10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended September 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

There were 5,584,551 shares of Common Stock, par value $0.01 per share, issued and outstanding as of October 31, 2011.

EXPLANATORY NOTE

ASB Bancorp, Inc. (the “Company”) was incorporated on May 12, 2011 by Asheville Savings Bank, S.S.B., Asheville, North Carolina (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 conversion was completed on October 11, 2011 and the Company acquired all of the Bank’s outstanding capital stock on that date. As of September 30, 2011, the Company was not an operating company and, therefore, the information presented in this report is on a consolidated basis for the Bank.

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

FORM 10-Q

Table of Contents

		Begins on Page
Part I.	Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets (Unaudited) At September 30, 2011 and December 31, 2010		1
	Consolidated Statements Of Income (Loss) (Unaudited) For the Three and Nine Months Ended September  30, 2011 and 2010		2
	Consolidated Statements Of Comprehensive Income (Loss) (Unaudited) For the Three and Nine Months Ended September 30, 2011 and 2010		3
	Consolidated Statement Of Changes In Equity (Unaudited) For the Nine Months Ended September  30, 2011		4
	Consolidated Statements Of Cash Flows (Unaudited) For the Nine Months Ended September  30, 2011 and 2010		5
	Notes To Consolidated Financial Statements (Unaudited)		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		42
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		60
Item 4.	Controls and Procedures		62
Part II.	Other Information
Item 1.	Legal Proceedings		62
Item 1A.	Risk Factors		62
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		63
Item 3.	Defaults Upon Senior Securities		63
Item 4.	[Removed and Reserved]		63
Item 5.	Other Information		63
Item 6.	Exhibits		63
Signatures			64

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands)	September 30, 2011			December 31, 2010*
Assets
Cash and due from banks	$	9,077		$	7,836
Interest-earning deposits with banks		66,325			16,398
Total cash and cash equivalents		75,402			24,234
Securities available for sale (amortized cost of $225,823 at September 30, 2011 and $176,193 at December 31, 2010)		229,913			175,445
Securities held to maturity (estimated fair value of $5,835 at September 30, 2011 and $6,198 at December 31, 2010)		5,372			5,948
Investment in Federal Home Loan Bank stock, at cost		3,896			3,970
Loans held for sale		4,148			8,386
Loans receivable (net of deferred loan fees of $432 at September 30, 2011 and $409 at December 31, 2010)		450,263			500,003
Allowance for loan losses		(10,873	)		(12,676	)
Loans receivable, net		439,390			487,327
Premises and equipment, net		14,312			14,844
Foreclosed real estate (net of loss reserves of $1,712 at September 30, 2011 and $1,299 at December 31, 2010)		10,697			10,650
Deferred income tax assets, net		3,645			6,641
Other assets		11,973			12,520
Total assets	$	798,748		$	749,965
Liabilities and Equity
Liabilities
Noninterest-bearing deposits	$	52,809		$	44,996
Interest-bearing deposits		562,746			574,761
Total deposits		615,555			619,757
Escrowed stock order funds		49,063			—
Overnight and short-term borrowings		319			1,008
Federal Home Loan Bank advances		60,000			60,000
Accounts payable and other liabilities		6,130			6,319
Total liabilities		731,067			687,084
Commitments and contingencies (Note 9)
Equity
Retained income		68,419			66,521
Accumulated other comprehensive loss, net of tax		(738	)		(3,640	)
Total equity		67,681			62,881
Total liabilities and equity	$	798,748		$	749,965

* Derived from audited consolidated financial statements.

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

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ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2011		2010			2011		2010
Interest and dividend income
Loans, including fees	$	5,705	$	6,961		$	17,992	$	22,055
Securities		1,361		1,152			3,918		3,114
Other earning assets		24		23			64		54
Total interest and dividend income		7,090		8,136			21,974		25,223
Interest expense
Deposits		1,511		2,266			4,818		7,052
Overnight and short-term borrowings		—		1			4		3
Federal Home Loan Bank advances		609		609			1,807		1,807
Total interest expense		2,120		2,876			6,629		8,862
Net interest income		4,970		5,260			15,345		16,361
Provision for loan losses		730		13,838			1,811		18,309
Net interest income (loss) after provision for loan losses		4,240		(8,578	)		13,534		(1,948	)
Noninterest income
Mortgage banking income		190		354			718		889
Deposit and other service charge income		838		900			2,559		2,824
Income from debit card services		312		307			925		872
Gain on sale of investment securities		417		18			640		798
Other noninterest income		247		136			770		474
Total noninterest income		2,004		1,715			5,612		5,857
Noninterest expenses
Salaries and employee benefits		2,606		2,418			7,662		7,255
Occupancy expense, net		765		765			2,293		2,312
Foreclosed property expenses		334		1,125			968		1,285
Data processing fees		405		395			1,224		1,121
Federal deposit insurance premiums		79		227			589		769
Advertising		145		224			543		649
Professional and outside services		197		226			610		581
Other noninterest expenses		791		840			2,295		2,482
Total noninterest expenses		5,322		6,220			16,184		16,454
Income (loss) before income tax provision		922		(13,083	)		2,962		(12,545	)
Income tax provision (benefit)		351		(5,080	)		1,064		(4,886	)
Net income (loss)	$	571	$	(8,003	)	$	1,898	$	(7,659	)

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

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ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2011			2010			2011			2010
Comprehensive Income
Net income (loss)	$	571		$	(8,003	)	$	1,898		$	(7,659	)
Other comprehensive income
Unrealized holding gains on securities available for sale:
Reclassification of securities gains recognized in net income		(417	)		(18	)		(640	)		(798	)
Deferred income tax benefit		167			7			256			319
Gains arising during the period		5,540			1,670			5,478			2,473
Deferred income tax expense		(2,217	)		(668	)		(2,192	)		(989	)
Unrealized holding gains adjustment, net of tax		3,073			991			2,902			1,005
Total other comprehensive income		3,073			991			2,902			1,005
Comprehensive income (loss)	$	3,644		$	(7,012	)	$	4,800		$	(6,654	)

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

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ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

(in thousands)	Retained income		Accumulated other comprehensive income (loss)			Total equity
Balances, December 31, 2010	$	66,521	$	(3,640	)	$	62,881
Net income		1,898		—			1,898
Other comprehensive income		—		2,902			2,902
Balances, September 30, 2011	$	68,419	$	(738	)	$	67,681

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

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ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended September 30,
(in thousands)	2011			2010
Operating Activities
Net income (loss)	$	1,898		$	(7,659	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		1,811			18,309
Provision for loss on foreclosed properties		899			1,210
Depreciation		928			924
Loss (gain) on sale of foreclosed real estate		(8	)		11
Deferred income tax expense (benefit)		1,060			(3,809	)
Net accretion of discounts on securities		1,053			447
Gain on sale of securities		(640	)		(798	)
Net amortization of premiums and deferred fees on loans		(109	)		(126	)
Mortgage loans originated for sale		(41,265	)		(65,441	)
Proceeds from sale of mortgage loans		46,221			60,888
Gain on sale of mortgage loans		(718	)		(889	)
Decrease (increase) in income tax receivable		599			(2,512	)
Decrease (increase) in interest receivable		43			(62	)
Decrease in interest payable		(6	)		(32	)
Net change in other assets and liabilities		(278	)		2,144
Net cash provided by operating activities		11,488			2,605
Investing Activities
Securities available for sale:
Purchases		(118,342	)		(141,066	)
Proceeds from sales		19,786			16,858
Proceeds from maturities and/or calls		26,928			37,555
Principal repayments on mortgage-backed and asset-backed securities		22,161			14,146
Redemption of FHLB stock		74			23
Net decrease in loans receivable		43,605			47,938
Foreclosed real estate:
Capital expenses		(40	)		(75	)
Net proceeds from sales		1,732			2,571
Purchases of premises and equipment		(396	)		(603	)
Net cash used in investing activities		(4,492	)		(22,653	)

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

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ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited)

	Nine Months Ended September 30,
(in thousands)	2011			2010
Financing Activities
Net increase (decrease) in deposits	$	(4,202	)	$	27,677
Net increase in escrowed stock order funds		49,063			—
Net repayments of repurchase agreements		(689	)		(621	)
Net cash provided by financing activities		44,172			27,056
Increase in cash and cash equivalents		51,168			7,008
Cash and Cash Equivalents:
Beginning of period		24,234			23,176
End of period	$	75,402		$	30,184
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest on deposits, advances and other borrowings	$	6,635		$	8,894
Income taxes		(484	)		1,434
Non-cash investing and financing transactions:
Transfers from loans to foreclosed real estate		2,630			10,547
Loans to finance the purchase of foreclosed properties		—			138
Change in unrealized gain on securities available for sale		4,838			1,675
Change in deferred income taxes resulting from other comprehensive income		(1,936	)		(670	)

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

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ASHEVILLE SAVINGS BANK, S.S.B. 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 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, as amended, on August 22, 2011. 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 nine months ended September 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.

Organization – The Company was incorporated on May 12, 2011 by 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 conversion was completed on October 11, 2011 and the Company acquired all of the Bank’s outstanding capital stock on that date. As of September 30, 2011, the Company was not an operating company and, therefore, the information presented in this report is on a consolidated basis for the Bank, which has one subsidiary as described below. 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 in 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 “Fed”) and the NCCoB.

Principles of Consolidation – The consolidated financial statements include the accounts of Appalachian Financial Services, Inc., a wholly owned subsidiary of the Bank. 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, (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.

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ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

Loan Segments and Classes

The Bank’s portfolio segments and classes within those segments are subject to risks that could have an adverse impact on the credit quality of the loan portfolio. Management 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.

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ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 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 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. 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.

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ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

A troubled debt restructuring (“TDR”) occurs when a borrower is experiencing financial difficulty and the Bank grants a concession 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 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 rarely reduces interest rates below market rates or forgives principal as concessions. 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 its TDR loans 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.

12

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 Bank adjusts the level of accumulated comprehensive income related to its retirement plans on an annual basis, consistent with the receipt of its annual actuarial studies.

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

(in thousands)	September 30, 2011			December 31, 2010
Unrealized gain (loss) on securities	$	2,454		$	(448	)
Benefit plan liability		(3,192	)		(3,192	)
Accumulated other comprehensive loss, net of tax	$	(738	)	$	(3,640	)

13

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 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 and consistent 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 September 30, 2011 presentation. The reclassifications had no effect on net income or equity as previously reported.

14

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

New Accounting Standards – 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 methodology 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 had no impact on financial condition, results of operations or liquidity.

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 Bank adopted ASU 2011-02 in the third quarter of 2011, but the adoption of this guidance did not have a material impact on the Bank’s consolidated financial statements.

15

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 adoption of the new guidance will not have a significant impact on the Bank’s financial statements.

16

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

2. STOCK CONVERSION AND CHANGE IN CORPORATE FORM

The Company completed its initial public stock offering in connection with the Bank’s conversion from the mutual to the stock form of organization on October 11, 2011. The Company sold a total of 5,584,551 shares of its common stock at an offering price of $10.00 per share. This included 446,764 shares purchased by the Asheville Savings Bank Employee Stock Ownership Plan (the “ESOP”) funded by a loan from the Company in the amount of $4.5 million. Trading of the Company’s common stock commenced on the Nasdaq Global Market on October 12, 2011 under the symbol “ASBB.” 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. Including the additional $4.5 million in ESOP share purchases, gross proceeds were $55.8 million. After payment of conversion expenses of approximately $1.9 million, the net proceeds of $53.9 million received in the offering, as reduced for the unearned ESOP shares of $4.5 million, will be reflected in the stockholders’ equity accounts of the Company in its December 31, 2011 consolidated balance sheet. On October 11, 2011, the Company purchased all of the Bank’s common stock for $28 million.

On October 11, 2011, liquidation accounts were established by the Company and the Bank for the benefit of eligible account holders and supplemental eligible account holders (collectively, “eligible depositors”) of the Bank as defined in the Amended and Restated Plan of Conversion (the “Plan of Conversion”). Each eligible depositor will have a pro rata interest in the liquidation accounts for each of his or her deposit accounts based upon the proportion that the balance of each such account bears to the balance of all deposit accounts of the Bank as of the dates defined in the Plan of Conversion. The liquidation accounts will be maintained for the benefit of eligible depositors who continue to maintain their deposit accounts in the Bank after the conversion. The liquidation accounts will be reduced annually to the extent that eligible depositors have reduced their qualifying deposits. In the unlikely event of a complete liquidation of the Bank or the Company or both, and only in such event, eligible depositors who continue to maintain accounts will be entitled to receive a distribution from the liquidation accounts before any liquidation may be made with respect to common stock. Neither the Company nor the Bank may declare or pay a cash dividend if the effect thereof would cause its equity to be reduced below either the amount required for the liquidation accounts or the regulatory capital requirements imposed by the Company’s or the Bank’s regulators.

17

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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
September 30, 2011
U.S. Government Sponsored Entity (GSE) and agency securities due -
After 1 year but within 5 years	$	47,722	$	850	$	(15	)	$	48,557
After 5 year but within 10 years		12,934		324		—			13,258
Asset-backed securities issued by the Small Business Administration (SBA)		23,670		477		(29	)		24,118
Residential mortgage-backed securities issued by GSE’s		133,485		2,244		(86	)		135,643
State and local government securities due -
After 5 year but within 10 years		1,114		77		—			1,191
After 10 years		6,218		243		(22	)		6,439
Mutual funds		680		27		—			707
Total	$	225,823	$	4,242	$	(152	)	$	229,913
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

18

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

3. 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 (in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
September 30, 2011
U.S. GSE and agency securities due -
After 5 year but within 10 years	$	1,081	$	113	$	—		$	1,194
Residential mortgage-backed securities issued by GSE’s		1,879		130		—			2,009
State and local government securities due -
After 10 years		2,412		220		—			2,632
Total	$	5,372	$	463	$	—		$	5,835
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

19

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

3. 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 September 30, 2011 and December 31, 2010. The total number of securities with unrealized losses at September 30, 2011 and December 31, 2010 were 19 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.

	September 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	$	5,984	$	(15	)	$	—	$	—	$	5,984	$	(15	)
Residential mortgage-backed GSE		19,212		(115	)		—		—		19,212		(115	)
State and local government		1,693		(22	)		—		—		1,693		(22	)
Temporarily impaired securities available for sale		26,889		(152	)		—		—		26,889		(152	)
Total temporarily impaired securities	$	26,889	$	(152	)	$	—	$	—	$	26,889	$	(152	)

20

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

3. INVESTMENT SECURITIES (Continued)

	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)	September 30, 2011		December 31, 2010
Pledged to Federal funds purchased lines of credit	$	12,999	$	1,972
Pledged to Treasury Tax and Loan deposit accounts		—		1,054
Pledged to repurchase agreements for commercial customers		319		1,553

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2011		2010		2011		2010
Gross proceeds from sales of securities	$	19,786	$	14,858	$	19,786	$	16,858
Gross realized gains from sales of securities		417		18		640		798

21

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4. LOANS RECEIVABLE

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

(in thousands)	September 30, 2011			December 31, 2010
Commercial:
Commercial construction and land development	$	23,331		$	28,473
Commercial mortgage		143,165			164,553
Commercial and industrial		16,102			17,656
Total commercial		182,598			210,682
Non-commercial:
Non-commercial construction and land development		7,695			8,670
Residential mortgage		180,022			180,439
Revolving mortgage		51,757			53,432
Consumer		28,600			47,212
Total non-commercial		268,074			289,753
Total loans receivable		450,672			500,435
Less: Deferred loan fees		(409	)		(432	)
Total loans receivable net of deferred loan fees		450,263			500,003
Less: Allowance for loan losses		(10,873	)		(12,676	)
Loans receivable, net	$	439,390		$	487,327

22

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4. LOANS RECEIVABLE (Continued)

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

(in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss*		Total Loans
September 30, 2011
Commercial:
Commercial construction and land development	$	7,037	$	950	$	15,344	$	—	$	—	$	23,331
Commercial mortgage		118,037		23,323		1,612		193		—		143,165
Commercial and industrial		12,939		2,174		989		—		—		16,102
Total commercial		138,013		26,447		17,945		193		—		182,598
Non-commercial:
Non-commercial construction and land development		5,402		—		2,293		—		—		7,695
Residential mortgage		166,126		9,366		4,527		3		—		180,022
Revolving mortgage		48,776		2,148		833		—		—		51,757
Consumer		27,083		1,445		72		—		—		28,600
Total non-commercial		247,387		12,959		7,725		3		—		268,074
Total loans receivable	$	385,400	$	39,406	$	25,670	$	196	$	—	$	450,672
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.

23

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4. LOANS RECEIVABLE (Continued)

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
September 30, 2011
Commercial:
Commercial construction and land development	$	4,256	$	2,627	$	6,883	$	16,448	$	23,331
Commercial mortgage		583		1,062		1,645		141,520		143,165
Commercial and industrial		581		455		1,036		15,066		16,102
Total commercial		5,420		4,144		9,564		173,034		182,598
Non-commercial:
Non-commercial construction and land development		—		543		543		7,152		7,695
Residential mortgage		1,388		2,705		4,093		175,929		180,022
Revolving mortgage		566		359		925		50,832		51,757
Consumer		913		28		941		27,659		28,600
Total non-commercial		2,867		3,635		6,502		261,572		268,074
Total loans receivable	$	8,287	$	7,779	$	16,066	$	434,606	$	450,672
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

24

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4. LOANS RECEIVABLE (Continued)

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:

	September 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	$	6,351	$	—	$	5,205	$	—
Commercial mortgage		1,062		—		3,810		—
Commercial and industrial		457		—		377		—
Total commercial		7,870		—		9,392		—
Non-commercial:
Non-commercial construction and land development		543		—		553		—
Residential mortgage		2,732		—		3,194		—
Revolving mortgage		392		—		191		—
Consumer		28		—		94		—
Total non-commercial		3,695		—		4,032		—
Total loans receivable	$	11,565	$	—	$	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)	September 30, 2011			December 31, 2010
At beginning of period	$	3,278		$	4,004
New loans		5,727			278
Repayments of loans		(3,325	)		(1,004	)
At end of period	$	5,680		$	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 September 30, 2011 and December 31, 2010, respectively.

25

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

5. ALLOWANCE FOR LOAN LOSSES

An analysis of the allowance for loan losses follows:

(in thousands)	Three Months Ended September 30, 2010			Nine Months Ended September 30, 2010
Balance at beginning of period	$	10,097		$	8,994
Provision for loan losses		13,838			18,309
Charge-offs		(7,087	)		(10,525	)
Recoveries		35			105
Balance at end of period	$	16,883		$	16,883

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

	Three Months Ended September 30, 2011									Nine Months Ended September 30, 2011
(in thousands)	Commercial			Non- Commercial			Total			Commercial			Non- Commercial			Total
Balance at beginning of period	$	7,608		$	4,745		$	12,353		$	7,658		$	5,018		$	12,676
Provision for loan losses		412			318			730			1,047			764			1,811
Charge-offs		(1,809	)		(424	)		(2,233	)		(2,578	)		(1,240	)		(3,818	)
Recoveries		—			23			23			84			120			204
Balance at end of period	$	6,211		$	4,662		$	10,873		$	6,211		$	4,662		$	10,873

26

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

5. ALLOWANCE FOR LOAN LOSSES (Continued)

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
September 30, 2011
Commercial:
Commercial construction and land development	$	144	$	659	$	803	$	17,568	$	5,763	$	23,331
Commercial mortgage		262		4,432		4,694		1,619		141,546		143,165
Commercial and industrial		183		531		714		959		15,143		16,102
Total commercial		589		5,622		6,211		20,146		162,452		182,598
Non-commercial:
Non-commercial construction and land development		576		148		724		2,525		5,170		7,695
Residential mortgage		329		1,835		2,164		5,213		174,809		180,022
Revolving mortgage		—		1,107		1,107		300		51,457		51,757
Consumer		—		667		667		—		28,600		28,600
Total non-commercial		905		3,757		4,662		8,038		260,036		268,074
Total loans receivable	$	1,494	$	9,379	$	10,873	$	28,184	$	422,488	$	450,672
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

27

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

5. ALLOWANCE FOR LOAN LOSSES (Continued)

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
September 30, 2011
Commercial:
Commercial construction and land development	$	19,187	$	367	$	17,201	$	17,568	$	144
Commercial mortgage		2,124		1,619		—		1,619		262
Commercial and industrial		1,511		500		459		959		183
Total commercial		22,822		2,486		17,660		20,146		589
Non-commercial:
Non-commercial construction and land development		2,660		1,972		553		2,525		576
Residential mortgage		5,622		2,839		2,374		5,213		329
Revolving mortgage		300		—		300		300		—
Total non-commercial		8,582		4,811		3,227		8,038		905
Total impaired loans	$	31,404	$	7,297	$	20,887	$	28,184	$	1,494
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

28

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

5. ALLOWANCE FOR LOAN LOSSES (Continued)

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

	Three Months Ended September 30, 2011				Nine Months Ended September 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	$	16,505	$	96	$	16,439	$	288	$	17,171	$	195
Commercial mortgage		1,619		11		4,978		68		12,674		322
Commercial and industrial		1,052		4		1,217		16		1,477		67
Total commercial		19,176		111		22,634		372		31,322		584
Non-commercial:
Non-commercial construction and land development		2,538		13		2,572		52		1,414		32
Residential mortgage		5,521		30		6,016		108		7,967		236
Revolving mortgage		300		—		105		—		33		16
Total non-commercial		8,359		43		8,693		160		9,414		284
Total loans receivable	$	27,535	$	154	$	31,327	$	532	$	40,736	$	868

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2011		2010		2011		2010
Average recorded investment in impaired loans	$	27,535	$	39,375	$	31,327	$	40,973
Interest income recognized on impaired loans	$	154	$	145	$	532	$	797

29

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

5. ALLOWANCE FOR LOAN LOSSES (Continued)

The following table summarizes the Bank’s recorded investment in TDRs before and after their modifications during the periods indicated. The Bank extended the payment terms on one loan during the three months ended September 30, 2011 and on five loans during the nine months ended September 30, 2011 and allowed the payments on one loan to be reduced based on the principal remaining after a partial charge-off during the 2011 nine-month period. The Bank does not typically grant reductions in interest rates to below market levels on the troubled debt it restructures.

	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
(in thousands)	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Extended payment terms
Non-commercial:
Non-commercial construction and land development		1	$	1,750	$	1,750		1	$	1,750	$	1,750
Residential mortgage		—		—		—		4		622		622
Total non-commercial		1		1,750		1,750		5		2,372		2,372
Total		1	$	1,750	$	1,750		5	$	2,372	$	2,372
Forgiveness of principal
Commercial:
Commercial and industrial		—	$	—	$	—		1	$	503	$	142
Total commercial		—		—		—		1		503		142
Total		—	$	—	$	—		1	$	503	$	142
Total		1	$	1,750	$	1,750		6	$	2,875	$	2,514

The following table presents loans that were modified as TDRs within the preceding 12 months that stopped performing in accordance with their modified terms during the periods indicated. During the nine months ended September 30, 2011, three loans modified as TDRs went into default of which one loan went into default during the third quarter of 2011.

	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
(in thousands)	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Extended payment terms
Commercial:
Commercial and industrial		1	$	500		2	$	813
Total commercial		1		500		2		813
Total		1	$	500		2	$	813
Forgiveness of principal
Commercial:
Commercial and industrial		—	$	—		1	$	142
Total commercial		—		—		1		142
Total		—	$	—		1	$	142
Total		1	$	500		3	$	955

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.

30

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

5. ALLOWANCE FOR LOAN LOSSES (Continued)

The Bank’s loans that were considered to be troubled debt restructurings follow:

(in thousands)	September 30, 2011		December 31, 2010
Nonperforming restructured loans	$	5,034	$	4,858
Performing restructured loans		13,031		15,233
Total	$	18,065	$	20,091

6. FORECLOSED REAL ESTATE

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2011			2010			2011			2010
Beginning balance	$	9,518		$	7,927		$	10,650		$	3,699
Transfers from loans		1,820			5,686			2,630			10,547
Capitalized cost		4			12			40			75
Loss provision		(277	)		(1,065	)		(899	)		(1,210	)
Proceeds from sales of properties, net of gains and losses		(368	)		(2,169	)		(1,724	)		(2,582	)
Sales of properties funded by loans		—			—			—			(138	)
Ending balance	$	10,697		$	10,391		$	10,697		$	10,391

7. REGULATORY CAPITAL REQUIREMENTS

Capital Levels - The Bank is a state-chartered 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 September 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.

31

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

7. REGULATORY CAPITAL REQUIREMENTS (Continued)

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
September 30, 2011
Tier I leverage capital	$	66,968		8.78	%	$	30,504		4.00	%	$	38,131		5.00	%
Tier I risk-based capital		66,968		15.39	%		17,401		4.00	%		26,101		6.00	%
Total risk-based capital		72,498		16.67	%		34,802		8.00	%		43,502		10.00	%
NC Savings Bank capital		77,857		9.75	%		39,944		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)	September 30, 2011			December 31, 2010
Total GAAP equity	$	67,681		$	62,881
Less: Accumulated other comprehensive loss, net of tax		(738	)		(3,640	)
Less: Disallowed deferred tax assets		1,451			3,144
Tier I capital		66,968			63,377
Unrealized gains on available for sale equity securities		16			—
Allowable portion of allowance for loan losses		5,514			6,165
Total risk-based capital		72,498			69,542
Disallowed portion of allowance for loan losses		5,359			6,511
NC Savings Bank capital	$	77,857		$	76,053

32

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

8. BENEFIT PLANS

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2011			2010			2011			2010
Non-Qualified Defined Benefit Plan
Components of Net Periodic Benefit Costs
Service cost	$	2		$	—		$	5		$	5
Interest cost		16			5			48			57
Amortization of prior service credit		(3	)		(1	)		(9	)		(10	)
Amortization of net loss		5			3			16			28
Net periodic benefit cost	$	20		$	7		$	60		$	80
Qualified Defined Benefit Plan
Components of Net Periodic Benefit Costs
Service cost	$	49		$	41		$	147		$	115
Interest cost		237			236			714			670
Expected return on plan assets		(240	)		(233	)		(722	)		(663	)
Amortization of prior service credit		(18	)		(17	)		(54	)		(49	)
Amortization of net loss		101			69			303			200
Net periodic benefit cost	$	129		$	96		$	388		$	273

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 September 30,				Nine Months Ended September 30,
(in thousands)	2011		2010		2011		2010
Contributions to defined contribution plan	$	49	$	44	$	142	$	135

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.

33

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

9. COMMITMENTS AND CONTINGENCIES (Continued)

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:

	September 30,		December 31,
(in thousands)	2011		2010
Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit	$	115,149	$	133,435
Commitments under standby letters of credit		135		39
Total	$	115,284	$	133,474

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.

34

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

9. 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 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 periodically involved in legal actions in the normal course of business. The Bank is not a party to any pending legal proceedings that the Bank’s management believes would have a material adverse effect on the Bank’s financial condition, results of operations, or cash flows.

Investment Commitments - During 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.

35

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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:

	September 30, 2011				December 31, 2010
(in thousands)	Carrying amount		Estimated fair value		Carrying amount		Estimated fair value
Financial assets:
Cash and cash equivalents	$	75,402	$	75,402	$	24,234	$	24,234
Investment securities
Available for sale		229,913		229,913		175,445		175,445
Held to maturity		5,372		5,835		5,948		6,198
Investments held at cost		3,896		3,896		3,970		3,970
Loans held for sale		4,148		4,148		8,386		8,386
Loans receivable, net		439,390		448,514		487,327		491,205
Accrued interest receivable		2,476		2,476		2,519		2,519
Deferred compensation assets		1,415		1,415		1,341		1,341
Financial liabilities:
Demand deposits		347,859		347,859		332,354		332,354
Time deposits		267,696		269,338		287,403		289,881
Stock order funds		49,063		49,063		—		—
Repurchase agreements		319		317		1,008		999
Advances from Federal
Home Loan Bank		60,000		68,565		60,000		64,048
Deferred compensation liabilities		1,415		1,415		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		—		—		—		—

36

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

10. FAIR VALUE MEASUREMENTS (Continued)

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 or other market risks.

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 September 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.

37

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

10. FAIR VALUE MEASUREMENTS (Continued)

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.

38

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

10. FAIR VALUE MEASUREMENTS (Continued)

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.

39

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

10. 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:

(in thousands)	Fair Value Measurement Using						Total
Description	Level 1		Level 2		Level 3		Carrying Amount in Statement of Financial Position		Assets/ Liabilities Measured at Fair Value
September 30, 2011
Securities available for sale:
U.S. GSE and agency securities	$	—	$	61,815	$	—	$	61,815	$	61,815
Asset-backed SBA securities		—		24,118		—		24,118		24,118
Residential mortgage-backed securities issued by GSE’s		—		135,643		—		135,643		135,643
State and local government securities		—		7,630		—		7,630		7,630
Mutual funds		707		—		—		707		707
Total	$	707	$	229,206	$	—	$	229,913	$	229,913
Defined benefit plan assets:
Cash and cash equivalents	$	285	$	—	$	—
Money market mutual funds		264		—		—
Debt security mutual funds		16,436		—		—
Total	$	16,985	$	—	$	—
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	$	—	$	—

40

ASHEVILLE SAVINGS BANK, S.S.B. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

10. FAIR VALUE MEASUREMENTS (Continued)

There were no transfers to or from Level 1 and 2 during the nine months ended September 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
Description	Level 1		Level 2		Level 3		Carrying Amount in Statement of Financial Position		Assets/ Liabilities Measured at Fair Value
September 30, 2011
Impaired loans	$	—	$	—	$	14,342	$	14,342	$	14,342
Foreclosed properties		—		—		10,697		10,697		10,697
December 31, 2010
Impaired loans	$	—	$	—	$	16,103	$	16,103	$	16,103
Foreclosed properties		—		—		10,650		10,650		10,650

41

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

A Caution About Forward-Looking Statements

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

• statements of our goals, intentions and expectations;

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

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

• estimates of our risks and future costs and benefits.

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

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

• a continued decline in real estate values;

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

• increased competitive pressures among financial services companies;

• changes in consumer spending, borrowing and savings habits;

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

• adverse changes in the securities markets; and

• 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.

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.

Critical Accounting Policies

During the three- and nine-month periods ended September 30, 2011, there was no significant change 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, 2010 included in the Company’s prospectus dated August 12, 2011 (the “Prospectus”).

42

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 income. Determining the amount 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 Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. See note 1 of the notes to the consolidated financial statements included in the Prospectus.

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 must estimate 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 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 14 of the notes to the consolidated financial statements included in the Prospectus.

Deferred Tax Assets. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.

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 September 30, 2011 and our operating performance for the three- and nine-month periods ended September 30, 2011. 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.

All information presented is 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.

43

Comparison of Financial Condition at September 30, 2011 and December 31, 2010

The following table provides the changes in our significant asset and liability categories at September 30, 2011 compared to December 31, 2010.

(dollars in thousands)	September 30, 2011			December 31, 2010			$ change			% change
Interest-earning assets
Interest-earning deposits with banks and overnight and short-term investments	$	66,325		$	16,398		$	49,927			304.5	%
Investment securities		235,285			181,393			53,892			29.7	%
Investments held at cost		3,896			3,970			(74	)		-1.9	%
Loans held for sale		4,148			8,386			(4,238	)		-50.5	%
Loans receivable, net of deferred fees		450,263			500,003			(49,740	)		-9.9	%
Total interest-earning assets		759,917			710,150			49,767			7.0	%
Non-interest-earning assets
Cash and due from banks		9,077			7,836			1,241			15.8	%
Allowance for loan losses		(10,873	)		(12,676	)		1,803			14.2	%
Premises and equipment, net of accumulated depreciation		14,312			14,844			(532	)		-3.6	%
Foreclosed real estate, net of reserves		10,697			10,650			47			0.4	%
Deferred income tax assets, net of deferred income tax liabilities		3,645			6,641			(2,996	)		-45.1	%
Other assets		11,973			12,520			(547	)		-4.4	%
Total non-interest-earning assets		38,831			39,815			(984	)		-2.5	%
Total assets	$	798,748		$	749,965			48,783			6.5	%
Interest-bearing liabilities
Interest-bearing deposits	$	562,746		$	574,761		$	(12,015	)		-2.1	%
Overnight and short-term borrowings		319			1,008			(689	)		-68.4	%
Federal Home Loan Bank advances		60,000			60,000			—			0.0	%
Total interest-bearing liabilities		623,065			635,769			(12,704	)		-2.0	%
Non-interest-bearing liabilities
Non-interest-bearing deposits		52,809			44,996			7,813			17.4	%
Stock order funds		49,063			—			49,063			n/a
Accounts payable and other liabilities		6,130			6,319			(189	)		-3.0	%
Total non-interest-bearing liabilities		108,002			51,315			56,687			110.5	%
Total liabilities		731,067			687,084			43,983			6.4	%
Total equity		67,681			62,881			4,800			7.6	%
Total liabilities and equity	$	798,748		$	749,965			48,783			6.5	%
Memoranda:
Cash and cash equivalents	$	75,402		$	24,234		$	51,168			211.1	%
Total core deposits (excludes certificate accounts)		347,859			332,354			15,505			4.7	%
Total deposits		615,555			619,757			(4,202	)		-0.7	%
Total funding liabilities		675,874			680,765			(4,891	)		-0.7	%

44

Total assets increased $48.8 million, or 6.5%, to $798.8 million at September 30, 2011 from $750.0 million at December 31, 2010, primarily due to $49.1 million in escrowed funds from orders to purchase shares of the Company’s common stock in the Company’s subscription and community offering, which was consummated on October 11, 2011. Cash and cash equivalents increased $51.2 million, or 211.1%, to $75.4 million at September 30, 2011 from $24.2 million at December 31, 2010. Investment securities increased $53.9 million, or 29.7%, during the first nine months of 2011 to $235.3 million at September 30, 2011 from $181.4 million at December 31, 2010, primarily due to the reinvestment of proceeds from loan repayments and prepayments that were not replaced by new loan originations. Loans receivable, net of deferred fees, decreased $49.7 million, or 9.9%, to $450.3 million at September 30, 2011 from $500.0 million at December 31, 2010 as loan repayments, prepayments, and foreclosures exceeded new loan originations.

Loan originations totaled $93.8 million for the nine months ended September 30, 2011 compared to $138.7 million for the nine months ended September 30, 2010. Residential mortgage loan originations totaled $49.9 million and residential construction and land development loan originations totaled $8.9 million for the nine months ended September 30, 2011 compared to $81.1 million and $8.6 million, respectively, for the comparable period of 2010. Originations of commercial mortgage loans totaled $24.7 million for the 2011 year-to-date period compared to $33.2 million for the same period in 2010. Originations of commercial construction and land development loans totaled $1.1 million for the nine-month period ended September 30, 2011, compared to no originations of commercial construction and land development loans for the comparable period of 2010. Commercial and industrial loan originations totaled $6.0 million for the nine months ended September 30, 2011 compared to $9.4 million for the nine months ended September 30, 2010. Origination activity was offset by $95.8 million of normal loan payments, prepayments, and payoffs and $46.2 million in loan sales for the nine months ended September 30, 2011 compared to $121.5 million and $60.9 million, respectively, for the nine months ended September 30, 2010.

Nonperforming loans decreased $1.9 million, or 13.8%, to $11.6 million at September 30, 2011 from $13.4 million at December 31, 2010. The decrease in nonperforming loans from December 31, 2010 to September 30, 2011 was primarily attributable to payoffs of two larger loans totaling $2.6 million that were partially offset by loans that stopped performing during the period. At September 30, 2011, troubled debt restructurings totaled $18.1 million compared to $20.1 million at December 31, 2010. The decrease in troubled debt restructurings during the nine months ended September 30, 2011 was the result of charge-offs and payoffs. Repayment terms of loans reported as troubled debt restructurings were modified to enable financially distressed borrowers more favorable terms to service their debt obligations. At September 30, 2011, $5.0 million of the total $18.1 million of troubled debt restructurings were not current.

Deposits decreased $4.2 million, or 0.7%, to $615.6 million at September 30, 2011 from $619.8 million at December 31, 2010. During the nine months ended September 30, 2011, the Company continued its focus on core deposits, from which it excludes certificates of deposit. Core deposits increased $15.5 million, or 4.7%, to $347.9 million at September 30, 2011 from $332.4 million at December 31, 2010. Certificates of deposit decreased $19.7 million, or 6.9%, to $267.7 million at September 30, 2011 compared to $287.4 million at December 31, 2010. Other liabilities increased $48.9 million during the first nine months of 2011 primarily due to the escrowed funds from stock orders pending the closing of the Company’s stock offering.

Results of Operations for the Three Months Ended September 30, 2011 and 2010

Overview. Net income was $571,000 for the three months ended September 30, 2011 as compared to a net loss of $8.0 million for the three months ended September 30, 2010. The $8.6 million increase in net income for the 2011 period was primarily due to a $13.1 million decrease in the provision for loan losses, an $898,000 decrease in noninterest expenses, a $756,000 decrease in interest expense, and a $289,000 increase in noninterest income, which were partially offset by a $1.0 million decrease in interest and dividend income and the related tax effects.

45

	Three Months Ended September 30,
(dollars in thousands)	2011		2010			$ change			% change
Interest and dividend income	$	7,090	$	8,136		$	(1,046	)		-12.9	%
Interest expense		2,120		2,876			(756	)		-26.3	%
Net interest income		4,970		5,260			(290	)		-5.5	%
Provision for loan losses		730		13,838			(13,108	)		-94.7	%
Net interest income (loss) after provision for loan losses		4,240		(8,578	)		12,818			149.4	%
Noninterest income		2,004		1,715			289			16.9	%
Noninterest expense		5,322		6,220			(898	)		-14.4	%
Income (loss) before income tax provision		922		(13,083	)		14,005			107.0	%
Income tax provision (benefit)		351		(5,080	)		5,431			106.9	%
Net income (loss)		571		(8,003	)		8,574			107.1	%

Net Interest Income. Net interest income decreased by $290,000, or 5.5%, to $5.0 million for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010. Total interest and dividend income decreased by $1.0 million, or 12.9%, to $7.1 million for the three months ended September 30, 2011 as compared to $8.1 million for the three months ended September 30, 2010, primarily as a result of a decrease of $14.1 million in the average balances of interest-earning assets to $723.7 million for the three months ended September 30, 2011 from $737.8 million for the three months ended September 30, 2010 and a 48 basis point decrease in yields on interest-earning assets. Interest income on loans decreased $1.3 million, or 18.1%, to $5.7 million during the three months ended September 30, 2011 primarily due to a decrease in average outstanding loans of $92.5 million, or 16.7%, to $460.4 million during the period, primarily as a result of loan repayments exceeding originations due to low loan demand. Loan originations decreased $25.4 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010, while loan sales decreased by $12.1 million, and loan principal repayments decreased $14.9 million to $31.1 million for the three months ended September 30, 2011 from $46.0 million for the three months ended September 30, 2010. The average balance of investment securities increased $13.9 million, or 22.7%, to $75.1 million for the three months ended September 30, 2011, while the average balance of mortgage-backed securities increased $62.1 million, or 67.2%, to $154.4 million over the same comparable three-month periods, primarily as a result of the reinvestment in securities of proceeds from loan repayments and sales.

Total interest expense decreased $756,000, or 26.3%, to $2.1 million for the three months ended September 30, 2011 primarily due to a 42 basis point decrease in average funding cost. Also contributing to the lower interest expense was a decline in the average balances of interest-bearing liabilities, which decreased $19.8 million, or 3.1%, to $628.0 million for the three months ended September 30, 2011 from $647.9 million for the three months ended September 30, 2010, primarily as the result of a $38.6 million decrease in average balances of certificates of deposit.

Provision for Loan Losses. The provision for loan losses was $730,000 for the three months ended September 30, 2011 compared to $13.8 million for the three months ended September 30, 2010. The decrease in the provision was due to the combination of fewer charge-offs in the loan portfolio, a decline in impaired loans, and lower loan balances.

46

Noninterest Income. Noninterest income increased $289,000, or 16.9%, to $2.0 million for the three months ended September 30, 2011 compared to $1.7 million for the three months ended September 30, 2010, primarily due to higher gains from sales of securities and loan prepayment penalties that were partially offset by lower gains from sales of residential mortgage loans and lower deposit overdraft fees.

Noninterest Expenses. Noninterest expenses decreased $898,000, or 14.4%, to $5.3 million for the three months ended September 30, 2011 from $6.2 million for the three months ended September 30, 2010. Decreases of $791,000 in loss provisions on foreclosed properties, $79,000 in advertising expenses, $29,000 in expenses for professional services, and $49,000 in other noninterest expense were partially offset by increases of $188,000 in salaries and benefits and $10,000 in data processing fees.

Income Tax Expense. Income tax expense was $351,000 on pre-tax income of $922,000 for the three months ended September 30, 2011 as compared to an income tax benefit of $5.1 million on a pre-tax loss of $13.1 million for the three months ended September 30, 2010. The effective tax rate was 38.07% for the three months ended September 30, 2011 compared to 38.83% for the three months ended September 30, 2010.

Results of Operations for the Nine Months Ended September 30, 2011 and 2010

Overview. Net income was $1.9 million for the nine months ended September 30, 2011 as compared to an $8.0 million net loss for the nine months ended September 30, 2010. The $9.6 million increase in net income for the 2011 period was primarily due to a $16.5 million decrease in the provision for loan losses and a $2.2 million decrease in interest expense, which was partially offset by a decrease in interest and dividend income of $3.2 million, a decrease in noninterest income of $245,000, and a decrease in noninterest expenses of $270,000.

	Nine Months Ended September 30,
(dollars in thousands)	2011		2010			$ change			% change
Interest and dividend income	$	21,974	$	25,223		$	(3,249	)		-12.9	%
Interest expense		6,629		8,862			(2,233	)		-25.2	%
Net interest income		15,345		16,361			(1,016	)		-6.2	%
Provision for loan losses		1,811		18,309			(16,498	)		-90.1	%
Net interest income (loss) after provision for loan losses		13,534		(1,948	)		15,482			794.8	%
Noninterest income		5,612		5,857			(245	)		-4.2	%
Noninterest expense		16,184		16,454			(270	)		-1.6	%
Income (loss) before income tax provision		2,962		(12,545	)		15,507			123.6	%
Income tax provision (benefit)		1,064		(4,886	)		5,950			121.8	%
Net income (loss)		1,898		(7,659	)		9,557			124.8	%

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Net Interest Income. Net interest income decreased by $1.0 million, or 6.2%, to $15.3 million for the nine months ended September 30, 2011 as compared to $16.4 million for the nine months ended September 30, 2010. Total interest and dividend income decreased by $3.2 million, or 12.9%, to $22.0 million for the nine months ended September 30, 2011 from $25.2 million for the nine months ended September 30, 2010, primarily as a result of a decrease in the average balance of interest earning assets of $13.9 million to $713.7 million for the nine months ended September 30, 2011 from $727.6 million for the nine months ended September 30, 2010 and a 51 basis point decrease in yield on interest-earning assets to 4.13% from 4.64% for the nine-month periods ended September 30, 2011 and 2010, respectively. Interest income on loans decreased $4.1 million, or 18.4%, to $18.0 million for the first nine months of 2011 from $22.1 million for the first nine months of 2010, primarily due to decrease in average loan volumes of $96.3 million, or 16.7%, to $478.7 million for the 2011 year-to-date period from $575.0 million for the 2010 year-to-date period and an 11 basis point decrease in average loan yields to 5.02% from 5.13% for the same comparable periods. Loan originations decreased by $44.9 million for the nine months ended September 30, 2011 compared to September 30, 2010. Loan sales decreased by $14.7 million during the same period, while loan principal repayments decreased $25.8 million to $95.8 million for the nine months ended September 30, 2011 from $121.6 million for the nine months ended September 30, 2010. The average balances of investment securities increased $20.3 million, or 40.8%, to $70.1 million in 2011 from $49.8 million in 2010, while mortgage-backed securities increased $62.1 million, or 81.3%, to $138.5 million in 2011 from $76.4 million in 2010 as proceeds from loan repayments and sales were reinvested in securities.

Total interest expense decreased $2.2 million, or 25.2%, to $6.6 million for the nine months ended September 30, 2011 from $8.9 million for the nine months ended September 30, 2010, primarily due to a 46 basis point decrease in the cost of average interest-bearing liabilities to 1.40% in 2011 from 1.86% in 2010, which was attributable to a 50 basis point decrease in the cost of interest-bearing deposits. Our average outstanding balance of borrowings remained relatively unchanged when comparing the two nine-month periods.

Provision for Loan Losses. The provision for loan losses was $1.8 million for the nine months ended September 30, 2011 compared to $18.3 million for the nine months ended September 30, 2010. The decrease in the provision was due to the combination of significantly fewer charge-offs in the loan portfolio, a decline in impaired loans, and lower loan balances.

Noninterest Income. Noninterest income decreased $245,000 to $5.6 million for the nine months ended September 30, 2011 from $5.9 million for the nine months ended September 30, 2010. Factors that contributed to the decline in noninterest income during the 2011 nine-month period were a decrease of $158,000 in gains from the sale of investment securities, a decrease of $265,000 in fees on deposit and other service charge income, and a decrease of $171,000 in mortgage banking income, which were partially offset by an increase of $180,000 in loan related fees from the collection of prepayment penalties on commercial loans, an increase of $53,000 in fees from higher debit card transaction volume and an increase of $81,000 in income from a limited partnership investment. The decrease in deposit and other service charge income was primarily the result of lower deposit overdraft fees that resulted from federal regulations that became effective in the third quarter of 2010.

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Noninterest Expenses. Noninterest expenses decreased $270,000 for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010. The primary factors affecting the decline were a decrease of $317,000 in foreclosed property expenses, a decrease of $180,000 in deposit insurance expenses, a decrease of $106,000 in advertising expenses, a decrease of $19,000 in occupancy expenses, and a decrease of $187,000 in other noninterest expenses, which were partially offset by an increase of $407,000 in salaries and benefits expenses, an increase of $103,000 in data processing expenses, and an increase of $29,000 in professional fees. The increase in salaries and benefits expenses was primarily due to incentive accruals of $225,000 for the nine months ended September 30, 2011 as compared to no incentive accruals for the nine months ended September 30, 2010 as well as a $95,000 increase in pension plan expenses. The decrease in other noninterest expenses were due to the combination of decreases in expenses associated with sales finance loans, high yield deposit program, and training.

Income Tax Expense. Income tax expense increased by $6.0 million for the nine months ended September 30, 2011 as compared to the nine month period ended September 30, 2010, primarily due to an increase in pre-tax income. The effective tax rate was 35.92% for the nine months ended September 30, 2011 compared to 38.95% for the nine months ended September 30, 2010.

Average Balances and Yields

The following tables present 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 for the periods indicated are derived by dividing annualized income or expense for the periods of less than twelve months and full-year income or expense for twelve-month periods by the average balances of assets or liabilities, respectively, 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 calculated on a tax equivalent basis using a federal marginal tax rate of 34%.

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	For the Three Months Ended September 30,
	2011								2010
(dollars in thousands)	Average Balance			Interest and Dividends		Yield/ Cost			Average Balance			Interest and Dividends		Yield/ Cost
Assets
Interest-earning deposits with banks	$	29,898		$	15		0.20	%	$	27,444		$	18		0.26	%
Loans receivable		460,388			5,705		4.92	%		552,856			6,961		5.00	%
Investment securities		75,079			436		2.44	%		61,165			443		2.95	%
Mortgage-backed and similar securities		154,388			925		2.38	%		92,322			709		3.05	%
Other interest-earning assets		3,912			9		0.91	%		3,974			5		0.50	%
Total interest-earning assets		723,665			7,090		3.90	%		737,761			8,136		4.38	%
Allowance for loan losses		(12,299	)							(11,239	)
Noninterest-earning assets		49,504								45,195
Total assets	$	760,870							$	771,717
Liabilities and equity
NOW accounts	$	133,909			214		0.63	%	$	129,619			438		1.34	%
Money market accounts		135,293			183		0.54	%		125,053			270		0.86	%
Savings accounts		24,494			19		0.31	%		20,069			18		0.36	%
Certificates of deposit		273,510			1,095		1.59	%		312,083			1,540		1.96	%
Total interest-bearing deposits		567,206			1,511		1.06	%		586,824			2,266		1.53	%
Overnight and short-term borrowings		803			—		0.00	%		1,056			1		0.38	%
Federal Home Loan Bank advances		60,000			609		4.03	%		60,000			609		4.03	%
Total interest-bearing liabilities		628,009			2,120		1.34	%		647,880			2,876		1.76	%
Noninterest-bearing deposits		58,349								45,110
Other noninterest-bearing liabilities		7,263								4,924
Total liabilities		693,621								697,914
Total equity		67,249								73,803
Total liabilities and equity	$	760,870							$	771,717
Net interest income				$	4,970							$	5,260
Interest rate spread							2.56	%							2.62	%
Net interest margin							2.74	%							2.84	%
Average interest-earning assets to average interest-bearing liabilities		115.23	%							113.87	%

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	For the Nine Months Ended September 30,
	2011								2010
(dollars in thousands)	Average Balance			Interest and Dividends		Yield/ Cost			Average Balance			Interest and Dividends		Yield/ Cost
Assets
Interest-earning deposits with banks	$	22,388		$	38		0.23	%	$	22,310		$	45		0.27	%
Loans receivable		478,748			17,992		5.02	%		574,987			22,055		5.13	%
Investment securities		70,114			1,283		2.57	%		49,841			1,194		3.29	%
Mortgage-backed and similar securities		138,488			2,635		2.54	%		76,422			1,920		3.36	%
Other interest-earning assets		3,942			26		0.88	%		3,986			9		0.30	%
Total interest-earning assets		713,680			21,974		4.13	%		727,546			25,223		4.64	%
Allowance for loan losses		(12,568	)							(9,896	)
Noninterest-earning assets		50,584								42,475
Total assets	$	751,696							$	760,125
Liabilities and equity
NOW accounts	$	134,236			757		0.75	%	$	126,627			1,411		1.49	%
Money market accounts		133,862			552		0.55	%		121,533			835		0.92	%
Savings accounts		23,555			57		0.32	%		19,626			53		0.36	%
Certificates of deposit		277,897			3,452		1.66	%		308,978			4,753		2.06	%
Total interest-bearing deposits		569,550			4,818		1.13	%		576,764			7,052		1.63	%
Overnight and short-term borrowings		1,278			4		0.42	%		1,316			3		0.30	%
Federal Home Loan Bank advances		60,000			1,807		4.03	%		60,000			1,807		4.03	%
Total interest-bearing liabilities		630,828			6,629		1.40	%		638,080			8,862		1.86	%
Noninterest-bearing deposits		48,762								41,716
Other noninterest-bearing liabilities		6,731								5,678
Total liabilities		686,321								685,474
Total equity		65,375								74,651
Total liabilities and equity	$	751,696							$	760,125
Net interest income				$	15,345							$	16,361
Interest rate spread							2.73	%							2.78	%
Net interest margin							2.89	%							3.01	%
Average interest-earning assets to average interest-bearing liabilities		113.13	%							114.02	%

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Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior 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 September 30, 2011 Compared to Three Months Ended September 30, 2010									Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
	Increase (Decrease) Due to:									Increase (Decrease) Due to:
(in thousands)	Volume			Rate			Net			Volume			Rate			Net
Interest income:
Interest-earning deposits with banks	$	2		$	(5	)	$	(3	)	$	—		$	(7	)	$	(7	)
Loans receivable		(1,147	)		(109	)		(1,256	)		(3,625	)		(438	)		(4,063	)
Investment securities		90			(97	)		(7	)		413			(324	)		89
Mortgage-backed and similar securities		398			(182	)		216			1,268			(553	)		715
Other interest-earning assets		—			4			4			—			17			17
Total interest-earning assets		(657	)		(389	)		(1,046	)		(1,944	)		(1,305	)		(3,249	)
Interest expense:
NOW accounts		14			(238	)		(224	)		80			(734	)		(654	)
Money market accounts		21			(108	)		(87	)		78			(361	)		(283	)
Savings accounts		4			(3	)		1			10			(6	)		4
Certificates of deposit		(176	)		(269	)		(445	)		(447	)		(854	)		(1,301	)
Total interest-bearing deposits		(137	)		(618	)		(755	)		(279	)		(1,955	)		(2,234	)
Overnight and short-term borrowings		—			(1	)		(1	)		—			1			1
Federal Home Loan Bank advances		—			—			—			—			—			—
Total interest-bearing liabilities		(137	)		(619	)		(756	)		(279	)		(1,954	)		(2,233	)
Net increase (decrease) interest income	$	(520	)	$	230		$	(290	)	$	(1,665	)	$	649		$	(1,016	)

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Risk Management

Overview. Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for on a mark-to-market basis. Other risks that we face are operational risk, liquidity risks and reputation risk. Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.

Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. We do not offer Alt-A, sub-prime or no-documentation mortgage loans.

When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. When the loan becomes 15 days past due, a late notice is sent to the borrower. When the loan becomes 30 days past due, a more formal letter is sent. Between 15 and 30 days past due, telephone calls are also made to the borrower. After 30 days, we regard the borrower in default. At 60 days delinquent, the borrower may be sent a letter from our attorney and we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Generally, when a consumer loan becomes 60 days past due, we institute collection proceedings and attempt to repossess any personal property that secures the loan. Management informs the board of directors monthly of the amount of loans delinquent more than 30 days, all loans in foreclosure and repossessed property that we own.

Analysis of Non-performing 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 non-performing 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. When property is acquired it is recorded at the lower of its cost or fair market value at the date of foreclosure. Any holding costs and declines in fair value after acquisition of the property result in charges against income.

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The following table provides information with respect to our non-performing assets at the dates indicated.

(dollars in thousands)	September 30, 2011			December 31, 2010			$ change			% change
Nonperforming Loans:
Nonaccruing Loans (1)
Commercial:
Commercial construction and land development	$	6,351		$	5,205		$	1,146			22.0	%
Commercial mortgage		1,062			3,810			(2,748	)		-72.1	%
Commercial and industrial		457			377			80			21.2	%
Total commercial		7,870			9,392			(1,522	)		-16.2	%
Non-commercial:
Non-commercial construction and land development		543			553			(10	)		-1.8	%
Residential mortgage		2,732			3,194			(462	)		-14.5	%
Revolving mortgage		392			191			201			105.2	%
Consumer		28			94			(66	)		-70.2	%
Total non-commercial		3,695			4,032			(337	)		-8.4	%
Total nonaccruing loans (1)		11,565			13,424			(1,859	)		-13.8	%
Total loans past due 90 or more days and still accruing		—			—			—			0.0	%
Total nonperforming loans		11,565			13,424			(1,859	)		-13.8	%
Foreclosed real estate		10,697			10,650			47			0.4	%
Total nonperforming assets		22,262			24,074			(1,812	)		-7.5	%
Performing troubled debt restructurings (2)		13,031			15,233			(2,202	)		-14.5	%
Performing troubled debt restructurings and total nonperforming assets	$	35,293		$	39,307			(4,014	)		-10.2	%
Allowance for loan losses	$	10,873		$	12,676
Total loans	$	450,263		$	500,003
Asset Quality Ratios:
Allowance as a percentage of total loans		2.41	%		2.54	%
Allowance as a percentage of nonperforming loans		94.02	%		94.43	%
Total nonperforming loans to total loans		2.57	%		2.68	%
Total nonperforming loans to total assets		1.45	%		1.79	%
Total nonperforming assets to total assets		2.79	%		3.21	%
Performing troubled debt restructurings and total nonperforming assets to total assets		4.42	%		5.24	%

(1) Nonaccruing loans include nonaccruing troubled debt restructurings.

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

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We periodically modify loans to extend the term or make other concessions to help borrowers stay current on their loan and to avoid foreclosure. At September 30, 2011, we had $18.1 million of these modified loans, which are also referred to as troubled debt restructurings, compared to $20.1 million at December 31, 2010. The decrease in troubled debt restructurings since December 31, 2010 was primarily the result of fewer newly restructured loans during the period, loan repayments, loans for which the collateral was transferred to foreclosed properties, loans charged off, and loans meeting sustained performance and other criteria to no longer be disclosed as a troubled debt restructuring. All troubled debt restructurings were restructured in order help the borrowers remain current on their debt obligation. At September 30, 2011, $5.0 million of the total $18.1 million of troubled debt restructurings were not performing according to their restructured terms and were included in the nonperforming asset table above as nonaccruing loans.

Interest income that would have been recorded had nonaccruing loans been current according to their original terms amounted to $149,000 and $530,000 for the three- and nine-month periods ended September 30, 2011, respectively, compared to $192,000 and $803,000 for the comparable periods of 2010. Interest income of $154,000 and $532,000 related to nonperforming loans was recognized in interest income for the three- and nine-month periods ended September 30, 2011, respectively, compared to $145,000 and $797,000 for the same periods of 2010.

At September 30, 2011, our nonaccruing loans included the following:

• Commercial Construction and Land Development loans

• One loan secured by multiple parcels of contiguous raw land totaling approximately 730 acres. The loan was considered impaired and nonaccruing with a balance of $3.7 million as of September 30, 2011 after a write-down of $85,000 in the third quarter of 2011 based on a current appraisal.

• Two loans to one borrower to develop real estate for mixed commercial and residential use in western North Carolina. The loans were considered impaired and nonaccruing with an aggregate balance of $1.8 million as of September 30, 2011 after write-downs in 2010 of $1.5 million based on a September 2010 appraised value of $2.3 million. At September 30, 2011, the two loans were in the process of foreclosure.

• A 19% participation interest with three other banks in one loan to develop 106 single-family lots in central South Carolina. The loan was considered impaired and nonaccruing with a remaining balance of $938,000 as of September 30, 2011 after write-downs in 2010 of $405,000 based on a June 2010 appraisal. At September 30, 2011, the loan was in the process of foreclosure, which was delayed due to the FDIC-assisted sale of the lead bank. The lead bank has ordered an updated appraisal and the Bank continues to monitor the collateral value.

• Commercial Mortgage loans

• One loan on a commercial condominium located in coastal South Carolina. The loan was considered impaired and nonaccruing with a remaining balance of $1.1 million as of September 30, 2011 after write-downs of $541,000 in the second quarter of 2011 and a specific reserve of $193,000 added in the third quarter of 2011 pending the final review of a new appraisal. The loan was in the process of foreclosure.

• Residential Mortgage loans

• Eighteen loans to multiple borrowers on one- to four-family residential properties with an aggregate balance of $2.7 million as of September 30, 2011.

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

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

(dollars in thousands)	September 30, 2011		December 31, 2010		$ change			% change
Adversely Classified Loans:
Substandard	$	25,670	$	31,854	$	(6,184	)		-19.4	%
Doubtful		196		—		196			n/a
Loss		—		265		(265	)		-100.0	%
Total adversely classified loans	$	25,866	$	32,119		(6,253	)		-19.5	%

At September 30, 2011, substandard loans totaling $25.7 million included $11.6 million in nonaccruing loans that were previously discussed as nonperforming loans. The remaining $14.1 million in performing substandard loans included the following:

• Commercial Construction and Land Development loans

• One loan for the construction of a mixed-use residential condominium, commercial office, and retail project located in western North Carolina. As of September 30, 2011, the loan had a balance of $8.6 million, with an additional $2.3 million debtor in possession loan to a third party associated with the Chapter 11 bankruptcy plan and both loans were performing in accordance with their terms. The principal repayments of both loans are largely dependent upon the cash flows generated from successful sales of the residential and commercial condominiums and leasing of the commercial retail spaces, which have been weak.

• Non Commercial Construction and Land loans

• Two loans for the construction of a single family residence built on speculation. As of September 30, 2011, the loans totaled $2.0 million and were performing, but were considered impaired with a specific loan loss reserve of $576,000. During the third quarter of 2011, the larger of the two loans in the amount of $1.8 million was restructured as troubled debt and was performing in accordance with the restructured terms.

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.

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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 September 30, 2011, cash and cash equivalents totaled $75.4 million, including $66.3 million in interest-bearing deposits in other banks, of which $62.6 million was on deposit with the Federal Reserve Bank. Securities totaling $229.9 million classified as available-for-sale provide an additional source of liquidity. In addition, at September 30, 2011, we had the ability to borrow a total of approximately $60.2 million from the Federal Home Loan Bank of Atlanta and approximately $10.0 million from the Federal Reserve Bank’s discount window. At September 30, 2011, we had $60.0 million in Federal Home Loan Bank advances outstanding and $1.5 million in letters of credit to secure public funds deposits.

A significant use of our liquidity is the funding of loan originations. At September 30, 2011, we had $115.1 million in commitments to extend credit outstanding. Certificates of deposit due within one year of September 30, 2011 totaled $165.3 million, or 61.8% of certificates of deposit. We believe the large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods due to the recent low interest rate environment and local competitive pressure. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due within one year of September 30, 2011. 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 offered.

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.

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

			Payments due by period
(in thousands)	Total		Less than One Year		One to Three Years		Three to Five Years		More than Five Years
At September 30, 2011
Long-term debt obligations	$	60,000	$	—	$	—	$	—	$	60,000
Operating lease obligations		2,209		355		1,065		789		—
Total	$	62,209	$	355	$	1,065	$	789	$	60,000
At December 31, 2010
Long-term debt obligations	$	60,000	$	—	$	—	$	—	$	60,000
Operating lease obligations		2,474		355		1,065		1,054		—
Total	$	62,474	$	355	$	1,065	$	1,054	$	60,000

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Capital Management. We are subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks, 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 September 30, 2011, we exceeded all of our regulatory capital requirements and were considered “well capitalized” under regulatory guidelines.

Following completion of this offering, we will manage our capital for maximum shareholder benefit. The capital from the offering will significantly increase our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of lending activities. Our financial condition and results of operations will be enhanced by the capital from the offering, resulting in increased net interest-earning assets and net income. However, the large increase in equity resulting from the capital raised in the offering will, initially, have an adverse impact on our return on equity. Following the offering, we may use capital management tools such as cash dividends and common share repurchases. However, under Federal Deposit Insurance Corporation regulations, we will not be allowed to repurchase any shares during the first year following the offering, except to fund the restricted stock awards under the equity benefit plan after its approval by shareholders, unless extraordinary circumstances exist and we receive regulatory approval.

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
September 30, 2011
Tier I leverage capital	$	66,968		8.78	%	$	30,504		4.00	%	$	38,131		5.00	%
Tier I risk-based capital		66,968		15.39	%		17,401		4.00	%		26,101		6.00	%
Total risk-based capital		72,498		16.67	%		34,802		8.00	%		43,502		10.00	%
NC Savings Bank capital		77,857		9.75	%		39,944		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

On October 11, 2011, the Bank received an additional $28 million from the Company in exchange for all of the Bank’s common stock issued in the Bank’s conversion from a mutual savings bank, which significantly increased the Bank’s capital ratios compared to the capital ratios presented in the table above:

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

For the nine months ended September 30, 2011 and the year ended December 31, 2010, 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.

59

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 Board Chair, who is an independent director, and members of management, to communicate, coordinate and control all aspects involving asset-liability management. The committee establishes and monitors 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 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 our interest-bearing liabilities, which are primarily term deposits. Accordingly, our earnings are usually adversely affected during periods of rising interest rates and positively impacted during periods of declining interest rates.

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.

Based on the results of 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.

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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.

									Over the Next Twelve Months
	As of September 30, 2011								Ending September 30, 2012
	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	$	66,308	$	(20,002	)		-23.17	%	$	21,022	$	(817	)		-3.74	%
200		73,501		(12,809	)		-14.84	%		21,000		(839	)		-3.84	%
100		82,183		(4,127	)		-4.78	%		21,501		(338	)		-1.55	%
0		86,310		—			0.00	%		21,839		—			0.00	%
(100)		77,968		(8,342	)		-9.67	%		20,720		(1,119	)		-5.12	%

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Item 4. Controls and Procedures

The Company’s management has carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the 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 (1) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) 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.

In addition, based on that evaluation, there has been no change in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A. Risk Factors

For information regarding ASB Bancorp’s risk factors, see “Risk Factors” in the Company’s prospectus, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) on August 12, 2011. Except as set forth below, as of September 30, 2011, the risk factors of ASB Bancorp have not changed materially from those disclosed in the prospectus.

The Standard & Poor’s downgrade in the U.S. government’s sovereign credit rating, and in the credit ratings of instruments issued, insured or guaranteed by certain related institutions, agencies and instrumentalities, could result in risks to the Company and the Bank and general economic conditions that we are not able to predict.

On August 5, 2011, Standard & Poor’s downgraded the United States long-term debt rating from its AAA rating to AA+. On August 8, 2011, Standard & Poor’s downgraded the credit ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long-term U.S. debt. Instruments of this nature are key assets on the balance sheets of financial institutions, including the Bank. These downgrades could adversely affect the market value of such instruments, and could adversely impact our ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available. In addition, these downgrades could materially affect global and domestic financial markets and economic conditions, which may affect the Company’s and the Bank’s business, financial condition and liquidity and result in future changes in capital requirements or a rebalancing of investment portfolios in response to management’s assessment of the related risk weightings. We cannot predict if, when or how these changes to the credit ratings will affect economic conditions. As a result, the changes to the credit ratings could result in a significant adverse impact to the Company, and could exacerbate the other risks to which the Company is subject.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item  4. [Removed and Reserved]

Item 5. Other Information

Not applicable.

Item 6. Exhibits

3.1	Articles of Incorporation of ASB Bancorp, Inc. (1)
3.2	Bylaws of ASB Bancorp, Inc. (1)
4.1	Form of Common Stock Certificate of ASB Bancorp, Inc. (1)
10.1	Employment Agreement, dated as of October 18, 2011, by and between ASB Bancorp, Inc., Asheville Savings Bank, S.S.B. and Suzanne S. DeFerie * (2)
10.2	Employment Agreement, dated as of October 18, 2011, by and between ASB Bancorp, Inc., Asheville Savings Bank, S.S.B. and Kirby A. Tyndall * (2)
10.3	Employment Agreement, dated as of October 18, 2011, by and between ASB Bancorp, Inc., Asheville Savings Bank, S.S.B. and David A. Kozak * (2)
10.4	Employment Agreement, dated as of October 18, 2011, by and between ASB Bancorp, Inc., Asheville Savings Bank, S.S.B. and Fred A. Martin * (2)
10.5	Asheville Savings Bank, S.S.B. Change in Control Severance Plan *
10.6	ASB Bancorp, Inc. Stock-Based Deferral Plan *
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 September 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. **

* Management contract or compensatory plan, contract or arrangement.

** Furnished, not filed.

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

(2) Incorporated herein by reference to the exhibits to ASB Bancorp, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 21, 2011.

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SIGNATURES

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

	ASB BANCORP, INC.
	Registrant
November 10, 2011	By:	/s/    SUZANNE S. DEFERIE
		Suzanne S. DeFerie
		President and Chief Executive Officer (Principal Executive Officer)
November 10, 2011	By:	/s/    KIRBY A. TYNDALL
		Kirby A. Tyndall
		Executive Vice President and
		Chief Financial Officer (Principal Financial and Accounting Officer)

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EX-10.5

Exhibit 10.5

ASHEVILLE SAVINGS BANK

CHANGE IN CONTROL SEVERANCE PLAN

Section 1. Plan Name and Effective Date

1.1 The name of the Plan is the Asheville Savings Bank Change in Control Severance Plan. The effective date of the Plan shall be October 11, 2011.

Section 2. Purpose

2.1 The purpose of the Plan is to provide severance pay to eligible Employees following a Change in Control and under the conditions set forth in this Plan. Severance payments under the Plan are designed to provide the Employee with funds while seeking other employment.

Section 3. Definitions

Bank shall mean the Asheville Savings Bank, a North Carolina-chartered savings bank.

Board shall mean the Board of Directors (or a Committee thereof) of the Bank.

Cause shall mean: (1) willful failure to follow or to cooperate in carrying out any of the lawful policies of Company or the Bank or the lawful directions of the Board, (2) continued and willful neglect of duties for or on behalf of the Bank, (3) willful misconduct in connection with the performance of any of the Employee’s duties, (4) conduct which results in the Employee’s suspension and/or temporary prohibition or removal and/or permanent prohibition from participation in the conduct of the affairs of the Bank pursuant to the rules and regulations of the primary federal or state banking agency having regulatory jurisdiction over the Bank, (5) conviction of a felony or any misdemeanor involving moral turpitude or willful violation of any law, rule or regulation to which the Bank is subject or of a final order or other formal administrative action entered into, by or imposed upon the Bank; (6) willful violation of any code of conduct or standards of ethics applicable to employees of the Bank that results in material and demonstrable damage to the business or reputation of the Bank, or (7) the issuance of a permanent injunction or similar remedy against the Employee preventing the Employee from executing or performing the duties of his position. The Employee shall be entitled to at least seven (7) days’ prior written notice of the Bank’s intention to terminate his or her employment for any Cause, specifying the grounds for such termination and the means, if any, to rectify such conduct, and seven (7) days to rectify or appeal in writing to the Board regarding the existence of such Cause.

Change in Control shall mean and shall be deemed to have occurred upon the occurrence of any of the following events.

(1) The acquisition by any “person” or “group” (as defined in or pursuant to Sections 13(d) and 14(d) of the Exchange Act) (other than Company, any Subsidiary or any Company or Subsidiary’s employee benefit plan), directly or indirectly, as “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) of securities representing fifty percent (50%) or more of either the then outstanding shares or the combined voting power of the then outstanding securities of Company or the Bank;

(2) Either a majority of the directors of Company elected at Company’s annual stockholders meeting shall have been nominated for election other than by or at the direction of the “incumbent directors” of Company, or the “incumbent directors” shall cease to constitute a majority of the directors of Company. The term “incumbent director” shall mean any director who was a director of Company on the

Effective Date and any individual who becomes a director of Company subsequent to the Effective Date and who is elected or nominated by or at the direction of at least majority of the then incumbent directors; or

(3) The consummation of (x) a merger, consolidation or other business combination of Company with any other “person” or “group” (as defined in or pursuant to Sections 13(d) and 14(d) of the 1934 Act) or affiliate thereof, other than a merger or consolidation that would result in the outstanding common stock of Company immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into common stock of the surviving entity or a parent or affiliate thereof) more than fifty percent (50%) of the outstanding common stock of Company or such surviving entity or a parent or affiliate thereof outstanding immediately after such merger, consolidation or other business combination, or (y) a plan of complete liquidation of Company or the Bank or an agreement for the sale or disposition of all or substantially all of Company’s or the Bank’s assets.

Comparable Position shall mean a position that, following a Change in Control, would (i) provide the Employee with base compensation that is comparable to that provided to the Employee prior to the Change in Control, (ii) be in a location that would not require the Employee to increase his or her daily one way commuting distance by more than thirty-five (35) miles as compared to the Employee’s commuting distance immediately prior to the Change in Control and (iii) have job skill requirements and duties that are comparable to the requirements and duties of the position held by the Employee prior to the Change in Control.

Employee shall mean a regular, active full-time, part-time, or Part-time Plus employee of the Bank, but excludes an employee who has a written employment agreement, severance agreement, or similar agreement with the Bank providing for severance payment(s) in the event of termination of employment.

Participant shall mean an Employee who satisfies the eligibility requirements as set forth in Section 4.1.

Pay shall mean the base or regular compensation rate as of the calendar month preceding the date of employment termination. In the case of a non-exempt Employee, “Pay” shall not include overtime compensation paid to such Employee during such month.

Payment Period shall mean, with respect to payment by the Bank of the Severance Payment pursuant to Section 5.1, the number of weeks or months of Pay a Participant is entitled to under Section 5.1. The Payment Period is not dependent on whether a benefit payment under Section 5 is made periodically or in a lump sum.

Plan shall mean this Asheville Savings Bank Employee Severance Plan as it may be amended from time to time.

Service shall mean all employment with the Bank, or any successor thereof.

Severance Payment has the meaning given to such term in Section 5.1.

Section 4. Eligibility

4.1 An Employee shall be eligible to receive a Severance Payment as set forth in Section 5, if:

(a) as of the Employee’s termination date, the Employee has completed at least one (1) year

2

of Service with the Bank (provided, however, that an Employee serving as a Senior Vice President, Vice President, Treasurer or Corporate Secretary shall not be subject to the foregoing minimum service requirement),

(b) on or after the effective date of a Change in Control and continuing through the first anniversary of the Change in Control, the Employee’s employment is terminated by the Bank, other than under the circumstances described in Section 5.5; and

(c) the Employee signs a general release waiving any employment-related claims against the Bank in a form provided by the Bank.

Section 5. Severance Payment Calculation and Payment

5.1 A Participant under the Plan shall be eligible to receive a severance payment calculated as follows (the “Severance Payment”):

Participant who is a Senior Vice President or Treasurer: Eighteen (18) months of Pay.

Participant who is a Vice President: Twelve (12) months of Pay.

Participant who is an Assistant Vice President or Corporate Secretary: Nine (9) months of Pay.

All other Non-Officer Participants. – the greater of: (a) two (2) weeks of Pay for each completed year of Service, calculated based on the Employee’s hire date, but not to exceed fifty two (52) weeks of Pay, or (b) four weeks of Pay.

Notwithstanding anything herein to the contrary, the Severance Payment shall not exceed two (2) times the lesser of:

(a) the Participant’s annual compensation (as defined in Internal Revenue Code of 1986, as amended (the “Code”) Regulation Section 1.415-2(d)(2)) for the calendar year preceding the calendar year in which the employment terminates; and

(b) the maximum amount of compensation under Section 401(a)(17) of the Code for the calendar year in which occurs the date of employment termination.

5.2 The Bank reserves the right to offset the payments described in Section 5.1 above against any monies the Participant owes the Bank.

5.3 Payments under the Plan shall be made during the Payment Period in accordance with the regular payroll schedule of the Bank, subject to any necessary or required benefit or tax withholding.

5.4 If a Participant dies before receiving a payment due under the Plan, such payment shall continue to be paid to the beneficiary designated by the Participant at the time of termination of employment. If no beneficiary has been designated, then such payments shall be made to the Participant’s estate.

5.5 Notwithstanding anything in this Plan to the contrary, in the event of an Employee’s involuntary termination for Cause, the voluntary termination by the Employee of his or her employment for any reason, other than upon the Bank’s failure to provide the Employee with a Comparable Position,

3

or the Employee’s termination of employment after the Plan terminates, the Employee will not be entitled to any compensation under this Section 5, other than regular compensation and benefits to which the Employee is entitled through the date of termination.

Section 6. Administration

6.1 The Plan is sponsored and shall be administered by the Bank.

6.2 The Bank may at any time delegate to a person or body, or reserve therefore, any of the fiduciary responsibilities or administrative duties with respect to the Plan. The Bank, or any such delegate, shall have the complete discretion and authority to interpret the Plan, including matters regarding eligibility and benefit entitlement.

6.3 Subject to the limitation of the provisions of the Plan, the Bank may establish such rules for the administration of the Plan as the Bank may deem desirable.

6.4 The expenses of administering the Plan, including the benefits, shall be paid by the Bank out of its general assets.

6.5 The Plan and all of its records shall be kept on a calendar year basis, beginning January 1 and ending December 31 of each calendar year.

6.6 Except as required by applicable law, benefits provided under the Plan shall not be subject to assignment or alienation, since they are primarily for the support and maintenance of the Participants. Likewise, such benefits shall not be subject to attachment by creditors of or through legal process against the Bank or any Participant.

6.7 The Bank reserves the right to change, amend or terminate the Plan by a resolution adopted by a majority of the Board. The Plan shall be reviewed annually by the Compensation Committee of the Board. Participants will be notified of any changes, and all changes will be subject to the Plan’s provisions and applicable laws. Notwithstanding the foregoing, the Plan is not subject to amendment or termination on or after the effective date of a Change in Control.

6.8 Nothing herein shall be construed as giving to any Employee of the Bank any right to remain in the employ of the Bank, alter an Employee’s status as an at-will employee, or provide or be construed as providing any right to claim any other benefit or allowance after termination of employment with the Bank except as expressly provided for herein.

Section 7. Miscellaneous

7.1 An Employee who believes they are entitled to benefits under the Plan, must submit a written claim to the Bank within sixty (60) days of the date of the alleged occurrence giving rise to the claim. If the Bank or any delegate believes that the claim should be denied, the Employee shall be notified in writing of the denial of the claim within ninety (90) days after the Bank’s receipt of the claim. Such notice shall (a) set forth the specific reason or reasons for the denial, making reference to the pertinent provisions of the Plan on which the denial is based; (b) describe any additional material or information that should be received before the claim may be acted upon favorably and explain the reason why such material or information, if any, is needed; (c) inform the Employee of his or her right pursuant to this section to request review of the decision by the Bank; and (d) explain the Plan’s claims review procedure and the time limits applicable to such procedures. An Employee who believes that he or she has submitted all available and relevant information may appeal the denial of a claim to the Bank by

4

submitting a written request for review within sixty (60) days after the date on which such denial is received. Such period may be extended by the Bank for good cause shown. During this period, the Employee making the request for review may examine the Plan documents, records and other information relevant to the Employee’s claim for benefits. The Bank shall decide whether or not to grant the claim within sixty (60) days after receipt of the request for review, but this period may be extended by the Bank for up to an additional sixty (60) days in special circumstances. The Bank’s decision shall be in writing, shall include specific reasons for the decision, shall refer to pertinent provisions of the Plan on which the decision is based, and shall be conclusive and binding on all persons.

7.2. The Plan and the rights of the parties hereunder shall be governed by and interpreted in accordance with federal law, and, to the extent applicable, the laws of North Carolina. The invalidity or unenforceability of any provision or any part of any provision, hereof shall in no way effect the validity or enforceability of any other provision or part hereof.

Section 8. Regulatory Requirements

(1) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Employer’s affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (“FDIA”) (12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Employer under this Agreement shall terminate, as of the effective date of such order, except for the payment of base salary due and owing on the effective date of said order, and reimbursement of expenses incurred as of the effective date of termination.

(2) If the Employee is suspended and/or temporarily prohibited from participating in the conduct of the Employer’s affairs by a notice served under Section 8(e)(3) or 8(g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)), all obligations of the Employer under this Agreement shall be suspended as of the date of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Employer shall reinstate (in whole or in part) any of its obligations which were suspended.

(3) If the Employer is in default (as defined in Section 3(x)(1) of the FDIA), all obligations under this Agreement shall terminate as of the date of default, but the vested rights of the parties shall not be affected.

(4) All obligations under this Plan shall be terminated, except to the extent a determination is made that continuation of the contract is necessary for the continued operation of the Employer (1) by the director of the Federal Deposit Insurance Corporation (the “FDIC”) or his or her designee (the “Director”), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Employer under the authority contained in Section 13(c) of the FDIA; or (2) by the Director, at the time the Director approves a supervisory merger to resolve problems related to operation of the Employer when the Employer is determined by the Director to be in an unsafe and unsound condition. Any rights of an Employee that have already vested, however, shall not be affected by such action.

(5) All obligations under this Plan are further subject to such conditions, restrictions, limitations and forfeiture provisions as may separately apply pursuant to any applicable state banking laws.

(6) Notwithstanding anything contained in this Agreement to the contrary, no payments shall be made under any other provision herein in contravention of the requirements of the Federal Deposit Insurance Act (12 U.S.C. 1828(k)).

5

EX-10.6

Exhibit 10.6

ASB BANCORP, INC.

STOCK-BASED DEFERRAL PLAN

1. Purpose.

This ASB Bancorp, Inc. Stock-Based Deferral Plan (the “Plan”) provides Directors and certain Eligible Officers of ASB Bancorp, Inc. and its affiliates with the opportunity to elect to defer compensation received for their service and, thereby, accumulate additional shares of ASB Bancorp, Inc. common stock. The Plan is intended to constitute a deferred compensation plan that satisfies the requirements of Section 409A of the Code.

2. Definitions.

As used in the Plan, the following terms have the meanings indicated:

Board means the Board of Directors of the Company.

Change in Control shall mean a change in control as defined in Internal Revenue Code Section 409A and rules, regulations, and guidance of general application thereunder issued by the Department of the Treasury, including –

(a) Change in ownership: a change in ownership of the Company, a corporation of which the Bank is a wholly owned subsidiary, occurs on the date any one person or group accumulates ownership of the Company stock constituting more than 50% of the total fair market value or total voting power of the Company stock,

(b) Change in effective control: (i) any one person or more than one person acting as a group acquires within a 12-month period ownership of the Company stock possessing 30% or more of the total voting power of the Company stock, or (ii) a majority of the Board is replaced during any 12-month period by Directors whose appointment or election is not endorsed in advance by a majority of the Board, or

(c) Change in ownership of a substantial portion of assets: a change in ownership of a substantial portion of the Company’s assets occurs if in a 12-month period any one person or more than one person acting as a group acquires from the Company assets having a total gross fair market value equal to or exceeding 40% of the total gross fair market value of all of the Company’s assets immediately before the acquisition or acquisitions. For this purpose, gross fair market value means the value of the Company’s assets, or the value of the assets being disposed of, determined without regard to any liabilities associated with the assets.

Code means the Internal Revenue Code of 1986, as amended.

Committee means the Compensation Committee of the Board or any other committee of the Board designated as the administrator of the Plan.

Company means ASB Bancorp, Inc. and its successors.

Company Stock means the common stock of the Company.

Compensation means (i) in the case of a Participant who is a Director, the cash retainer fees, meeting (board and committee) fees and other cash compensation payable to the Participant in connection with his or her service on the Board or the board of directors of any affiliate of the Company for any Plan Year and (ii) in the case of a Participant who is an Eligible Officer, base salary and any cash incentive compensation.

Deferred Stock Account means a bookkeeping account reflecting the investment of a Participant’s deferred Compensation in Company Stock Units and any adjustments thereto.

Director means a member of the Board of the Company or Asheville Savings Bank.

Effective Date means August 1, 2011.

Eligible Officer means an officer of the Company or an affiliate of the Company who is designated by the Board as eligible to defer Compensation through the Plan.

Participant means a Director or Eligible Officer who elects to defer Compensation through the Plan.

Plan Year means the Company’s fiscal year ending December 31st of each year.

Separation from Service is intended to have the same meaning as under Code Section 409A and any regulations or guidance issued under such provision.

Stock Unit means a hypothetical share of Company Stock. Each Stock Unit held in a Deferred Stock Account shall be deemed to have the same value, from time to time, as a share of Company Stock.

Trust means a trust created for the purposes specified in Section 10.

3. Participation in the Plan.

A Director serving on the Board of the Company shall be eligible to participate in the Plan as of the Effective Date. A Director who joins the Board following the Effective Date shall be eligible to participate in the Plan upon his or her first day of service as a Director. An officer of the Company or an affiliate shall participate in the Plan only upon designation as an Eligible Officer by the Board. Participation in the Plan by a Director or Eligible Officer shall commence upon the submission of a timely deferral election form to the Committee in the manner prescribed below.

4. Deferrals.

(a) A Participant may elect to defer the payment of Compensation (in increments of 1% up to 100% or in a specified dollar amount) that would otherwise be payable in cash during the Plan Year by completing a deferral election. A deferral election must specify the applicable percentage or fixed dollar amount of Compensation that the Participant wishes to defer. A deferral election shall pertain to all Compensation payable during a Plan Year.

(b) A deferral election must be in writing and be delivered to the Company prior to the start of the Plan Year (or, in the case of an Eligible Officer who elects to defer performance-based incentive compensation, not later than March 31 of the year to which the compensation relates) to which it pertains. A deferral election shall be irrevocable and

2

may not be amended with respect to the Plan Year to which it pertains. A deferral election may be made only for a single Plan Year.

(c) All amounts deferred under the Plan shall be held as Stock Units. With respect to all amounts for which a deferral election is made, the Company shall transfer such amounts to the Trust as soon as is reasonably practicable after the time when the Compensation otherwise would have been payable in cash to the Participant (or pursuant to a Participant’s election under Section 17) or at such other times as the Committee, in its sole discretion, shall determine. Thereafter, the trustee of the Trust shall determine the number of Stock Units to be credited to an individual Participant’s Deferred Stock Account by reference to the total number of shares of Company Stock acquired by the Trust with the proceeds of each transfer and the proportion that the Participant’s Compensation included in such transfer bears to the total of all Compensation transferred.

5. Stock Unit Accounting.

(a) All Stock Units credited to a Participant’s Deferred Stock Account shall be credited with hypothetical cash dividends equal to the cash dividends that are declared and paid on Company Stock if any. On each record date, the Company shall determine the amount of cash dividends to be paid per share of Company Stock. On the payment date of such dividend, the Company shall credit an equal amount of hypothetical cash dividends to each Stock Unit. The hypothetical cash dividends shall be converted into Stock Units by reference to the reinvestment of such dividends by the trustee of the Trust as set forth in Section 7.

(b) Stock Units may not be sold, assigned, transferred, disposed of, pledged, hypothecated or otherwise encumbered.

6. Distribution of Accounts.

(a) A Participant may elect the timing of distributions from the Participant’s Deferred Stock Account. Distributions from a Participant’s Deferred Stock Account shall commence at one of the following specified events elected by the Participant:

(i) the Participant’s Separation from Service for any reason (including resignation or death);

(ii) a specified number of years between one year and five years after the Participant’s Separation from Service; or

(iii) a fixed date or age as specified in a Participant’s deferral election. An amount is payable as of a fixed date or age if the dates are nondiscretionary and objectively determinable at the time of the deferral election.

In addition, a Participant may make a separate election for distributions to commence at a Change in Control or, if eligible, may request a hardship distribution as noted in Section 19 of his Plan.

(b) If a Participant does not make an election under subsection (a)(ii), distribution of the Participant’s Deferred Stock Account shall commence at Separation from Service. Prior to Separation from Service, a Participant who has previously elected commencement at Separation from Service (or made no previous election) may make one subsequent

3

election. The subsequent election must be submitted at least twelve months prior to Separation from Service and shall take effect twelve months after the date on which it is submitted. The subsequent distribution election must elect the specified time under subsection (a)(ii) as five years after Separation from Service. The Committee may establish additional procedures, conditions, and limitations relating to the submission of a subsequent election.

(c) A Participant’s Accounts shall be distributed in a single lump sum payment, unless the Participant elects to receive a distribution in equal annual installments over at least two and not more than 10 years.

(d) Payment of Stock Units shall be made only in whole shares of Company Stock equal to the number of whole Stock Units. Fractional shares shall be disregarded for distribution purposes.

(e) Despite any contrary provision of this Plan, if, when the Participant’s service terminates, the Participant is a “specified employee,” as defined in Code Section 409A, and if any payments under Article 6 of this Agreement will result in additional tax or interest to the Participant because of Section 409A, the Participant shall not be entitled to the payment under Article 6 until the earliest of (i) the date that is at least six months after termination of the Participant’s employment for reasons other than the Participant’s death, (ii) the date of the Participant’s death, or (iii) any earlier date that does not result in additional tax or interest to the Participant under Section 409A. If any provision of this Agreement would subject the Participant to additional tax or interest under Section 409A, the Company shall reform the provision. However, the Company shall maintain to the maximum extent practicable the original intent of the applicable provision without subjecting the Participant to additional tax or interest.

7. Trust.

(a) As soon as practicable after the Effective Date, the Company shall establish a trust for the purposes set forth in this Plan. The Company shall from time to time transfer to the Trust cash in an amount equal to Participants’ deferred Compensation (including amounts transferred pursuant to a Participant’s election under Section 17) for the purpose of acquiring shares of Company Stock. In no event shall the Company issue or contribute shares of Company Stock directly to the Trust.

(b) The Trust and its assets shall remain subject to the claims of the Company’s creditors. All benefit obligations under this Plan shall be paid from the general assets of the Company, which shall include the assets of the Trust in the event of the Company’s insolvency. Any interest that the Participant may be deemed to have under this Plan may not be sold, hypothecated or transferred (including, without limitation, transfer by gift), except by will or the laws of descent and distribution. Shares issued to the Trust shall be issued in the name of the trustee. The trustee shall invest all cash dividends on Company Stock in additional shares of Company Stock. Unless otherwise determined by the Committee, a Participant shall have the right to direct the trustee as to the voting of the number of shares of Company Stock equal to the aggregate number of Stock Units in the Participant’s Deferred Stock Account.

(c) The Company shall bear all expenses associated with the acquisition of Company Stock by the Trust and the maintenance of the Trust.

4

8. No Acceleration of Benefits.

Notwithstanding any other provision in this Plan to the contrary, the time or schedule for any payment of a Participant’s Deferred Stock Account under this Plan shall not be accelerated under any circumstances.

9. Effect of Stock Dividends and Other Changes to Company Stock.

In the event of a stock dividend, stock split or combination of shares, recapitalization or merger in which the Company is the surviving corporation or other change in the Company’s capital stock, the number and kind of shares of Company Stock to be subject to the Plan and the maximum number of shares which are authorized for distribution under the Plan shall be appropriately adjusted by the Board, whose determination shall be binding on all persons.

10. Interpretation and Administration of the Plan.

The Committee shall administer, construe and interpret the Plan. Any decision of the Committee with respect to the Plan shall be final, conclusive and binding upon all Participants. The Committee may act by a majority of its members. The Committee may authorize any member of the Committee or any officer of the Company to execute and deliver documents on behalf of the Committee. The Committee may consult with counsel, who may be counsel to the Company, and shall not incur any liability for action taken in good faith in reliance upon the advice of counsel. The Committee may designate an officer of the Company to be authorized to take or cause to be taken such actions of a ministerial nature as necessary to effectuate the intent and purposes of the Plan, including issuing Company Stock for the Plan, maintaining records of the Plan, and arranging for distributions in accordance with this Plan document. The Committee shall interpret this Plan for all purposes in accordance with Code Section 409A and the regulations thereunder and any provision of the Plan shall be deemed modified to the extent necessary to comply with Code Section 409A and the regulations thereunder.

11. Term of the Plan.

The Plan shall become effective as of the Effective Date and continue in effect unless terminated by action of the Board. Any termination of the Plan by the Board shall not alter or impair any of the rights or obligations for any benefit previously deferred under the Plan.

12. Termination or Amendment of the Plan.

The Board, or a Committee of the Board, may suspend or terminate the Plan or revise or amend the Plan in any respect; provided, any amendment or termination of the Plan shall not adversely affect a Participant with respect to any benefit previously deferred under the Plan; provided, however, that approval of an amendment to the Plan by the stockholders of the Company shall be required to the extent, if any, that stockholder approval of such amendment is required by applicable law, rule or regulation.

13. Rights Under the Plan.

The Plan shall not constitute or be evidence of any agreement or understanding, express or implied, that the Company will retain any person as a Director or employee for any period of time.

5

14. Beneficiary.

A Participant may designate in writing delivered to the Committee, one or more beneficiaries (which may include a trust) to receive any distributions under the Plan after the death of the Participant. If a Participant fails to designate a beneficiary, or no designated beneficiary survives the Participant, any payments to be made with respect to the Participant after death shall be made to the personal representative of the Participant’s estate.

15. Notice.

All notices and other communications required or permitted to be given under this Plan shall be in writing and shall be deemed to have been duly given if delivered personally or mailed first class, postage prepaid, as follows: (i) if to the Company—at its principal business address to the attention of the Chairman of the Committee; (ii) if to any Participant—at the last address of the Participant known to the sender at the time the notice or other communication is sent.

16. Construction.

The Plan shall be construed and enforced according to the laws of the State of North Carolina, unless federal law applies. All transactions under this Plan shall also be subject to compliance with applicable securities laws. Reference to one gender includes the other, and references to the singular and plural include each other.

17. Special Transfer Rule.

A Participant who, as of the Effective Date, is a participant in the Asheville Savings Bank Second Amended and Restated Directors and Officers Deferral Plan (collectively referred to herein as the “Prior Plan”) may elect not later than 30 days after the Effective Date to effect a one-time transfer to this Plan of all or any portion of the amounts accrued on their behalf under the Prior Plan as of the Effective Date. All transferred amounts shall be treated in the same manner as any other compensation deferred under this Plan and shall be subject to the provisions of this Plan, except for vesting and distribution elections (if any). All distribution elections made under the Prior Plan will be in effect for this Plan with respect to transferred amounts.

18. Prior Plan

All funds transferred into this Plan from the Prior Plan by operation of Section 17 shall be subject to the benefit and distribution provisions and/or elections and the vesting provisions in the Prior Plan.

19. Unforeseeable Emergency

The Company shall permit financial hardship distributions upon an “unforeseeable emergency” (as defined in Section 409A of the Internal Revenue Code and the rules promulgated thereunder) involving the Participant or his or her family. The Participant may submit a written application for an in-service hardship distribution to the Company. The application must specify the nature of the financial hardship, the total amount requested to be distributed from the Participant’s Account and the total amount of the actual expense incurred or to be incurred due to the financial hardship. If, in the discretion of the Company, the Participant has suffered an unforeseeable emergency that results in severe financial hardship to Participant, the Company shall cause the Plan to pay an in-service distribution to the Participant from the Participant’s Account. A distribution because of an unforeseeable emergency shall

6

not exceed the amount required to meet the immediate financial need created by the unforeseeable emergency and not otherwise reasonably available from other resources of Participant. Such distribution shall be made in a lump sum as soon as administratively feasible, after the Committee determines that the Participant has incurred an unforeseeable emergency that will result in severe financial hardship to the Participant.

THIS PLAN WAS APPROVED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF THE COMPANY ON JUNE 21, 2011, TO BE EFFECTIVE AS OF AUGUST 1, 2011, AND IS HEREBY EXECUTED BY A DULY AUTHORIZED OFFICER OF THE COMPANY ON JUNE 21, 2011.

ASB BANCORP, INC.

/s/ Suzanne S. DeFerie                            

Duly Authorized Officer

7

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’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.

November 10, 2011	/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’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.

November 10, 2011	/s/ Kirby A. Tyndall
	Kirby A. Tyndall
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

EX-32

Exhibit 32

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 September 30, 2011 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.

November 10, 2011	By:	/s/ Suzanne S. DeFerie
		Suzanne S. DeFerie
		President and Chief Executive Officer
		(Principal Executive Officer)
November 10, 2011	By:	/s/ Kirby A. Tyndall
		Kirby A. Tyndall
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

XML

Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands	Sep. 30, 2011	Dec. 31, 2010
Consolidated Balance Sheets [Abstract]
Amortized cost of securities available for sale	$ 225,823	$ 176,193
Fair value of securities held to maturity	5,835	6,198
Deferred loan fees on loans receivable	432	409
Loss reserves on foreclosed real estate	$ 1,712	$ 1,299

XML

Consolidated Statements Of Income (Loss) (USD $) In Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Interest and dividend income
Loans, including fees	$ 5,705	$ 6,961	$ 17,992	$ 22,055
Securities	1,361	1,152	3,918	3,114
Other earning assets	24	23	64	54
Total interest and dividend income	7,090	8,136	21,974	25,223
Interest expense
Deposits	1,511	2,266	4,818	7,052
Overnight and short-term borrowings		1	4	3
Federal Home Loan Bank advances	609	609	1,807	1,807
Total interest expense	2,120	2,876	6,629	8,862
Net interest income	4,970	5,260	15,345	16,361
Provision for loan losses	730	13,838	1,811	18,309
Net interest income (loss) after provision for loan losses	4,240	(8,578)	13,534	(1,948)
Noninterest income
Mortgage banking income	190	354	718	889
Deposit and other service charge income	838	900	2,559	2,824
Income from debit card services	312	307	925	872
Gain on sale of investment securities	417	18	640	798
Other noninterest income	247	136	770	474
Total noninterest income	2,004	1,715	5,612	5,857
Noninterest expenses
Salaries and employee benefits	2,606	2,418	7,662	7,255
Occupancy expense, net	765	765	2,293	2,312
Foreclosed property expenses	334	1,125	968	1,285
Data processing fees	405	395	1,224	1,121
Federal deposit insurance premiums	79	227	589	769
Advertising	145	224	543	649
Professional and outside services	197	226	610	581
Other noninterest expenses	791	840	2,295	2,482
Total noninterest expenses	5,322	6,220	16,184	16,454
Income (loss) before income tax provision	922	(13,083)	2,962	(12,545)
Income tax provision (benefit)	351	(5,080)	1,064	(4,886)
Net income (loss)	$ 571	$ (8,003)	$ 1,898	$ (7,659)

XML

Document And Entity Information	9 Months Ended
	Sep. 30, 2011	Oct. 31, 2011
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q3
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		5,584,551

XML

Allowance For Loan Losses

9 Months Ended

Sep. 30, 2011

Allowance For Loan Losses [Abstract]

Allowance For Loan Losses

5. ALLOWANCE FOR LOAN LOSSES

An analysis of the allowance for loan losses follows:

(in thousands)	Three Months Ended September 30, 2010			Nine Months Ended September 30, 2010
Balance at beginning of period	$	10,097		$	8,994
Provision for loan losses		13,838			18,309
Charge-offs		(7,087	)		(10,525	)
Recoveries		35			105
Balance at end of period	$	16,883		$	16,883

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

	Three Months Ended September 30, 2011									Nine Months Ended September 30, 2011
(in thousands)	Commercial			Non- Commercial			Total			Commercial			Non- Commercial			Total
Balance at beginning of period	$	7,608		$	4,745		$	12,353		$	7,658		$	5,018		$	12,676
Provision for loan losses		412			318			730			1,047			764			1,811
Charge-offs		(1,809	)		(424	)		(2,233	)		(2,578	)		(1,240	)		(3,818	)
Recoveries		—			23			23			84			120			204
Balance at end of period	$	6,211		$	4,662		$	10,873		$	6,211		$	4,662		$	10,873

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
September 30, 2011
Commercial:
Commercial construction and land development	$	144	$	659	$	803	$	17,568	$	5,763	$	23,331
Commercial mortgage		262		4,432		4,694		1,619		141,546		143,165
Commercial and industrial		183		531		714		959		15,143		16,102
Total commercial		589		5,622		6,211		20,146		162,452		182,598
Non-commercial:
Non-commercial construction and land development		576		148		724		2,525		5,170		7,695
Residential mortgage		329		1,835		2,164		5,213		174,809		180,022
Revolving mortgage		—		1,107		1,107		300		51,457		51,757
Consumer		—		667		667		—		28,600		28,600
Total non-commercial		905		3,757		4,662		8,038		260,036		268,074
Total loans receivable	$	1,494	$	9,379	$	10,873	$	28,184	$	422,488	$	450,672
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
September 30, 2011
Commercial:
Commercial construction and land development	$	19,187	$	367	$	17,201	$	17,568	$	144
Commercial mortgage		2,124		1,619		—		1,619		262
Commercial and industrial		1,511		500		459		959		183
Total commercial		22,822		2,486		17,660		20,146		589
Non-commercial:
Non-commercial construction and land development		2,660		1,972		553		2,525		576
Residential mortgage		5,622		2,839		2,374		5,213		329
Revolving mortgage		300		—		300		300		—
Total non-commercial		8,582		4,811		3,227		8,038		905
Total impaired loans	$	31,404	$	7,297	$	20,887	$	28,184	$	1,494
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 September 30, 2011				Nine Months Ended September 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	$	16,505	$	96	$	16,439	$	288	$	17,171	$	195
Commercial mortgage		1,619		11		4,978		68		12,674		322
Commercial and industrial		1,052		4		1,217		16		1,477		67
Total commercial		19,176		111		22,634		372		31,322		584
Non-commercial:
Non-commercial construction and land development		2,538		13		2,572		52		1,414		32
Residential mortgage		5,521		30		6,016		108		7,967		236
Revolving mortgage		300		—		105		—		33		16
Total non-commercial		8,359		43		8,693		160		9,414		284
Total loans receivable	$	27,535	$	154	$	31,327	$	532	$	40,736	$	868

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2011		2010		2011		2010
Average recorded investment in impaired loans	$	27,535	$	39,375	$	31,327	$	40,973
Interest income recognized on impaired loans	$	154	$	145	$	532	$	797

The following table summarizes the Bank's recorded investment in TDRs before and after their modifications during the periods indicated. The Bank extended the payment terms on one loan during the three months ended September 30, 2011 and on five loans during the nine months ended September 30, 2011 and allowed the payments on one loan to be reduced based on the principal remaining after a partial charge-off during the 2011 nine-month period. The Bank does not typically grant reductions in interest rates to below market levels on the troubled debt it restructures.

	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
(in thousands)	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Extended payment terms
Non-commercial:
Non-commercial construction and land development		1	$	1,750	$	1,750		1	$	1,750	$	1,750
Residential mortgage		—		—		—		4		622		622
Total non-commercial		1		1,750		1,750		5		2,372		2,372
Total		1	$	1,750	$	1,750		5	$	2,372	$	2,372
Forgiveness of principal
Commercial:
Commercial and industrial		—	$	—	$	—		1	$	503	$	142
Total commercial		—		—		—		1		503		142
Total		—	$	—	$	—		1	$	503	$	142
Total		1	$	1,750	$	1,750		6	$	2,875	$	2,514

The following table presents loans that were modified as TDRs within the preceding 12 months that stopped performing in accordance with their modified terms during the periods indicated. During the nine months ended September 30, 2011, three loans modified as TDRs went into default of which one loan went into default during the third quarter of 2011.

	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
(in thousands)	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Extended payment terms
Commercial:
Commercial and industrial		1	$	500		2	$	813
Total commercial		1		500		2		813
Total		1	$	500		2	$	813
Forgiveness of principal
Commercial:
Commercial and industrial		—	$	—		1	$	142
Total commercial		—		—		1		142
Total		—	$	—		1	$	142
Total		1	$	500		3	$	955

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 troubled debt restructurings follow:

(in thousands)	September 30, 2011		December 31, 2010
Nonperforming restructured loans	$	5,034	$	4,858
Performing restructured loans		13,031		15,233
Total	$	18,065	$	20,091

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Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements [Abstract]

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:

	September 30, 2011				December 31, 2010
(in thousands)	Carrying amount		Estimated fair value		Carrying amount		Estimated fair value
Financial assets:
Cash and cash equivalents	$	75,402	$	75,402	$	24,234	$	24,234
Investment securities
Available for sale		229,913		229,913		175,445		175,445
Held to maturity		5,372		5,835		5,948		6,198
Investments held at cost		3,896		3,896		3,970		3,970
Loans held for sale		4,148		4,148		8,386		8,386
Loans receivable, net		439,390		448,514		487,327		491,205
Accrued interest receivable		2,476		2,476		2,519		2,519
Deferred compensation assets		1,415		1,415		1,341		1,341
Financial liabilities:
Demand deposits		347,859		347,859		332,354		332,354
Time deposits		267,696		269,338		287,403		289,881
Stock order funds		49,063		49,063		—		—
Repurchase agreements		319		317		1,008		999
Advances from Federal
Home Loan Bank		60,000		68,565		60,000		64,048
Deferred compensation liabilities		1,415		1,415		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 or other market risks.

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 September 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
Description	Level 1		Level 2		Level 3		Carrying Amount in Statement of Financial Position		Assets/ Liabilities Measured at Fair Value
September 30, 2011
Securities available for sale:
U.S. GSE and agency securities	$	—	$	61,815	$	—	$	61,815	$	61,815
Asset-backed SBA securities		—		24,118		—		24,118		24,118
Residential mortgage-backed securities issued by GSE's		—		135,643		—		135,643		135,643
State and local government securities		—		7,630		—		7,630		7,630
Mutual funds		707		—		—		707		707
Total	$	707	$	229,206	$	—	$	229,913	$	229,913
Defined benefit plan assets:
Cash and cash equivalents	$	285	$	—	$	—
Money market mutual funds		264		—		—
Debt security mutual funds		16,436		—		—
Total	$	16,985	$	—	$	—
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 nine months ended September 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
Description	Level 1		Level 2		Level 3		Carrying Amount in Statement of Financial Position		Assets/ Liabilities Measured at Fair Value
September 30, 2011
Impaired loans	$	—	$	—	$	14,342	$	14,342	$	14,342
Foreclosed properties		—		—		10,697		10,697		10,697
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

9 Months Ended

Sep. 30, 2011

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 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, as amended, on August 22, 2011. 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 nine months ended September 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.

Organization – The Company was incorporated on May 12, 2011 by 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 conversion was completed on October 11, 2011 and the Company acquired all of the Bank's outstanding capital stock on that date. As of September 30, 2011, the Company was not an operating company and, therefore, the information presented in this report is on a consolidated basis for the Bank, which has one subsidiary as described below. 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 in 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 "Fed") and the NCCoB.

Principles of Consolidation – The consolidated financial statements include the accounts of Appalachian Financial Services, Inc., a wholly owned subsidiary of the Bank. 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, (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. Loans that are deemed to be troubled debt restructurings 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 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. 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 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 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 rarely reduces interest rates below market rates or forgives principal as concessions. 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 its TDR loans 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 – 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 Bank adjusts the level of accumulated comprehensive income related to its retirement plans on an annual basis, consistent with the receipt of its annual actuarial studies.

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

(in thousands)	September 30, 2011			December 31, 2010
Unrealized gain (loss) on securities	$	2,454		$	(448	)
Benefit plan liability		(3,192	)		(3,192	)
Accumulated other comprehensive loss, net of tax	$	(738	)	$	(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 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 and consistent 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 September 30, 2011 presentation. The reclassifications had no effect on net income or equity as previously reported.

New Accounting Standards – 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 methodology 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 had no impact on financial condition, results of operations or liquidity.

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 Bank adopted ASU 2011-02 in the third quarter of 2011, but the adoption of this guidance did not have a material impact on the Bank's consolidated 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 adoption of the new guidance will not have a significant impact on the Bank's financial statements.

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Regulatory Capital Requirements

9 Months Ended

Sep. 30, 2011

Regulatory Capital Requirements [Abstract]

Regulatory Capital Requirements

7. REGULATORY CAPITAL REQUIREMENTS

Capital Levels - The Bank is a state-chartered 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 September 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
September 30, 2011
Tier I leverage capital	$	66,968		8.78	%	$	30,504		4.00	%	$	38,131		5.00	%
Tier I risk-based capital		66,968		15.39	%		17,401		4.00	%		26,101		6.00	%
Total risk-based capital		72,498		16.67	%		34,802		8.00	%		43,502		10.00	%
NC Savings Bank capital		77,857		9.75	%		39,944		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)	September 30, 2011			December 31, 2010
Total GAAP equity	$	67,681		$	62,881
Less: Accumulated other comprehensive loss, net of tax		(738	)		(3,640	)
Less: Disallowed deferred tax assets		1,451			3,144
Tier I capital		66,968			63,377
Unrealized gains on available for sale equity securities		16			—
Allowable portion of allowance for loan losses		5,514			6,165
Total risk-based capital		72,498			69,542
Disallowed portion of allowance for loan losses		5,359			6,511
NC Savings Bank capital	$	77,857		$	76,053

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Benefit Plans

9 Months Ended

Sep. 30, 2011

Benefit Plans [Abstract]

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 September 30,						Nine Months Ended September 30,
(in thousands)	2011			2010			2011			2010
Non-Qualified Defined Benefit Plan
Components of Net Periodic Benefit Costs
Service cost	$	2		$	—		$	5		$	5
Interest cost		16			5			48			57
Amortization of prior service credit		(3	)		(1	)		(9	)		(10	)
Amortization of net loss		5			3			16			28
Net periodic benefit cost	$	20		$	7		$	60		$	80
Qualified Defined Benefit Plan
Components of Net Periodic Benefit Costs
Service cost	$	49		$	41		$	147		$	115
Interest cost		237			236			714			670
Expected return on plan assets		(240	)		(233	)		(722	)		(663	)
Amortization of prior service credit		(18	)		(17	)		(54	)		(49	)
Amortization of net loss		101			69			303			200
Net periodic benefit cost	$	129		$	96		$	388		$	273

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 September 30,				Nine Months Ended September 30,
(in thousands)	2011		2010		2011		2010
Contributions to defined contribution plan	$	49	$	44	$	142	$	135

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Foreclosed Real Estate

9 Months Ended

Sep. 30, 2011

Foreclosed Real Estate [Abstract]

Foreclosed Real Estate

6. FORECLOSED REAL ESTATE

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2011			2010			2011			2010
Beginning balance	$	9,518		$	7,927		$	10,650		$	3,699
Transfers from loans		1,820			5,686			2,630			10,547
Capitalized cost		4			12			40			75
Loss provision		(277	)		(1,065	)		(899	)		(1,210	)
Proceeds from sales of properties, net of gains and losses		(368	)		(2,169	)		(1,724	)		(2,582	)
Sales of properties funded by loans		—			—			—			(138	)
Ending balance	$	10,697		$	10,391		$	10,697		$	10,391

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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 (loss)	1,898		1,898
Other comprehensive income		2,902	2,902
Balances at Sep. 30, 2011	$ 68,419	$ (738)	$ 67,681

[1] Derived from audited consolidated financial statements.

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Stock Conversion And Change In Corporate Form

9 Months Ended

Sep. 30, 2011

Stock Conversion And Change In Corporate Form [Abstract]

Stock Conversion And Change In Corporate Form

2. STOCK CONVERSION AND CHANGE IN CORPORATE FORM

The Company completed its initial public stock offering in connection with the Bank's conversion from the mutual to the stock form of organization on October 11, 2011. The Company sold a total of 5,584,551 shares of its common stock at an offering price of $10.00 per share. This included 446,764 shares purchased by the Asheville Savings Bank Employee Stock Ownership Plan (the "ESOP") funded by a loan from the Company in the amount of $4.5 million. Trading of the Company's common stock commenced on the Nasdaq Global Market on October 12, 2011 under the symbol "ASBB." 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. Including the additional $4.5 million in ESOP share purchases, gross proceeds were $55.8 million. After payment of conversion expenses of approximately $1.9 million, the net proceeds of $53.9 million received in the offering, as reduced for the unearned ESOP shares of $4.5 million, will be reflected in the stockholders' equity accounts of the Company in its December 31, 2011 consolidated balance sheet. On October 11, 2011, the Company purchased all of the Bank's common stock for $28 million.

On October 11, 2011, liquidation accounts were established by the Company and the Bank for the benefit of eligible account holders and supplemental eligible account holders (collectively, "eligible depositors") of the Bank as defined in the Amended and Restated Plan of Conversion (the "Plan of Conversion"). Each eligible depositor will have a pro rata interest in the liquidation accounts for each of his or her deposit accounts based upon the proportion that the balance of each such account bears to the balance of all deposit accounts of the Bank as of the dates defined in the Plan of Conversion. The liquidation accounts will be maintained for the benefit of eligible depositors who continue to maintain their deposit accounts in the Bank after the conversion. The liquidation accounts will be reduced annually to the extent that eligible depositors have reduced their qualifying deposits. In the unlikely event of a complete liquidation of the Bank or the Company or both, and only in such event, eligible depositors who continue to maintain accounts will be entitled to receive a distribution from the liquidation accounts before any liquidation may be made with respect to common stock. Neither the Company nor the Bank may declare or pay a cash dividend if the effect thereof would cause its equity to be reduced below either the amount required for the liquidation accounts or the regulatory capital requirements imposed by the Company's or the Bank's regulators.

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Investment Securities

9 Months Ended

Sep. 30, 2011

Investment Securities [Abstract]

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
September 30, 2011
U.S. Government Sponsored Entity (GSE) and agency securities due -
After 1 year but within 5 years	$	47,722	$	850	$	(15	)	$	48,557
After 5 year but within 10 years		12,934		324		—			13,258
Asset-backed securities issued by the Small Business Administration (SBA)		23,670		477		(29	)		24,118
Residential mortgage-backed securities issued by GSE's		133,485		2,244		(86	)		135,643
State and local government securities due -
After 5 year but within 10 years		1,114		77		—			1,191
After 10 years		6,218		243		(22	)		6,439
Mutual funds		680		27		—			707
Total	$	225,823	$	4,242	$	(152	)	$	229,913
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
September 30, 2011
U.S. GSE and agency securities due -
After 5 year but within 10 years	$	1,081	$	113	$	—		$	1,194
Residential mortgage-backed securities issued by GSE's		1,879		130		—			2,009
State and local government securities due -
After 10 years		2,412		220		—			2,632
Total	$	5,372	$	463	$	—		$	5,835
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 September 30, 2011 and December 31, 2010. The total number of securities with unrealized losses at September 30, 2011 and December 31, 2010 were 19 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.

	September 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	$	5,984	$	(15	)	$	—	$	—	$	5,984	$	(15	)
Residential mortgage-backed GSE		19,212		(115	)		—		—		19,212		(115	)
State and local government		1,693		(22	)		—		—		1,693		(22	)
Temporarily impaired securities available for sale		26,889		(152	)		—		—		26,889		(152	)
Total temporarily impaired securities	$	26,889	$	(152	)	$	—	$	—	$	26,889	$	(152	)

	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)	September 30, 2011		December 31, 2010
Pledged to Federal funds purchased lines of credit	$	12,999	$	1,972
Pledged to Treasury Tax and Loan deposit accounts		—		1,054
Pledged to repurchase agreements for commercial customers		319		1,553

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2011		2010		2011		2010
Gross proceeds from sales of securities	$	19,786	$	14,858	$	19,786	$	16,858
Gross realized gains from sales of securities		417		18		640		798

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Loans Receivable

9 Months Ended

Sep. 30, 2011

Loans Receivable [Abstract]

Loans Receivable

4. LOANS RECEIVABLE

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

(in thousands)	September 30, 2011			December 31, 2010
Commercial:
Commercial construction and land development	$	23,331		$	28,473
Commercial mortgage		143,165			164,553
Commercial and industrial		16,102			17,656
Total commercial		182,598			210,682
Non-commercial:
Non-commercial construction and land development		7,695			8,670
Residential mortgage		180,022			180,439
Revolving mortgage		51,757			53,432
Consumer		28,600			47,212
Total non-commercial		268,074			289,753
Total loans receivable		450,672			500,435
Less: Deferred loan fees		(409	)		(432	)
Total loans receivable net of deferred loan fees		450,263			500,003
Less: Allowance for loan losses		(10,873	)		(12,676	)
Loans receivable, net	$	439,390		$	487,327

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

(in thousands)	Pass		Special Mention		Substandard		Doubtful		Loss*		Total Loans
September 30, 2011
Commercial:
Commercial construction and land development	$	7,037	$	950	$	15,344	$	—	$	—	$	23,331
Commercial mortgage		118,037		23,323		1,612		193		—		143,165
Commercial and industrial		12,939		2,174		989		—		—		16,102
Total commercial		138,013		26,447		17,945		193		—		182,598
Non-commercial:
Non-commercial construction and land development		5,402		—		2,293		—		—		7,695
Residential mortgage		166,126		9,366		4,527		3		—		180,022
Revolving mortgage		48,776		2,148		833		—		—		51,757
Consumer		27,083		1,445		72		—		—		28,600
Total non-commercial		247,387		12,959		7,725		3		—		268,074
Total loans receivable	$	385,400	$	39,406	$	25,670	$	196	$	—	$	450,672
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
September 30, 2011
Commercial:
Commercial construction and land development	$	4,256	$	2,627	$	6,883	$	16,448	$	23,331
Commercial mortgage		583		1,062		1,645		141,520		143,165
Commercial and industrial		581		455		1,036		15,066		16,102
Total commercial		5,420		4,144		9,564		173,034		182,598
Non-commercial:
Non-commercial construction and land development		—		543		543		7,152		7,695
Residential mortgage		1,388		2,705		4,093		175,929		180,022
Revolving mortgage		566		359		925		50,832		51,757
Consumer		913		28		941		27,659		28,600
Total non-commercial		2,867		3,635		6,502		261,572		268,074
Total loans receivable	$	8,287	$	7,779	$	16,066	$	434,606	$	450,672
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:

	September 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	$	6,351	$	—	$	5,205	$	—
Commercial mortgage		1,062		—		3,810		—
Commercial and industrial		457		—		377		—
Total commercial		7,870		—		9,392		—
Non-commercial:
Non-commercial construction and land development		543		—		553		—
Residential mortgage		2,732		—		3,194		—
Revolving mortgage		392		—		191		—
Consumer		28		—		94		—
Total non-commercial		3,695		—		4,032		—
Total loans receivable	$	11,565	$	—	$	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)	September 30, 2011			December 31, 2010
At beginning of period	$	3,278		$	4,004
New loans		5,727			278
Repayments of loans		(3,325	)		(1,004	)
At end of period	$	5,680		$	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 September 30, 2011 and December 31, 2010, respectively.

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Consolidated Statements Of Comprehensive Income (Loss) (USD $) In Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Comprehensive Income
Net income (loss)	$ 571	$ (8,003)	$ 1,898	$ (7,659)
Other comprehensive income
Reclassification of securities gains recognized in net income	(417)	(18)	(640)	(798)
Deferred income tax benefit	167	7	256	319
Gains arising during the period	5,540	1,670	5,478	2,473
Deferred income tax expense	(2,217)	(668)	(2,192)	(989)
Unrealized holding gains adjustment, net of tax	3,073	991	2,902	1,005
Total other comprehensive income	3,073	991	2,902	1,005
Comprehensive income (loss)	$ 3,644	$ (7,012)	$ 4,800	$ (6,654)

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Consolidated Statements Of Cash Flows (USD $) In Thousands	9 Months Ended
	Sep. 30, 2011		Sep. 30, 2010
Operating Activities
Net income (loss)	$ 1,898		$ (7,659)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses	1,811		18,309
Provision for loss on foreclosed properties	899		1,210
Depreciation	928		924
Loss (gain) on sale of foreclosed real estate	(8)		11
Deferred income tax expense (benefit)	1,060		(3,809)
Net accretion of discounts on securities	1,053		447
Gain on sale of securities	(640)		(798)
Net amortization of premiums and deferred fees on loans	(109)		(126)
Mortgage loans originated for sale	(41,265)		(65,441)
Proceeds from sale of mortgage loans	46,221		60,888
Gain on sale of mortgage loans	(718)		(889)
Decrease (increase) in income tax receivable	599		(2,512)
Decrease (increase) in interest receivable	43		(62)
Decrease in interest payable	(6)		(32)
Net change in other assets and liabilities	(278)		2,144
Net cash provided by operating activities	11,488		2,605
Investing Activities
Purchases	(118,342)		(141,066)
Proceeds from sales	19,786		16,858
Proceeds from maturities and/or calls	26,928		37,555
Principal repayments on mortgage-backed and asset-backed securities	22,161		14,146
Redemption of FHLB stock	74		23
Net decrease in loans receivable	43,605		47,938
Foreclosed real estate:
Capital expenses	(40)		(75)
Net proceeds from sales	1,732		2,571
Purchases of premises and equipment	(396)		(603)
Net cash used in investing activities	(4,492)		(22,653)
Financing Activities
Net increase in deposits	(4,202)		27,677
Net increase in escrowed stock order funds	49,063
Net repayments of repurchase agreements	(689)		(621)
Net cash provided by financing activities	44,172		27,056
Increase in cash and cash equivalents	51,168		7,008
Cash and Cash Equivalents:
Beginning of period	24,234	[1]	23,176
End of period	75,402		30,184
SUPPLEMENTAL DISCLOSURES:
Interest on deposits, advances and other borrowings	6,635		8,894
Income taxes	(484)		1,434
Non-cash investing and financing transactions:
Transfers from loans to foreclosed real estate	2,630		10,547
Loans to finance the purchase of foreclosed properties			138
Change in unrealized gain on securities available for sale	4,838		1,675
Change in deferred income taxes resulting from other comprehensive income	$ (1,936)		$ (670)

[1] Derived from audited consolidated financial statements.

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Commitments And Contingencies

9 Months Ended

Sep. 30, 2011

Commitments And Contingencies [Abstract]

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:

	September 30,		December 31,
(in thousands)	2011		2010
Financial instruments whose contract amounts represent credit risk:
Commitments to extend or originate credit	$	115,149	$	133,435
Commitments under standby letters of credit		135		39
Total	$	115,284	$	133,474

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 periodically involved in legal actions in the normal course of business. The Bank is not a party to any pending legal proceedings that the Bank's management believes would have a material adverse effect on the Bank's financial condition, results of operations, or cash flows.

Investment Commitments - During 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	Sep. 30, 2011	Dec. 31, 2010
Assets
Cash and due from banks	$ 9,077	$ 7,836	[1]
Interest-earning deposits with banks	66,325	16,398	[1]
Total cash and cash equivalents	75,402	24,234	[1]
Securities available for sale (amortized cost of $225,823 at September 30, 2011 and $176,193 at December 31, 2010)	229,913	175,445	[1]
Securities held to maturity (estimated fair value of $5,835 at September 30, 2011 and $6,198 at December 31, 2010)	5,372	5,948	[1]
Investment in Federal Home Loan Bank stock, at cost	3,896	3,970	[1]
Loans held for sale	4,148	8,386	[1]
Loans receivable (net of deferred loan fees of $432 at September 30, 2011 and $409 at December 31, 2010)	450,263	500,003	[1]
Allowance for loan losses	(10,873)	(12,676)	[1]
Loans receivable, net	439,390	487,327	[1]
Premises and equipment, net	14,312	14,844	[1]
Foreclosed real estate (net of loss reserves of $1,712 at September 30, 2011 and $1,299 at December 31, 2010)	10,697	10,650	[1]
Deferred income tax assets, net	3,645	6,641	[1]
Other assets	11,973	12,520	[1]
Total assets	798,748	749,965	[1]
Liabilities and Equity
Noninterest-bearing deposits	52,809	44,996	[1]
Interest-bearing deposits	562,746	574,761	[1]
Total deposits	615,555	619,757	[1]
Escrowed stock order funds	49,063
Overnight and short-term borrowings	319	1,008	[1]
Federal Home Loan Bank advances	60,000	60,000	[1]
Accounts payable and other liabilities	6,130	6,319	[1]
Total liabilities	731,067	687,084	[1]
Commitments and contingencies (Note 9)			[1]
Equity
Retained income	68,419	66,521	[1]
Accumulated other comprehensive loss, net of tax	(738)	(3,640)	[1]
Total equity	67,681	62,881	[1]
Total liabilities and equity	$ 798,748	$ 749,965	[1]

[1] Derived from audited consolidated financial statements.