales of properties funded by loans		—			(138	)		—			(138	)
Ending balance	$	9,518		$	7,927		$	9,518		$	7,927

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Consolidated Statement Of Changes In Equity (USD $) In Thousands	Retained Income [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Total
Balances at Dec. 31, 2010	$ 66,521	$ (3,640)	$ 62,881	[1]
Net income	1,327		1,327
Change in unrealized gain on available for sale securities, net of tax		1,339	1,339
Balances at Jun. 30, 2011	$ 67,848	$ (2,301)	$ 65,547

[1] * Derived from audited consolidated financial statements.

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Plan Of Conversion And Change In Corporate Form

6 Months Ended

Jun. 30, 2011

Plan Of Conversion And Change In Corporate Form

Plan Of Conversion And Change In Corporate Form

2. PLAN OF CONVERSION AND CHANGE IN CORPORATE FORM

On March 15, 2011, the Board of Directors of the Bank adopted a plan of conversion ("Plan") pursuant to which the Bank will convert from the mutual to stock form of organization. The Plan was submitted to the FDIC, the NCCoB, and the Federal Reserve Board, all of which have conditionally approved, or provided their intent not to object to, the Bank's conversion. The final valuation by an independent appraiser remains subject to review and acceptance by the FDIC. The Plan was approved by the affirmative vote of at least a majority of the total votes eligible to be cast by the voting members of the Bank at a special meeting of members held on September 22, 2011. The Plan sets forth that the Bank proposes to convert into a stock savings bank structure with the establishment of a stock holding company, the Company, as parent of the Bank. In connection with the conversion, the Company received orders for approximately $55.5 million of its common stock at a price of $10.00 per share. The Bank will convert to the stock form of ownership, followed by the issuance of all of the Bank's outstanding stock to the Company. Pursuant to the Plan, the Bank determined the total offering value and number of shares of common stock based upon a valuation by an independent appraiser. The Bank's Board of Directors adopted an employee stock ownership plan (ESOP) which will purchase 8% of the common stock sold in the offering. The Company was organized as a corporation under the laws of the State of North Carolina and will own all of the outstanding common stock of the Bank upon completion of the conversion. The closing of the conversion is subject to the satisfaction of customary closing conditions and is expected to occur in early October 2011.

The costs of issuing the common stock will be deferred and deducted from the sales proceeds of the offering. If the conversion is unsuccessful, all deferred costs will be charged to operations. The Bank had incurred deferred conversion costs of approximately $539,000 as of June 30, 2011, and no deferred conversion costs as of December 31, 2010. At the completion of the conversion to stock form, the Bank will establish a liquidation account in the amount of retained earnings contained in the final prospectus. The liquidation account will be maintained for the benefits of eligible savings account holders who maintain deposit accounts in the Bank after conversion.

The conversion will be accounted for as a change in corporate form with the historic basis of the Bank's assets, liabilities and equity unchanged as a result.

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Investment Securities

6 Months Ended

Jun. 30, 2011

Investment Securities

Investment Securities

3. 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 (in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
June 30, 2011
U.S. Government Sponsored Entity (GSE) and agency securities due -
After 1 year but within 5 years	$	45,646	$	466	$	(63	)	$	46,049
After 5 year but within 10 years		21,023		136		(71	)		21,088
After 10 years		2,000		—		—			2,000
Asset-backed securities issued by the Small Business Administration (SBA)		22,456		272		(41	)		22,687
Residential mortgage-backed securities issued by GSE's		121,337		1,149		(423	)		122,063
State and local government securities due -
After 5 year but within 10 years		1,118		38		—			1,156
After 10 years		4,514		40		(28	)		4,526
Mutual funds		675		10		—			685
Total	$	218,769	$	2,111	$	(626	)	$	220,254
December 31, 2010
U.S. GSE and agency securities due -
After 1 year but within 5 years	$	32,072	$	215	$	(244	)	$	32,043
After 5 year but within 10 years		18,182		44		(227	)		17,999
Asset-backed securities issued by the SBA		15,952		101		(14	)		16,039
Residential mortgage-backed securities issued by GSE's		105,944		644		(1,178	)		105,410
State and local government securities due -
After 10 years		3,379		—		(92	)		3,287
Mutual funds		664		3		—			667
Total	$	176,193	$	1,007	$	(1,755	)	$	175,445

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 (in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
June 30, 2011
U.S. GSE and agency securities due -
After 5 year but within 10 years	$	1,084	$	97	$	—		$	1,181
Residential mortgage-backed securities issued by GSE's		2,053		141		—			2,194
State and local government securities due -
After 10 years		2,411		122		—			2,533
Total	$	5,548	$	360	$	—		$	5,908
December 31, 2010
U.S. GSE and agency securities due -
After 5 year but within 10 years	$	1,090	$	79	$	—		$	1,169
Residential mortgage-backed securities issued by GSE's		2,449		149		—			2,598
State and local government securities due -
After 10 years		2,409		36		(14	)		2,431
Total	$	5,948	$	264	$	(14	)	$	6,198

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, 2011 and December 31, 2010. The total number of securities with unrealized losses at June 30, 2011 and December 31, 2010 were 50 and 63, respectively. The unrealized losses relate to debt 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 Bank 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 Bank will collect all contractual cash flows, therefore all impairment is considered to be temporary.

	June 30, 2011 (unaudited)
	Less Than 12 Months					12 Months or More				Total
(in thousands)	Fair value		Unrealized losses			Fair value		Unrealized losses		Fair value		Unrealized losses
Securities Available for Sale
US GSE and agency		15,960		(134	)	$	—	$	—	$	15,960	$	(134	)
Asset-backed SBA		5,956		(41	)		—		—		5,956		(41	)
Residential mortgage- backed GSE		50,148		(423	)		—		—		50,148		(423	)
State and local government		2,253		(28	)		—		—		2,253		(28	)
Temporarily impaired securities available for sale		74,317		(626	)		—		—		74,317		(626	)
Total temporarily impaired securities	$	74,317	$	(626	)	$	—	$	—	$	74,317	$	(626	)

	December 31, 2010
	Less Than 12 Months					12 Months or More				Total
(in thousands)	Fair value		Unrealized losses			Fair value		Unrealized losses		Fair value		Unrealized losses
Securities Available for Sale
US GSE and agency	$	28,901	$	(471	)	$	—	$	—	$	28,901	$	(471	)
Asset-backed SBA		1,857		(14	)		—		—		1,857		(14	)
Residential mortgage-backed GSE		60,009		(1,178	)		—		—		60,009		(1,178	)
State and local government		3,287		(92	)		—		—		3,287		(92	)
Temporarily impaired securities available for sale		94,054		(1,755	)		—		—		94,054		(1,755	)
Securities Held to Maturity
State and local government		1,453		(14	)		—		—		1,453		(14	)
Temporarily impaired securities held to maturity		1,453		(14	)		—		—		1,453		(14	)
Total temporarily impaired securities	$	95,507	$	(1,769	)	$	—	$	—	$	95,507	$	(1,769	)

Investment securities pledged as collateral follow:

(in thousands)	June 30, 2011		December 31, 2010
Pledged to Federal funds purchased lines of credit	$	13,062	$	1,972
Pledged to Treasury Tax and Loan deposit accounts		—		1,054
Pledged to repurchase agreements for commercial customers		2,358		1,553

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

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2011		2010		2011		2010
Gross proceeds from sales of securities	$	8,746	$	13,817	$	8,746	$	15,817
Gross realized gains from sales of securities		223		294		223		780

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Loans Receivable

6 Months Ended

Jun. 30, 2011

Loans Receivable

Loans Receivable

4. LOANS RECEIVABLE

The Bank's loans receivable by segment and class follow:

(in thousands)	June 30, 2011			December 31, 2010
Commercial:
Commercial construction and land development	$	25,946		$	28,473
Commercial mortgage		156,765			164,553
Commercial and industrial		16,185			17,656
Total commercial		198,896			210,682
Non-commercial:
Non-commercial construction and land development		6,956			8,670
Residential mortgage		175,937			180,439
Revolving mortgage		51,892			53,432
Consumer		34,337			47,212
Total non-commercial		269,122			289,753
Total loans receivable		468,018			500,435
Less: Deferred loan fees		(419	)		(432	)
Total loans receivable net of deferred loan fees		467,599			500,003
Less: Allowance for loan losses		(12,353	)		(12,676	)
Loans receivable, net	$	455,246		$	487,327

The Bank's loans receivable by segment, class, and grade follow:

(in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss*		Total Loans
June 30, 2011
Commercial:
Commercial construction and land development	$	11,468	$	756	$	13,308	$	—	$	414	$	25,946
Commercial mortgage		134,583		19,587		2,595		—		—		156,765
Commercial and industrial		12,826		2,041		1,176		—		142		16,185
Total commercial		158,877		22,384		17,079		—		556		198,896
Non-commercial:
Non-commercial construction and land development		4,600		326		2,027		—		3		6,956
Residential mortgage		161,375		9,161		5,389		—		12		175,937
Revolving mortgage		48,800		2,478		614		—		—		51,892
Consumer		32,614		1,629		94		—		—		34,337
Total non-commercial		247,389		13,594		8,124		—		15		269,122
Total loans receivable	$	406,266	$	35,978	$	25,203	$	—	$	571	$	468,018
December 31, 2010
Commercial:
Commercial construction and land development	$	12,532	$	1,578	$	14,269	$	—	$	94	$	28,473
Commercial mortgage		141,269		17,128		6,043		—		113		164,553
Commercial and industrial		15,542		716		1,398		—		—		17,656
Total commercial		169,343		19,422		21,710		—		207		210,682
Non-commercial:
Non-commercial construction and land development		6,367		—		2,281		—		22		8,670
Residential mortgage		166,007		7,625		6,771		—		36		180,439
Revolving mortgage		50,976		1,712		744		—		—		53,432
Consumer		45,133		1,731		348		—		—		47,212
Total non-commercial		268,483		11,068		10,144		—		58		289,753
Total loans receivable	$	437,826	$	30,490	$	31,854	$	—	$	265	$	500,435

* Items included in the "Loss" column are fully reserved.

The Bank's loans receivable by segment, class, and delinquency status follow:

	Past Due
(in thousands)	30-89 Days		90 Days or More		Total		Current		Total Loans
June 30, 2011
Commercial:
Commercial construction and land development	$	—	$	4,744	$	4,744	$	21,202	$	25,946
Commercial mortgage		586		1,852		2,438		154,327		156,765
Commercial and industrial		567		284		851		15,334		16,185
Total commercial		1,153		6,880		8,033		190,863		198,896
Non-commercial:
Non-commercial construction and land development		—		280		280		6,676		6,956
Residential mortgage		990		2,718		3,708		172,229		175,937
Revolving mortgage		823		—		823		51,069		51,892
Consumer		1,096		33		1,129		33,208		34,337
Total non-commercial		2,909		3,031		5,940		263,182		269,122
Total loans receivable	$	4,062	$	9,911	$	13,973	$	454,045	$	468,018
December 31, 2010
Commercial:
Commercial construction and land development	$	462	$	3,451	$	3,913	$	24,560	$	28,473
Commercial mortgage		2,298		3,363		5,661		158,892		164,553
Commercial and industrial		288		290		578		17,078		17,656
Total commercial		3,048		7,104		10,152		200,530		210,682
Non-commercial:
Non-commercial construction and land development		282		553		835		7,835		8,670
Residential mortgage		4,996		2,878		7,874		172,565		180,439
Revolving mortgage		576		191		767		52,665		53,432
Consumer		1,387		94		1,481		45,731		47,212
Total non-commercial		7,241		3,716		10,957		278,796		289,753
Total loans receivable	$	10,289	$	10,820	$	21,109	$	479,326	$	500,435

The Bank's 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 follow:

	June 30, 2011				December 31, 2010
(in thousands)	Nonaccruing		Past Due 90 Days or More and Still Accruing		Nonaccruing		Past Due 90 Days or More and Still Accruing
Commercial:
Commercial construction and land development	$	4,744	$	—	$	5,205	$	—
Commercial mortgage		1,852		—		3,810		—
Commercial and industrial		792		—		377		—
Total commercial		7,388		—		9,392		—
Non-commercial:
Non-commercial construction and land development		280		—		553		—
Residential mortgage		3,266		—		3,194		—
Revolving mortgage		103		—		191		—
Consumer		33		—		94		—
Total non-commercial		3,682		—		4,032		—
Total loans receivable	$	11,070	$	—	$	13,424	$	—

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

(in thousands)	June 30, 2011			December 31, 2010
At beginning of period	$	3,278		$	4,004
New loans		3,011			278
Repayments of loans		(892	)		(1,004	)
At end of period	$	5,397		$	3,278

The Bank services loans for Habitat for Humanity of Western North Carolina as an in kind donation. The balances of these loans were $11.8 million and $11.4 million at June 30, 2011 and December 31, 2010, respectively.

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Consolidated Statements Of Comprehensive Income (USD $) In Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Comprehensive Income
Net income (loss)	$ 742	$ (86)	$ 1,327	$ 344
Other comprehensive income
Reclassification of securities gains recognized in net income	(223)	(294)	(223)	(780)
Deferred income tax benefit	89	118	89	312
Gains arising during the period	2,741	1,560	2,456	2,069
Deferred income tax expense	(1,097)	(624)	(983)	(827)
Unrealized holding gains adjustment, net of tax	1,510	760	1,339	774
Total other comprehensive income	1,510	760	1,339	774
Comprehensive income	$ 2,252	$ 674	$ 2,666	$ 1,118

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Consolidated Statements Of Cash Flows (USD $) In Thousands	6 Months Ended
	Jun. 30, 2011		Jun. 30, 2010
Operating Activities
Net income	$ 1,327		$ 344
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	1,081		4,471
Provision for loss on foreclosed properties	622		145
Depreciation	618		617
Loss (gain) on sale of foreclosed real estate	(17)		3
Deferred income tax expense (benefit)	703		(205)
Net accretion of discounts on securities	630		283
Gain on sale of securities	(223)		(780)
Net amortization of premiums and deferred fees on loans	(68)		(91)
Mortgage loans originated for sale	(29,874)		(38,903)
Proceeds from sale of mortgage loans	34,994		37,525
Gain on sale of mortgage loans	(528)		(535)
Decrease in income tax receivable	761
Increase in interest receivable	(173)		(37)
Increase in interest payable	(6)		(13)
Net change in other assets and liabilities	6,213		3,864
Net cash provided by operating activities	16,060		6,688
Investing Activities
Purchases	(76,689)		(77,119)
Proceeds from sales	8,746		15,817
Proceeds from maturities and/or calls	12,000		16,000
Principal repayments on mortgage-backed and asset-backed securities	13,360		8,398
Redemption of FHLB stock	49
Net decrease in loans receivable	30,257		29,436
Foreclosed real estate:
Capital expenses	(36)		(63)
Net proceeds from sales	1,373		410
Purchases of premises and equipment	(267)		(212)
Net cash used in investing activities	(11,207)		(7,333)
Financing Activities
Net increase (decrease) in deposits	(3,294)		17,842
Net proceeds from (repayments of) repurchase agreements	32		(386)
Decrease in advance payments by payments by borrowers for property taxes and insurance			(804)
Net cash provided by (used in) financing activities	(3,262)		16,652
Increase in cash and cash equivalents	1,591		16,007
Cash and Cash Equivalents:
Beginning of period	24,234	[1]	23,176
End of period	25,825		39,183
SUPPLEMENTAL DISCLOSURES:
Interest on deposits, advances and other borrowings	4,521		6,012
Income taxes	10		1,202
Non-cash investing and financing transactions:
Transfers from loans to foreclosed real estate	810		4,861
Loans to finance the purchase of foreclosed properties			138
Change in unrealized gain on securities available for sale	2,233		1,289
Change in deferred income taxes resulting from other comprehensive income	$ (894)		$ (515)

[1] * Derived from audited consolidated financial statements.

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Commitments And Contingencies

6 Months Ended

Jun. 30, 2011

Commitments And Contingencies

Commitments And Contingencies

9. 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:

(in thousands)	June 30, 2011		December 31, 2010
Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit	$	104,338	$	121,588
Commitments under standby letters of credit		138		58
Total	$	104,476	$	121,646

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

Interest Rate Risk – The Bank's profitability depends to a large extent on its net interest income, which is the difference between interest income from loans and investments and interest expense on deposits and borrowings. Like most financial institutions, the Bank's interest income and interest expense are significantly affected by changes in market interest rates and other economic factors beyond its control. The Bank's interest-earning assets consist primarily of long-term, fixed-rate mortgage loans, adjustable rate mortgage loans and investments that typically adjust more slowly to changes in interest rates than its interest-bearing liabilities, which are primarily term deposits. Accordingly, the Bank's earnings are usually adversely affected during periods of rising interest rates and positively impacted during periods of declining interest rates. However, based on the results of the Bank's interest rate risk simulation model, which management believes accurately reflects the extraordinary stress currently existing in the financial markets with respect to potential margin compression resulting from the Bank's difficulty in reducing its cost of funds further in this competitive pricing environment, the Bank's earnings may well be adversely affected if interest rates decline further. Such a decline in rates could result from, among other things, 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 currently the beneficiary of a stable rate environment and 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 involved in legal actions in the normal course of business. Management, based on advice of legal counsel, does not expect any significant losses from current litigation.

Investment Commitments – During 2005, the Bank entered into an agreement to invest $1,000,000 as a limited partner in a Small Business Investment Company. The Bank made no additional investments during 2010 and 2009, but invested $800,000 prior to 2009. The Bank has a remaining commitment of approximately $200,000. This investment is recognized at cost and is included in "other assets" on the balance sheet.

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Consolidated Balance Sheets (USD $) In Thousands	Jun. 30, 2011	Dec. 31, 2010
Assets
Cash and due from banks	$ 9,193	$ 7,836	[1]
Interest-earning deposits with banks	16,632	16,398	[1]
Total cash and cash equivalents	25,825	24,234	[1]
Securities available for sale (amortized cost of $218,769 at June 30, 2011 and $176,193 at December 31, 2010)	220,254	175,445	[1]
Securities held to maturity (estimated fair value of $5,908 at June 30, 2011 and $6,198 at December 31, 2010)	5,548	5,948	[1]
Investment in Federal Home Loan Bank stock, at cost	3,921	3,970	[1]
Loans held for sale	3,794	8,386	[1]
Loans receivable (net of deferred loan fees of $432 at June 30, 2011 and $420 at December 31, 2010)	467,599	500,003	[1]
Allowance for loan losses	(12,353)	(12,676)	[1]
Loans receivable, net	455,246	487,327	[1]
Premises and equipment, net	14,493	14,844	[1]
Foreclosed real estate (net of loss reserves of $1,712 at June 30, 2011 and $1,299 at December 31, 2010)	9,518	10,650	[1]
Deferred income tax assets, net	5,044	6,641	[1]
Other assets	11,500	12,520	[1]
Total assets	755,143	749,965	[1]
Liabilities and Equity
Noninterest-bearing deposits	46,887	44,996	[1]
Interest-bearing deposits	569,576	574,761	[1]
Total deposits	616,463	619,757	[1]
Overnight and short-term borrowings	1,040	1,008	[1]
Federal Home Loan Bank advances	60,000	60,000	[1]
Accounts payable and other liabilities	12,093	6,319	[1]
Total liabilities	689,596	687,084	[1]
Commitments and contingencies (Note 9.)			[1]
Equity
Retained income	67,848	66,521	[1]
Accumulated other comprehensive loss, net of tax	(2,301)	(3,640)	[1]
Total equity	65,547	62,881	[1]
Total liabilities and equity	$ 755,143	$ 749,965	[1]

[1] * Derived from audited consolidated financial statements.