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As filed with the Securities and Exchange Commission on May 26, 2011

Registration No. 333-____________

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

 

 

ASB Bancorp, Inc.

and

Asheville Savings Bank, S.S.B.

Retirement Savings Plan

 

(Exact name of registrant as specified in its charter)

 

 

 

      North Carolina      

 

              6036               

 

    To be applied for    

State or other jurisdiction of

incorporation or organization

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification No.)

11 Church Street

Asheville, North Carolina 28801

(828) 254-7411

 

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Suzanne S. DeFerie

President and Chief Executive Officer

ASB Bancorp, Inc.

11 Church Street

Asheville, North Carolina 28801

(828) 254-7411

 

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

Gary R. Bronstein, Esq.   Kent M. Krudys, Esq.
Lori M. Beresford, Esq.   Robert Lipsher, Esq.
Kilpatrick Townsend & Stockton LLP   Luse Gorman Pomerenk & Schick, P.C.
607 14th Street, NW, Suite 900   5335 Wisconsin Avenue, NW, Suite 780
Washington, DC 20005   Washington, DC 20015
(202) 508-5800   (202) 274-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

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.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

Calculation of Registration Fee

 

 

Title of each class of

securities to be registered

 

Proposed

maximum

Aggregate

offering price (1)

  Amount of
registration fee

Common Stock $0.01 par value

  $83,317,500   $9,674

Participation Interests (2)

   
 
 
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Regulation 457(o) under the Securities Act.
(2) The securities of ASB Bancorp, Inc. to be purchased by the Asheville Savings Bank, S.S.B. Retirement Savings Plan are included in the common stock being registered. Pursuant to Rule 457(h)(2) of the Securities Act of 1933, as amended, no separate fee is required for the participation interests.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

 

 

 


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PARTICIPATION INTERESTS IN

ASHEVILLE SAVINGS BANK RETIREMENT SAVINGS PLAN

AND

OFFERING OF 481,900 SHARES OF

ASB BANCORP, INC.

COMMON STOCK ($.01 PAR VALUE)

 

 

This prospectus supplement relates to the offer and sale to participants in the Asheville Savings Bank Retirement Savings Plan (the “401(k) Plan”), of shares of common stock of ASB Bancorp, Inc. (“ASB Bancorp”) in connection with the initial public offering of ASB Bancorp, Inc.

401(k) Plan participants may direct the 401(k) Plan trustee to use all or a portion of their account balances to subscribe for and purchase shares of ASB Bancorp common stock through the ASB Bancorp Stock Fund. Based upon the value of the 401(k) Plan assets as of May 1, 2011 the ASB Bancorp Stock Fund trustee may purchase up to 481,900 shares of ASB Bancorp common stock at a purchase price of $10.00 per share. This prospectus supplement relates to the election of 401(k) Plan participants to direct the 401(k) Plan trustee to invest all or a portion of their 401(k) Plan account balances in ASB Bancorp common stock.

The ASB Bancorp, Inc. prospectus dated                     , which is attached to this prospectus supplement, includes detailed information regarding the offering of shares of ASB Bancorp common stock and the financial condition, results of operations and business of Asheville Savings Bank, S.S.B. (“Asheville Savings Bank”). This prospectus supplement provides information regarding the 401(k) Plan. You should read this prospectus supplement together with the prospectus and keep both for future reference.

 

 

Please refer to “Risk Factors” beginning on page      of the prospectus.

Neither the Securities and Exchange Commission, the North Carolina Commissioner of Banks, the Federal

Deposit Insurance Corporation, nor any other state or federal agency or any state securities commission,

has approved or disapproved these securities. Any representation to the contrary is a criminal offense.

These securities are not deposits or accounts and are not insured or guaranteed by

the Federal Deposit Insurance Corporation or any other government agency.

This prospectus supplement may be used only in connection with offers and sales by ASB Bancorp of participation interests or shares of common stock under the 401(k) Plan in the offering. No one may use this prospectus supplement to re-offer or resell interests or shares of common stock acquired through the 401(k) Plan.

You should rely only on the information contained in this prospectus supplement and the attached prospectus. Neither ASB Bancorp, Asheville Savings Bank nor the 401(k) Plan has authorized anyone to provide you with different information.

This prospectus supplement does not constitute an offer to sell or solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in that jurisdiction. Neither the delivery of this prospectus supplement and the prospectus nor any sale of common stock shall under any circumstances imply that there has been no change in the affairs of Asheville Savings Bank or the 401(k) Plan since the date of this prospectus supplement, or that the information contained in this prospectus supplement or incorporated by reference is correct as of any time after the date of this prospectus supplement.

 

 

The date of this Prospectus Supplement is                     , 2011.


Table of Contents

TABLE OF CONTENTS

 

 

     Page  

THE OFFERING

     1   

Securities Offered

     1   

Election to Purchase ASB Bancorp, Inc. Common Stock in the Stock Offering

     1   

Value of Participation Interests

     2   

Method of Directing Your Investment Election

     2   

Time for Directing Your Investment Election

     2   

Irrevocability of Your Investment Election

     2   

Purchase Price of ASB Bancorp, Inc. Common Stock

     2   

Nature of a Participant’s Interest in ASB Bancorp, Inc. Common Stock

     2   

Voting and Tender Rights of ASB Bancorp, Inc. Stock

     3   

Future Direction to Purchase Common Stock

     3   

DESCRIPTION OF THE 401(k) PLAN

     3   

Introduction

     3   

Eligibility and Participation

     4   

Contributions Under the 401(k) Plan

     4   

Limitations on Contributions

     4   

401(k) Plan Investments

     6   

Benefits Under the 401(k) Plan

     6   

Withdrawals and Distributions from the 401(k) Plan

     6   

ADMINISTRATION OF THE 401(k) PLAN

     7   

401(k) Plan Trustee

  

401(k) Plan Administrator

  

Trustees

     7   

Reports to 401(k) Plan Participants

     7   

Plan Administrator

     8   

Amendment and Termination

     8   

Merger, Consolidation or Transfer

     8   

Federal Income Tax Consequences

     8   

Restrictions on Resale

     9   

SEC Reporting and Short-Swing Profit Liability

     10   

Financial Information Regarding Plan Assets

     10   

LEGAL OPINION

     11   

 

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THE OFFERING

Securities Offered

The securities offered in connection with this prospectus supplement are participation interests in the 401(k) Plan. At a purchase price of $10.00 per share, the 401(k) Plan trustee may subscribe for up to 481,900 shares of ASB Bancorp common stock in the stock offering (the “Stock Offering”). The interests offered by means of this prospectus supplement are conditioned on the close of the Stock Offering. Certain subscription rights and purchase limitations also govern your investment in the ASB Bancorp Stock Fund in connection with the Stock Offering. See “The Conversion and Stock Offering – Subscription Offering and Subscription Rights” and “– Limitations on Purchases of Shares” in the prospectus attached to this prospectus supplement for further discussion of these subscription rights and purchase limitations.

This prospectus supplement contains information regarding the 401(k) Plan. The attached prospectus contains information regarding the Stock Offering and the financial condition, results of operations and business of Asheville Savings Bank and its affiliates. The address of the principal executive office of Asheville Savings Bank is 11 Church Street, Asheville, North Carolina 28801. The telephone number of Asheville Savings Bank is (828) 250-8430.

Election to Purchase ASB Bancorp, Inc. Common Stock in the Stock Offering

In connection with the Stock Offering, you may direct the 401(k) Plan trustee to liquidate up to 100% of your account balance and use the funds to subscribe for ASB Bancorp common stock offered for sale in the Stock Offering. If there is not enough ASB Bancorp common stock available in the Stock Offering to fill all subscriptions, the common stock will be apportioned and the 401(k) Plan trustee may not be able to purchase all of the common stock you requested. If the Stock Offering is oversubscribed and your order is cut back, your 401(k) Plan funds (which are not invested in ASB Bancorp Stock Fund) will be reinvested in accordance with the investment elections that you have in place for your elective deferrals.

All plan participants are eligible to direct the 401(k) Plan trustee to use their 401(k) Plan assets to invest in the Stock Offering. However, participant investment directions are subject to subscription rights and purchase priorities. See “Summary – Persons Who May Order Stock in the Offering” in the attached prospectus. Subscription requests for common stock will be filled in the following order of priority: (1) persons with $50 or more on deposit at Asheville Savings Bank as of the close of business on             ; (2) persons with $50 or more on deposit at Asheville Savings Bank as of the close of business on             ; and (3) depositors of Asheville Savings Bank as of the close of business on             , who are not eligible under categories 1 and 2 above and borrowers of Asheville Savings Bank as of             , whose borrowings still exist as of the close of business on             . If you fall into one of the above subscription offering categories, you have subscription rights to purchase shares of ASB Bancorp common stock in the Stock Offering and you may use your account balance in the 401(k) Plan to subscribe for shares of ASB Bancorp common stock. To the extent shares of common stock remain available after filling offers in the subscription offering, shares will be available in a community offering.

The limitations on the total amount of ASB Bancorp common stock that you may purchase in the Stock Offering, as described in the prospectus (see “The Conversion and Stock Offering – Limitations on Purchases of Shares”), will be calculated based on the aggregate amount that you subscribed for: (a) through your 401(k) Plan account and (b) through your sources of funds outside of the 401(k) Plan. Whether you place an order through the 401(k) Plan, outside the 401(k) Plan, or both, the number of

 

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shares of ASB Bancorp common stock, if any, that you receive will be determined based on the total number of subscriptions, your purchase priority and the allocation priorities described in the prospectus. If, as a result of the calculation, you are allocated insufficient shares to fill all of your orders, available shares will be allocated between orders on a pro rata basis.

Value of Participation Interests

As of May 1, 2011, the market value of the 401(k) Plan assets equaled approximately $4,819,000 million. The plan administrator has distributed quarterly statements to each participant reflecting the value of his or her beneficial interest in the 401(k) Plan as of             . The value of the 401(k) Plan assets represents past contributions made to the 401(k) Plan on your behalf, plus or minus earnings or losses on the contributions, less previous withdrawals.

Method of Directing Your Investment Election

Included with this prospectus supplement is a blue investment form (“Investment Election Form”). If you wish to direct the 401(k) Plan trustee to liquidate all or a portion of your current investments and use the funds to subscribe for shares in the Stock Offering you must complete, sign and submit this form to Jonna Bradham, Human Resources Manager of Asheville Savings Bank. If you do not wish to invest in the ASB Bancorp Stock Fund at this time, you do not need to take any action. The minimum investment in the ASB Bancorp Stock Fund during the Stock Offering is $             and the maximum individual investment is $            . The minimum investment through the 401(k) Plan during the Stock Offering is              shares.

Time for Directing Your Investment Election

If you wish to participate in the Stock Offering using your 401(k) Plan funds, you must submit your Investment Election Form to Jonna Bradham by              on             , 2011. If you have any questions regarding the ASB Bancorp Stock Fund, you can call Jonna Bradham at (828) 250-8568.

Irrevocability of Your Investment Election

Once you have submitted your Investment Election Form, you cannot change your election to subscribe for shares of common stock through the 401(k) Plan in the Stock Offering.

Purchase Price of ASB Bancorp, Inc. Common Stock

The 401(k) Plan trustee will use the funds transferred to the ASB Bancorp Stock Fund to purchase shares of ASB Bancorp common stock in the Stock Offering. The 401(k) Plan trustee will pay the same price for shares of ASB Bancorp common stock as all other persons who purchase shares of ASB Bancorp common stock in the Stock Offering. If there is not enough common stock available in the Stock Offering to fill all subscriptions, the common stock will be apportioned and the trustee may not be able to purchase all of the common stock you requested. If the Stock Offering is oversubscribed and your order is cut back, your 401(k) Plan funds (which are not invested in ASB Bancorp common stock) will be reinvested in accordance with the investment elections you have in place for your elective deferrals.

Nature of a Participant’s Interest in ASB Bancorp, Inc. Common Stock

The 401(k) Plan trustee will hold ASB Bancorp common stock in the name of the 401(k) Plan. The 401(k) Plan trustee will credit shares of ASB Bancorp common stock acquired at your direction to your account under the 401(k) Plan. Your interest in the ASB Bancorp Stock Fund will be credited in

 

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units. Immediately after the close of the Stock Offering each unit will equal one share of ASB Bancorp common stock. Once the ASB Bancorp Stock Fund begins to have open market purchases each unit will consist of a portion of cash and common stock. For liquidity purposes, the ASB Bancorp Stock Fund will be 3-5% in cash.

Voting and Tender Rights of ASB Bancorp, Inc. Common Stock

The 401(k) Plan trustee will exercise voting and tender rights attributable to all ASB Bancorp common stock held in the ASB Bancorp Stock Fund, as directed by participants with interests in the ASB Bancorp Stock Fund. With respect to each matter as to which holders of ASB Bancorp common stock have a right to vote, you will have voting instruction rights that reflect your proportionate interest in the ASB Bancorp Stock Fund. The number of shares of ASB Bancorp common stock held in the ASB Bancorp Stock Fund voted for and against each matter will be proportionate to the number of voting instruction rights exercised. If there is a tender offer for ASB Bancorp common stock, the 401(k) Plan allots each participant a number of tender instruction rights reflecting each participant’s proportionate interest in the ASB Bancorp Stock Fund. The percentage of shares of ASB Bancorp common stock held in the ASB Bancorp Stock Fund that will be tendered will be the same as the percentage of the total number of tender instruction rights exercised in favor of the tender offer. The remaining shares of ASB Bancorp common stock held in the ASB Bancorp Stock Fund will not be tendered. The 401(k) Plan provides that participants will exercise their voting instruction rights and tender instruction rights on a confidential basis.

Future Direction to Purchase Common Stock

You will be able to invest in the ASB Bancorp Stock Fund after the stock offering by accessing your account via the internet and directing the trustee to invest your future contributions or your account balance in the 401(k) Plan into the ASB Bancorp Stock Fund. After the stock offering, to the extent that shares of common stock are available, MG Trust Company will acquire ASB Bancorp common stock at your election in open market transactions at the prevailing market price. Special restrictions may apply to transfers directed to and from the ASB Bancorp Stock Fund by the participants who are subject to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, relating to the purchase and sale of securities by officers, directors and principal shareholders of ASB Bancorp. In addition, if you are an officer of ASB Bancorp that is restricted by the Federal Deposit Insurance Corporation from selling shares acquired in the stock offering for one year, the shares you purchased in the stock offering will not be tradable for one year. However, any stock units that you held in the ASB Bancorp Stock Fund before the stock offering are not subject to this one-year trading restriction and therefore may be sold.

DESCRIPTION OF THE 401(k) PLAN

Introduction

Asheville Savings Bank adopted the amended and restated 401(k) Plan effective July 1, 2011. Asheville Savings Bank intends for the 401(k) Plan to comply, in form and in operation, with all applicable provisions of the Internal Revenue Code and the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Asheville Savings Bank may amend the 401(k) Plan from time to time in the future to ensure continued compliance with these laws. Asheville Savings Bank may also amend the 401(k) Plan from time to time in the future to add, modify, or eliminate certain features of the plan, as it sees fit. Federal law provides you with various rights and protections as a participant in the 401(k) Plan, which is governed by ERISA. However, the Pension Benefit Guaranty Corporation does not guarantee your benefits under the 401(k) Plan.

 

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Reference to Full Text of the Plan. The following portions of this prospectus supplement summarize the material provisions of the 401(k) Plan. Asheville Savings Bank qualifies this summary in its entirety by reference to the full text of the 401(k) Plan. You may obtain copies of the 401(k) Plan document, including any amendments to the plan and a summary plan description, by contacting Jonna Bradham at (828) 250-8568. You should carefully read the 401(k) Plan documents to understand your rights and obligations under the 401(k) Plan.

Eligibility and Participation

Asheville Savings Bank employees must attain age             and complete one year of service in order to be eligible to participate in the 401(k) Plan. As of May 1, 2011, 139 of the             eligible employees of Asheville Savings Bank participated in the 401(k) Plan.

Contributions Under the 401(k) Plan

Employee Pre-Tax Contributions. You may defer a percentage of your eligible compensation into the 401(k) Plan after you satisfy the Plan’s eligibility requirements. For pre-tax contributions being made to the Plan, the percentage you defer is subject to an annual limit of the lesser of 60% of eligible compensation or $16,500 (2011 IRS limit) in a calendar year. For purposes of the Plan, “eligible compensation” is defined as taxable compensation reportable by Asheville Savings Bank on your Form W-2, excluding reimbursement or other expense allowances, fringe benefits, moving expenses, deferred compensation and welfare benefits and including salary reduction contributions made to Bank sponsored cafeteria, qualified transportation fringe, simplified employee pension, 401(k), 457(b) or 403(b) plans. In addition to pre-tax salary deferrals, you may make “catch up” contributions if you are currently age 50 or will be 50 before the end of the calendar year. You are always 100% vested in your elective deferrals.

Asheville Savings Bank Safe Harbor Matching Contributions. The 401(k) Plan currently provides that Asheville Savings Bank will make matching contributions on behalf of each eligible participant with respect to each eligible participant’s elective deferrals. If you elect to defer funds into the 401(k) Plan, Asheville Savings Bank will match 100% of the first 3% you defer into the 401(k) Plan and 50% on the next 2% you defer into the 401(k) Plan. Asheville Savings Bank makes matching contributions only to those participants who actively defer a percentage of their compensation into the 401(k) Plan.

Rollover Contributions. Asheville Savings Bank allows employees who receive a distribution from a previous employer’s tax-qualified employee benefit plan to deposit that distribution into a Rollover Contribution account under the 401(k) Plan, provided the rollover contribution satisfies IRS requirements. For additional information on Rollover Contributions see the Summary Plan Description for the 401(k) Plan.

Limitations on Contributions

Limitation on Employee Salary Deferrals. By law, your total deferrals under the 401(k) Plan, together with similar plans, may not exceed $16,500 for 2011. Eligible employees who are age 50 and over may also make additional “catch-up” contributions to the plan, up to a maximum of $5,500 for 2011. The Internal Revenue Service periodically increases these limitations. An eligible participant who exceeds these limitations must include any excess deferrals in gross income for federal income tax purposes in the year of deferral. In addition, the participant must pay federal income taxes on any excess deferrals when distributed by the 401(k) Plan to the participant, unless the plan distributes the excess deferrals and any related income no later than the first April 15th following the close of the taxable year in which the participant made the excess deferrals. Any income on excess deferrals distributed before such date is treated, for federal income tax purposes, as earned and received by the participant in the taxable year of the distribution.

 

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Limitation on Annual Additions and Benefits. As required by the Internal Revenue Code, the 401(k) Plan provides that the total amount of contributions and forfeitures (annual additions) credited to a participant during any year under all defined contribution plans of Asheville Savings Bank (including the 401(k) Plan and the proposed Asheville Savings Bank, S.S.B. Employee Stock Ownership Plan) may not exceed the lesser of 100% of the participant’s annual compensation or $49,000 for 2011.

Limitation on Plan Contributions for Highly Compensated Employees. Special provisions of the Internal Revenue Code limit the amount of pre-tax and matching contributions that may be made to the 401(k) Plan in any year on behalf of highly compensated employees, in relation to the amount of pre-tax and matching contributions made by or on behalf of all other employees eligible to participate in the 401(k) Plan. If pre-tax and matching contributions exceed these limitations, the plan must adjust the contribution levels for highly compensated employees.

In general, a highly compensated employee includes any employee who (1) was a 5% owner of the sponsoring employer at any time during the year or the preceding year, or (2) had compensation for the preceding year in excess of $110,000 and, if the sponsoring employer so elects, was in the top 20% of employees by compensation for that year. The preceding dollar amount applies for 2011 and may be adjusted periodically by the Internal Revenue Service.

Top-Heavy Plan Requirements. If the 401(k) Plan is a “Top-Heavy Plan” for any calendar year, Asheville Savings Bank may be required to make certain minimum contributions to the 401(k) Plan on behalf of non-key employees. In general, the 401(k) Plan will be treated as a Top-Heavy Plan for any calendar year if, as of the last day of the preceding calendar year, the aggregate balance of the accounts of “Key Employees” exceeds 60% of the aggregate balance of the accounts of all employees under the plan. A Key Employee is generally any employee who, at any time during the calendar year or any of the four preceding years, is:

 

  (1) an officer of Asheville Savings Bank whose annual compensation exceeds $160,000;

 

  (2) a 5% owner of the employer, meaning an employee who owns more than 5% of the outstanding stock of ASB Bancorp, or who owns stock that possesses more than 5% of the total combined voting power of all stock of ASB Bancorp; or

 

  (3) a 1% owner of the employer, meaning an employee who owns more than 1% of the outstanding stock of ASB Bancorp, or who owns stock that possesses more than 1% of the total combined voting power of all stock of ASB Bancorp, and whose annual compensation exceeds $150,000.

The foregoing dollar amounts are for 2011.

 

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401(k) Plan Investments

Effective July 1, 2011, the 401(k) Plan offers the following investment choices:

 

     Annual Rates of Return as of
December 31,

Fund Name

   2010    2009    2008

[Fund description]

Once you have submitted your Investment Election Form, you may not change your investment directions in the Stock Offering.

Benefits Under the 401(k) Plan

Vesting. All participants are 100% vested in their contributions and any earnings thereon. This means you have a non-forfeitable right to these funds and any earnings on the funds at all times.

Withdrawals and Distributions from the 401(k) Plan

Withdrawals Before Termination of Employment. While in active service, participants may take loans from the 401(k) Plan (subject to the restrictions set forth in the 401(k) Plan and the Asheville Savings Bank loan policy). A participant may also take hardship withdrawals, provided the participant has a hardship event as defined by the Internal Revenue Service regulations and subject to approval by the Plan Administrator. If a participant reaches age 59 1/2, the Participant may elect to withdraw all or a portion of his or her 401(k) Plan account balance while still employed by Asheville Savings Bank.

 

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Distribution Upon Retirement, Death or Disability. If a participant’s accounts are $1,000 or less upon termination of employment, payment will be in the form of a lump sum as of a valuation date as soon thereafter as administratively possible. If a participant’s accounts exceed $1,000 upon termination of employment, and the participant does not elect to have his/her distribution paid, payment will be in the form of a Direct Rollover to an individual retirement plan designated by the Plan Administrator.

Distribution Upon Termination for Any Other Reason. If a participant’s accounts are $1,000 or less upon termination of employment, payment will be in the form of a lump sum as of a valuation date as soon thereafter as administratively possible. If a participant’s accounts exceed $1,000 upon termination of employment, and the participant does not elect to have his/her distribution paid, payment will be in the form of a Direct Rollover to an individual retirement plan designated by the Plan Administrator.

Nonalienation of Benefits. Except with respect to federal income tax withholding, and as provided for under a qualified domestic relations order, benefits payable under the 401(k) Plan will not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to benefits payable under the 401(k) Plan will be void.

Applicable federal tax law requires the 401(k) Plan to impose substantial restrictions on your right to withdraw amounts held under the 401(k) Plan before your termination of employment with Asheville Savings Bank. Federal law may also impose an excise tax on withdrawals from the 401(k) Plan before you attain 59 1/2 years of age, regardless of whether the withdrawal occurs during your employment with Asheville Savings Bank or after termination of employment.

ADMINISTRATION OF THE 401(k) PLAN

Trustees

The board of directors of Asheville Savings Bank has appointed Reliance Trust Company to serve as trustee for the 401(k) Plan for all assets except those assets held in the new Stock Fund.             will serve as the Stock Fund trustee. The Plan trustee receives, holds and invests the contributions to the 401(k) Plan in trust and distributes them to participants and beneficiaries in accordance with the terms of the 401(k) Plan and the directions of the Plan Administrator. The trustee is responsible for the investment of the trust assets, as directed by the Plan Administrator and the participants.

Reports to 401(k) Plan Participants

The Plan Administrator furnishes participants quarterly statements that show the balance in their accounts as of the statement date, contributions made to their accounts during that period and any additional adjustments required to reflect earnings or losses.

 

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Plan Administrator

Asheville Savings Bank acts as Plan Administrator for the 401(k) Plan. The Plan Administrator handles the following administrative functions: interpreting the provisions of the plan, prescribing procedures for filing applications for benefits, preparing and distributing information explaining the plan, maintaining plan records, books of account and all other data necessary for the proper administration of the plan, preparing and filing all returns and reports required by the U.S. Department of Labor and the IRS and making all required disclosures to participants, beneficiaries and others under ERISA.

Amendment and Termination

Asheville Savings Bank expects to continue the 401(k) Plan indefinitely. Nevertheless, Asheville Savings Bank may terminate the 401(k) Plan at any time. If Asheville Savings Bank terminates the 401(k) Plan in whole or in part, all affected participants become fully vested in their accounts, regardless of other provisions of the 401(k) Plan. Asheville Savings Bank reserves the right to make, from time to time, changes which do not cause any part of the trust to be used for, or diverted to, any purpose other than the exclusive benefit of participants or their beneficiaries. Asheville Savings Bank may amend the plan, however, as necessary or desirable, in order to comply with ERISA or the Internal Revenue Code.

Merger, Consolidation or Transfer

If the 401(k) Plan merges or consolidates with another plan or transfers the trust assets to another plan, and either the 401(k) Plan or the other plan is subsequently terminated, the 401(k) Plan requires that you receive a benefit immediately after the merger, consolidation or transfer that would equal or exceed the benefit you would have been entitled to receive immediately before the merger, consolidation or transfer, if the 401(k) Plan had terminated at that time.

Federal Income Tax Consequences

The following briefly summarizes the material federal income tax aspects of the 401(k) Plan. You should not rely on this summary as a complete or definitive description of the material federal income tax consequences of the 401(k) Plan. Statutory provisions change, as do their interpretation, and their application may vary in individual circumstances. Finally, applicable state and local income tax laws may have different tax consequences than the federal income tax laws. 401(k) Plan participants should consult a tax advisor with respect to any transaction involving the 401(k) Plan, including any distribution from the 401(k) Plan.

As a “tax-qualified retirement plan,” the Internal Revenue Code affords the 401(k) Plan certain tax advantages, including the following:

 

  (1) the sponsoring employer may take an immediate tax deduction for the amount contributed to the plan each year;

 

  (2) participants pay no current income tax on amounts contributed by the employer on their behalf; and

 

  (3) earnings of the plan are tax-deferred, thereby permitting the tax-deferred accumulation of income and gains on investments.

 

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Asheville Savings Bank administers the 401(k) Plan to comply in operation with the requirements of the Internal Revenue Code as of the applicable effective date of any change in the law. If Asheville Savings Bank should receive an adverse determination letter from the Internal Revenue Service regarding the 401(k) Plan’s tax exempt status, all participants would generally recognize income equal to their vested interests in the 401(k) Plan, the participants would not be permitted to transfer amounts distributed from the 401(k) Plan to an Individual Retirement Account or to another qualified retirement plan, and Asheville Savings Bank would be denied certain tax deductions taken in connection with the 401(k) Plan.

Lump Sum Distribution. A distribution from the 401(k) Plan to a participant or the beneficiary of a participant qualifies as a lump sum distribution if it is made within one taxable year, on account of the participant’s death, disability or separation from service, or after the participant attains age 59 1/2; and consists of the balance credited to the participant under this plan and all other profit sharing plans, if any, maintained by Asheville Savings Bank. The portion of any lump sum distribution included in taxable income for federal income tax purposes consists of the entire amount of the lump sum distribution, less the amount of after-tax contributions, if any, made to any other profit-sharing plans maintained by Asheville Savings Bank, if the distribution includes those amounts.

ASB Bancorp Common Stock Included in Lump Sum Distribution. If a lump sum distribution includes ASB Bancorp common stock, the distribution generally is taxed in the manner described above. The total taxable amount is reduced, however, by the amount of any net unrealized appreciation on ASB Bancorp common stock; that is, the excess of the value of ASB Bancorp common stock at the time of the distribution over the cost or other basis of the securities to the trust. The tax basis of ASB Bancorp common stock, for purposes of computing gain or loss on a subsequent sale, equals the value of ASB Bancorp common stock at the time of distribution, less the amount of net unrealized appreciation. Any gain on a subsequent sale or other taxable disposition of ASB Bancorp common stock, to the extent of the net unrealized appreciation at the time of distribution, is long-term capital gain, regardless of how long you hold the ASB Bancorp common stock, or the “holding period.” Any gain on a subsequent sale or other taxable disposition of ASB Bancorp common stock that exceeds the amount of net unrealized appreciation upon distribution is considered long-term capital gain, regardless of the holding period. The recipient of a distribution may elect to include the amount of any net unrealized appreciation in the total taxable amount of the distribution, to the extent allowed under IRS regulations.

We have provided you with a brief description of the material federal income tax aspects of the 401(k) Plan that are generally applicable under the Internal Revenue Code. We do not intend this description to be a complete or definitive description of the federal income tax consequences of participating in or receiving distributions from the 401(k) Plan. Accordingly, you should consult a tax advisor concerning the federal, state and local tax consequences of participating in and receiving distributions from the 401(k) Plan.

Restrictions on Resale

Any “affiliate” of ASB Bancorp under Rules 144 and 405 of the Securities Act of 1933, as amended, who receives a distribution of common stock under the 401(k) Plan, may re-offer or resell such shares only under a registration statement filed under the Securities Act of 1933, as amended, assuming the availability of a registration statement, or under Rule 144 or some other exemption from these registration requirements. An “affiliate” of ASB Bancorp is someone who directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, ASB Bancorp. Generally, a director, principal officer or major shareholder of a corporation is deemed to be an “affiliate” of that corporation.

Any person who may be an “affiliate” of ASB Bancorp may wish to consult with counsel before transferring any common stock they own. In addition, participants should consult with counsel regarding the applicability to them of Section 16 of the Securities Exchange Act of 1934, as amended, which may restrict the sale of ASB Bancorp common stock acquired under the 401(k) Plan or other sales of ASB Bancorp common stock.

 

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Persons who are not deemed to be “affiliates” of ASB Bancorp at the time of resale may resell freely any shares of ASB Bancorp common stock distributed to them under the 401(k) Plan, either publicly or privately, without regard to the registration and prospectus delivery requirements of the Securities Act of 1933, as amended, or compliance with the restrictions and conditions contained in the exemptions available under federal law. A person deemed an “affiliate” of ASB Bancorp at the time of a proposed resale may publicly resell common stock only under a “re-offer” prospectus or in accordance with the restrictions and conditions contained in Rule 144 of the Securities Act of 1933, as amended, or some other exemption from registration, and may not use this prospectus supplement or the accompanying prospectus in connection with any such resale. In general, Rule 144 restricts the amount of common stock which an affiliate may publicly resell in any three-month period to the greater of one percent of ASB Bancorp common stock then outstanding or the average weekly trading volume reported on the Nasdaq Capital Market during the four calendar weeks before the sale. Affiliates may sell only through brokers without solicitation and only at a time when ASB Bancorp is current in filing all required reports under the Securities Exchange Act of 1934, as amended.

SEC Reporting and Short-Swing Profit Liability

Section 16 of the Securities Exchange Act of 1934, as amended, imposes reporting and liability requirements on officers, directors and persons who beneficially own more than 10% of public companies such as ASB Bancorp. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the filing of reports of beneficial ownership. Within ten days of becoming a person required to file reports under Section 16(a), such person must file a Form 3 reporting initial beneficial ownership with the Securities and Exchange Commission (“SEC”). Such persons must also report periodically certain changes in beneficial ownership involving the allocation or reallocation of assets held in their 401(k) Plan accounts, either on a Form 4 within two business days after a transaction, or annually on a Form 5 within 45 days after the close of a company’s fiscal year.

In addition to the reporting requirements described above, Section 16(b) of the Securities Exchange Act of 1934, as amended, provides for the recovery by ASB Bancorp of profits realized from the purchase and sale or sale and purchase of its common stock within any six-month period by any officer, director or person who beneficially owns more than 10% of the common stock.

The SEC has adopted rules that exempt many transactions involving the 401(k) Plan from the “short-swing” profit recovery provisions of Section 16(b). The exemptions generally involve restrictions upon the timing of elections to buy or sell employer securities for the accounts of any officer, director or person who beneficially owns more than 10% of the common stock of a company.

Except for distributions of the common stock due to death, disability, retirement, termination of employment or under a qualified domestic relations order, persons who are subject to Section 16(b) may be required, under limited circumstances involving the purchase of common stock within six months of the distribution, to hold the shares of common stock distributed from the 401(k) Plan for six months after the distribution date.

Financial Information Regarding Plan Assets

Financial information representing the net assets available for 401(k) Plan benefits at December 31, 2010, is available upon written request to Jonna Bradham in the Human Resources Department at Asheville Savings Bank.

 

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LEGAL OPINION

The validity of the issuance of the common stock of ASB Bancorp will be passed upon by Kilpatrick Townsend & Stockton LLP, Washington, DC. Kilpatrick Townsend & Stockton LLP is acting as special counsel for ASB Bancorp in connection with the Stock Offering.

 

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ASHEVILLE SAVINGS BANK RETIREMENT SAVINGS PLAN

INVESTMENT FORM

Name of Plan Participant:                                                                                                           

Social Security Number:                                                                                                               

1. Instructions. In connection with the stock offering, you may direct up to 100% of your current 401(k) Plan account balance into the ASB Bancorp Fund (the “Employer Stock Fund”). The percentage of your 401(k) Plan account (up to 100%) transferred into the Employer Stock Fund will be used to purchase shares of ASB Bancorp stock in the stock offering.

To direct a transfer of the funds credited to your 401(k) Plan account to the Employer Stock Fund, you must complete, sign and submit this form to Jonna Bradham in the Human Resources Department by                     . Current Asheville Savings Bank employees should return their forms through inter-office mail. Former Asheville Savings Bank employees should return their forms using the business reply envelope that has been provided. A representative for the Plan Administrator will retain a copy of this form and return a copy to you. If you need any assistance in completing this form, please contact Jonna Bradham at (828) 250-8568. If you do not complete and return this form to Jonna Bradham by                     , the funds credited to your account under the 401(k) Plan will continue to be invested in accordance with your prior investment directions, or in accordance with the terms of the Plan if no investment directions have been provided.

2. Investment Directions. I hereby authorize the Plan Administrator to direct the Trustee to invest the following percentages (in multiples of not less than 1%) of my 401(k) Plan account balance in the Employer Stock Fund:

 

Fund Name

I understand that my election to transfer funds to the Employer Stock Fund to purchase shares of ASB Bancorp stock in the stock offering is irrevocable. I understand that the funds transferred to the Employer Stock Fund will be divisible by $10.00, the per share price for the common stock.

 


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3. Purchaser Information. The ability of a 401(k) Plan participant to purchase ASB Bancorp stock in the stock offering is based upon the participant’s subscription rights in the stock offering. Please indicate your status (check one):

 

  ¨ Check here if you had $50.00 or more on deposit with Asheville Savings Bank as of                     .

 

  ¨ Check here if you had $50.00 or more on deposit with Asheville Savings Bank as of close of business on                     .

 

  ¨ Check here if you are not eligible for either category noted above, but you were a Asheville Savings Bank depositor or borrower as of the close of business on                     .

4. Acknowledgment of Participant. I understand that this Investment Form shall be subject to all of the terms and conditions of the 401(k) Plan. I acknowledge that I have received a copy of the Prospectus and the Prospectus Supplement. I acknowledge further that my investment election on this form is irrevocable.

 

         
Signature of Participant     Date

 

 

Acknowledgment of Receipt by Administrator. This Investment Form was received by the Plan Administrator and will become effective on the date noted below.

 

By:          
      Date

THE PARTICIPATION INTERESTS REPRESENTED BY THE COMMON STOCK OFFERED HEREBY ARE NOT DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY ASB BANCORP OR ASHEVILLE SAVINGS BANK. THE COMMON STOCK IS SUBJECT TO AN INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL INVESTED.

PLEASE COMPLETE AND RETURN TO JONNA BRADHAM

IN THE HUMAN RESOURCES DEPARTMENT AT

ASHEVILLE SAVINGS BANK BY              P.M. ON             .

 


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PROSPECTUS

ASB Bancorp, Inc.

(Proposed Holding Company for Asheville Savings Bank, S.S.B.)

Up to 7,245,000 Shares of Common Stock

 

 

 

ASB Bancorp, Inc. is offering shares of its common stock for sale in connection with the conversion of Asheville Savings Bank, S.S.B. from the mutual to the stock form of ownership. After the offering, ASB Bancorp, Inc. will be the holding company for Asheville Savings Bank through its ownership of 100% of Asheville Savings Bank’s outstanding common stock. We have received conditional approval to list our common stock on the Nasdaq Global Market under the symbol “ASBB.”

If you are or were a depositor or borrower of Asheville Savings Bank:

 

   

You may have priority rights to purchase shares of common stock.

If you are a participant in the Asheville Savings Bank Retirement Savings Plan:

 

   

You may direct that all or part of your current account balance in this plan be invested in shares of common stock.

 

   

You will receive a separate supplement to this prospectus that describes your rights under this plan.

If you fit neither of the categories above, but are interested in purchasing shares of our common stock:

 

   

You may have an opportunity to purchase shares of common stock after priority orders are filled.

We are offering up to 7,245,000 shares of common stock for sale on a best efforts basis, subject to certain conditions. We must sell a minimum of 5,355,000 shares to complete the offering. If, as a result of regulatory considerations, demand for the shares or changes in market conditions, the independent appraiser determines that our pro forma market value has increased, we may sell up to 8,331,750 shares without giving you further notice or the opportunity to change or cancel your order. If our pro forma market value at the end of the stock offering period is either below $53.6 million or above $83.3 million, then, after consulting with the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks, we may: (i) terminate the stock offering and promptly return all funds, with interest; (ii) set a new offering range and give all subscribers the opportunity to confirm, modify or rescind their stock purchase orders; or (iii) take such other actions as may be permitted by the Federal Deposit Insurance Corporation, the North Carolina Commissioner of Banks and the Securities and Exchange Commission.

The offering is expected to close at 12:00 noon, Eastern time, on                     , 2011. We may extend this closing date without notice to you until                     , 2011, unless the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks approve a later date, which will not be beyond                     , 2012.

Keefe, Bruyette & Woods, Inc. will use its best efforts to assist us in our selling efforts, but is not required to purchase any of the common stock that is being offered for sale. Purchasers will not pay a commission to purchase shares of common stock in the offering. All shares offered for sale are offered at a price of $10.00 per share.

The minimum purchase is 25 shares. Once submitted, orders are irrevocable unless the offering is terminated or extended beyond                     , 2011. If the offering is extended beyond                     , 2011, subscribers will have the right to modify or rescind their purchase orders. Funds received before the completion of the offering will be maintained in a segregated account at Asheville Savings Bank. All funds received will bear interest at Asheville Savings Bank’s statement savings rate, which is currently 0.31% per annum. If we terminate the offering for any reason, or if we extend the offering beyond                     , 2011, we will notify you and will promptly return your funds with interest if you do not respond to the notice.

We expect our directors and executive officers, together with their associates, to subscribe for 160,500 shares, which equals 3.0% of the shares offered for sale at the minimum of the offering range.

The North Carolina Commissioner of Banks conditionally approved our plan of conversion on                     , 2011. However, such approval does not constitute a recommendation or endorsement of this offering.

This investment involves a degree of risk, including the possible loss of principal.

Please read “Risk Factors” beginning on page     .

 

 

 

OFFERING SUMMARY

Price Per Share: $10.00

 

     Minimum      Maximum      Maximum
As Adjusted
 

Number of shares

     5,355,000         7,245,000         8,331,750   

Gross offering proceeds

   $ 53,550,000       $ 72,450,000       $ 83,317,500   

Estimated offering expenses, excluding selling agent fees and expenses

   $ 1,360,000       $ 1,360,000       $ 1,360,000   

Estimated selling agent fees and expenses(1)

   $ 477,000       $ 650,000       $ 750,500   

Estimated net proceeds

   $ 51,713,000       $ 70,440,000       $ 81,207,000   

Estimated net proceeds per share

   $ 9.66       $ 9.72       $ 9.75   

 

(1) Excludes fees payable if a syndicated community offering is held. For a discussion of the compensation of Keefe, Bruyette & Woods, Inc., see “The Conversion and Stock Offering — Marketing Arrangements.”

These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Neither the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the North Carolina Commissioner of Banks, nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

For assistance, please contact the stock information center toll-free at (            )             -            .

 

 

LOGO

 

 

The date of this prospectus is                     , 2011


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[Map of North Carolina showing office locations of Asheville Savings Bank]


Table of Contents

TABLE OF CONTENTS

 

     PAGE  

Summary

     1   

Risk Factors

     13   

A Warning About Forward-Looking Statements

     21   

Selected Consolidated Financial and Other Data

     22   

Use of Proceeds

     24   

Our Dividend Policy

     26   

Market for the Common Stock

     27   

Capitalization

     28   

Regulatory Capital Compliance

     30   

Pro Forma Data

     31   

Our Business

     36   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     45   

Our Management

     76   

Subscriptions by Executive Officers and Directors

     98   

Regulation and Supervision

     99   

Federal and State Taxation

     108   

The Conversion and Stock Offering

     110   

Restrictions on the Acquisition of ASB Bancorp, Inc. and Asheville Savings Bank

     127   

Description of ASB Bancorp, Inc. Capital Stock

     134   

Transfer Agent and Registrar

     135   

Registration Requirements

     135   

Legal and Tax Opinions

     135   

Experts

     135   

Where You Can Find More Information

     135   

Index to Consolidated Financial Statements of Asheville Savings Bank

     137   


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SUMMARY

This summary highlights selected information from this document and may not contain all the information that is important to you. To understand the stock offering fully, you should read this entire document carefully.

The Companies

ASB Bancorp, Inc.

Asheville Savings Bank

11 Church Street

Asheville, North Carolina 28801

(828) 254-7411

ASB Bancorp, Inc. This offering is made by ASB Bancorp, Inc., a North Carolina corporation incorporated in May 2011 by Asheville Savings Bank to be its holding company. Currently, ASB Bancorp, Inc. has no assets. Following the conversion, ASB Bancorp, Inc. will own all of Asheville Savings Bank’s capital stock and will direct, plan and coordinate Asheville Savings Bank’s business activities. In the future, ASB Bancorp, Inc. might also acquire or organize other operating subsidiaries, including other financial institutions or financial services companies, although it currently has no specific plans or agreements to do so.

Asheville Savings Bank. Asheville Savings Bank operates as a community-oriented financial institution, with 13 full-service offices in its primary market area, which encompasses Buncombe, Madison, McDowell, Henderson and Transylvania Counties in North Carolina and the surrounding areas. We offer a variety of deposit products and provide residential and commercial real estate loans, and to a lesser extent, revolving mortgage loans, which consist of home equity loans and lines of credit, consumer loans, construction and land development loans and commercial and industrial loans to borrowers generally located within our primary market area. At March 31, 2011, we had total assets of $750.7 million, total deposits of $616.6 million and total equity of $63.3 million.

Our Operating Strategy (page     )

Our mission is to operate and grow a profitable community-oriented financial institution. We plan to achieve this by executing our strategy of:

 

   

continuing to provide products and services to individuals and businesses in communities served by our branch offices;

 

   

continuing to originate residential and commercial mortgage loans;

 

   

expanding our commercial and industrial lending activities and emphasizing the origination of small business loans;

 

   

emphasizing lower cost core deposits to maintain low funding costs;

 

   

expanding our market share within our primary market area; and

 

   

seeking to enhance fee income through providing investment advisory services.

The Conversion

Description of the Conversion

Currently, we are a North Carolina chartered mutual savings bank with no shareholders. Our depositors and eligible borrowers currently have the right to vote on certain matters such as the election of directors and this

 

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conversion transaction. The conversion transaction that we are undertaking involves a change from our mutual form to a stock savings bank that will result in all of Asheville Savings Bank’s capital stock being owned by ASB Bancorp, Inc. Voting rights in ASB Bancorp, Inc. will belong to its shareholders, including our employee stock ownership plan. For more information on the employee stock ownership plan, see “Summary—Benefits of the Offering to Management—Employee Stock Ownership Plan.” We are conducting the conversion under the terms of our plan of conversion. The North Carolina Commissioner of Banks has conditionally approved the plan of conversion and the Federal Deposit Insurance Corporation has provided its non-objection to our mutual to stock conversion, subject to a condition that it be approved by our members. In addition, the Federal Reserve Board has approved ASB Bancorp, Inc.’s application to become a bank holding company and to acquire all of the outstanding shares of Asheville Savings Bank’s common stock upon consummation of the conversion. We have called a special meeting of members for                     , 2011 to vote on the plan of conversion.

The following diagram depicts our corporate structure after the conversion and offering, including the number of shares of common stock that will be owned by public shareholders at the minimum, maximum, and maximum, as adjusted, of the offering range upon completion of the conversion and the offering:

LOGO

Regulation and Supervision (page     )

We are and will be upon completion of the conversion, subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. ASB Bancorp, Inc. will be subject to regulation by the Federal Reserve Board.

 

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The Offering

Purchase Price

The purchase price is $10.00 per share. You will not pay a commission to buy any shares in the offering.

Number of Shares to be Sold

We are offering for sale between 5,355,000 and 7,245,000 shares of ASB Bancorp, Inc. common stock in this offering. With regulatory approval, we may increase the number of shares to be sold to 8,331,750 shares without giving you further notice or the opportunity to change or cancel your order. In considering whether to increase the offering size, the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks will consider the level of subscriptions, the views of our independent appraiser, our financial condition and results of operations and changes in market conditions.

How We Determined the Offering Range (page     )

We are offering between 5,355,000 and 7,245,000 shares, which is our offering range, based on an independent appraisal of our pro forma market value prepared by Feldman Financial Advisors, Inc., an independent appraisal firm experienced in appraisals of financial institutions. Feldman Financial estimates that as of                     , our pro forma market value was between $53.6 million and $72.5 million, with a midpoint of $63.0 million.

In preparing its appraisal, Feldman Financial considered the information in this prospectus, including our consolidated financial statements. Feldman Financial also considered the following factors, among others:

 

   

our historical, present and projected operating results and financial condition and the economic and demographic characteristics of our primary market area;

 

   

a comparative evaluation of the operating and financial statistics of Asheville Savings Bank with those of other similarly situated, publicly traded companies;

 

   

the effect of the capital raised in this offering on our net worth and earnings potential; and

 

   

the trading market for securities of comparable institutions and general conditions in the market for such securities.

Two measures that some investors use to analyze whether a stock might be a good investment are the ratio of the offering price to the issuer’s “book value” and the ratio of the offering price per share to the issuer’s core income per share for the past twelve months. Feldman Financial considered these ratios, among other factors, in preparing its appraisal. Book value is the same as total equity and represents the difference between the issuer’s assets and liabilities. For purposes of the appraisal, core earnings is defined as net earnings after taxes, plus non-recurring expenses and minus non-recurring income, adjusted for income taxes in each case. Feldman Financial’s appraisal also incorporates an analysis of a peer group of publicly traded companies that Feldman Financial considered to be comparable to us.

 

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The following table presents a summary of selected pricing ratios for the peer group companies and for us utilized by Feldman Financial in its appraisal. These ratios are based on our earnings for the twelve months ended March 31, 2011 and book value as of March 31, 2011 and the latest date for which complete financial data was publicly available for the peer group.

 

     Price to Core
Earnings Multiple
     Price to Book Value
Ratio
 

ASB Bancorp, Inc. (pro forma):

     

Minimum

     N.M.         49.3%   

Midpoint

     N.M.         59.9      

Maximum

     N.M.         57.9      

Maximum, as adjusted

     N.M.         62.0      

Peer group companies as of May 9, 2011:

     

Average

     22.5x         66.6%   

Median

     19.0         67.2      

 

N.M. means not meaningful.

Compared to the average price to book value ratio of the peer group at the maximum of the offering range, our stock would be priced at a discount of 13.1% to the peer group on a price-to-book value basis.

The independent appraisal does not indicate market value. You should not assume or expect that the valuation described above means that our common stock will trade at or above the $10.00 purchase price after the offering.

Possible Change in Offering Range (page     )

Feldman Financial will update its appraisal before we complete the stock offering. If, as a result of regulatory considerations, demand for the shares or changes in market conditions, Feldman Financial determines that our pro forma market value has increased, we may sell up to 8,331,750 shares without further notice to you. If our pro forma market value at the end of the stock offering period is either below $53.6 million or above $83.3 million, then, after consulting with the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks, we may: (i) terminate the stock offering and promptly return all funds, with interest; (ii) set a new offering range and give all subscribers the opportunity to confirm, modify or rescind their purchase orders for shares of ASB Bancorp, Inc.’s common stock; or (iii) take such other actions as may be permitted by the Federal Deposit Insurance Corporation, the North Carolina Commissioner of Banks and the Securities and Exchange Commission.

Possible Termination of the Offering

We must sell a minimum of 5,355,000 shares to complete the offering. If we do not sell the minimum number of shares, or if we terminate the offering for any other reason, we will promptly return all funds, with interest, at our current statement savings rate.

After-Market Performance of Mutual-to-Stock Conversions

The appraisal prepared by Feldman Financial includes examples of after-market stock price performance for standard mutual-to-stock conversion offerings (i.e., excluding “second step” conversions by mutual holding companies) completed since January 1, 2010. The following table presents stock price appreciation information for all standard mutual-to-stock conversions completed between January 1, 2010 and May 9, 2011. These companies did not constitute the group of ten comparable public companies utilized in Feldman Financial’s valuation analysis.

 

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                   Percentage Change From Initial Offering Price  

Issuer

(Market/Symbol)

   Date of
IPO
     Offering
Size
     After 1
Day
    After 1
Week
    After 1
Month
    Through
May 9,
2011
 
            (In millions)      %     %     %     %  

Franklin Financial Corp. (NASDAQ/FRNK)

     04/28/11       $ 138.9         19.7        18.5     NA        18.8   

Sunshine Financial Inc. (OTC/SSNF)

     04/06/11         12.3         12.5        13.5        15.0        12.5   

Fraternity Community Bancorp, Inc. (OTC/FRTR)

     04/01/11         15.9         12.6        11.7        10.0        5.5   

Anchor Bancorp (NASDAG/ANCB)

     01/26/11         25.5         0.0        0.0        4.5        0.0   

Wolverine Bancorp, Inc. (NASDAQ/WBKC)

     01/20/11         25.1         24.5        20.0        35.0        45.0   

SP Bancorp, Inc. (NASDAQ/SPBC)

     11/01/10         17.3         (6.0     (6.2     (9.9     19.9   

Madison Bancorp, Inc. (OTC/MDSN)

     10/07/10         6.1         0.0        0.0        0.0        0.0   

Standard Financial Corp. (NASDAQ/STND)

     10/07/10         34.8         19.0        18.5        29.5        53.4   

Century Next Financial Corp. (OTC/CTUY)

     10/01/10         10.6         0.0        15.0        10.0        60.0   

United-American Savings Bank (OTC/UASB)

     08/06/10         3.0         0.0        (5.0     5.0        30.5   

Peoples Federal Bancshares, Inc. (NASDAQ/PEOP)

     07/07/10         66.1         4.0        7.5        4.2        39.9   

Fairmount Bancorp, Inc. (OTC/FMTB)

     06/03/10         4.4         0.0        5.0        10.0        60.0   

Harvard Illinois Bancorp, Inc. (OTC/HARI)

     04/09/10         7.8         0.0        0.0        (1.0     (1.0

OBA Financial Services, Inc. (NASDAQ/OBAF)

     01/22/10         46.3         3.9        1.5        3.0        47.5   

OmniAmerican Bancorp, Inc. (NASDAQ/OABC)

     01/21/10         119.0         18.5        14.0        9.9        45.8   

Versailles Financial Corp. (OTC/VERF)

     01/11/10         4.3         0.0        0.0        0.0        40.0   

Athens Bancshares Corp. (NASDAQ/AFCB)

     01/07/10         26.8         16.0        15.0        10.6        35.3   

All Transactions:

              

Average

        33.2         7.3        7.6        8.5        30.2   

Median

        17.3         3.9        7.5        7.5        35.3   

NASDAQ Transactions:

              

Average

        55.5         11.1        9.9        10.9        34.0   

Median

        34.8         16.0        14.0        7.2        39.9   

This table is not intended to indicate how our stock may perform. Furthermore, this table presents only short-term price performance with respect to a limited number of companies that have only recently completed their initial public offerings and may not be indicative of the longer-term stock price performance of these companies.

Stock price appreciation or depreciation is affected by many factors, including, but not limited to: general market and economic conditions; the interest rate environment; the amount of proceeds a company raises in its offering and its ability to successfully deploy those proceeds through originating loans and making other investments; and numerous factors relating to the specific company, including the experience and ability of management, historical and anticipated operating results, the nature and quality of the company’s assets, and the company’s primary market area. The companies listed in the table above may not be similar to ASB Bancorp, Inc., the pricing ratios for their stock offerings were in some cases different from the pricing ratios for ASB Bancorp, Inc.’s common stock and the market conditions in which these offerings were completed were, in some cases, different from current market conditions. Any or all of these differences may cause our stock to perform differently from these other offerings. Before you make an investment decision, we urge you to read carefully this prospectus, including, but not limited to, the section entitled “Risk Factors.”

You also should be aware that, recently, stock prices of some thrift initial public offerings have decreased once the stock has begun trading. We cannot assure you that our stock will not trade below the $10.00 purchase price or that our stock will perform similarly to other recent mutual to stock conversions.

Conditions to Completing the Conversion and Offering

We are conducting the conversion and offering under the terms of our plan of conversion. We cannot complete the conversion and offering unless:

 

   

we sell at least the minimum number of shares offered;

 

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we receive the final approval of the North Carolina Commissioner of Banks and the non-objection of the Federal Deposit Insurance Corporation to complete the offering;

 

   

we receive the final approval of the Federal Reserve Board for ASB Bancorp, Inc. to become a bank holding company and to acquire all of the outstanding shares of common stock of Asheville Savings Bank; and

 

   

our members approve the plan of conversion.

Reasons for the Conversion and Offering (page     )

Our primary reasons for the conversion and offering are to:

 

   

enhance profitability and earnings through reinvesting and leveraging the proceeds, primarily through traditional funding and lending activities;

 

   

support future branching activities and/or the acquisition of other financial institutions or financial services companies;

 

   

enhance Asheville Savings Bank’s ability to compete in its primary market area by offering new products and services;

 

   

increase our capital to meet anticipated industry-wide increases in regulatory capital requirements; and

 

   

implement equity compensation plans to retain and attract qualified directors, officers and staff to enhance the current incentive-based compensation programs.

Benefits of the Offering to Management (page     )

We intend to adopt the following benefit plans and employment agreements:

Employee Stock Ownership Plan. We have adopted an employee stock ownership plan that will purchase in the conversion offering a number of shares of common stock equal to 8% of the shares sold in the offering by means of a 15-year loan from ASB Bancorp, Inc. As the loan is repaid and shares are released from collateral, the plan will allocate shares to the accounts of participating employees. Participants will receive allocations based on their individual compensation as a percentage of total plan compensation. Non-employee directors are not eligible to participate in the employee stock ownership plan. The purchase of common stock by the employee stock ownership plan in the offering will comply with all applicable regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks except to the extent waived by the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. We will incur additional compensation expense as a result of this plan. See “Pro Forma Data” for an illustration of the effects of this plan.

Future Equity Incentive Plan. We intend to implement an equity incentive plan no earlier than six months after completion of the conversion. If we implement the plan within one year after the conversion, the plan must be approved by a majority of the total votes eligible to be cast by our shareholders. If we implement the plan more than one year after the conversion, it must be approved only by a majority of the total votes cast. Under this plan, we may award stock options and shares of restricted stock to key employees and directors. We will award shares of restricted stock at no cost to the recipient. We will grant stock options at an exercise price at least equal to 100% of the fair market value of our common stock on the option grant date. We will incur additional compensation expense as a result of this plan. See “Pro Forma Data” for an illustration of the effects of this plan. Under this plan, we may grant stock options in an amount up to 10% of the number of shares sold in the offering, and we may grant awards of restricted stock in an amount up to 4% of the number of shares sold in the offering. The equity incentive plan will comply with all applicable regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks except to the extent waived by the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks.

 

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The following table represents the total value of all shares to be available for restricted stock awards under the equity incentive plan, based on a range of market prices from $8.00 per share to $14.00 per share. The value of the grants will depend on the actual trading price of our common stock at the time of grant.

 

       Value of  
Share Price      214,200
Shares
Awarded  at
Minimum of
Range
     252,000
Shares
Awarded  at
Midpoint of
Range
     289,800
Shares
Awarded at
Maximum of
Range
     333,270
Shares
Awarded at
Maximum, as
Adjusted, of
Range
 
       (In thousands, except per share amounts)  
$ 8.00       $ 1,714       $ 2,016       $ 2,318       $ 2,666   
  10.00         2,142         2,520         2,898         3,333   
  12.00         2,570         3,024         3,478         3,999   
  14.00         2,999         3,528         4,057         4,666   

The following table presents the total value of all stock options available for grant under the equity incentive plan, based on a range of market prices from $8.00 per share to $14.00 per share. For purposes of this table, the value of the stock options was determined using the Black-Scholes option-pricing formula. See “Pro Forma Data.” Financial gains can be realized on a stock option only if the market price of the common stock increases above the exercise price at which the option is granted.

 

              Value of  

Exercise Price

     Option Value      535,500
Options
Granted at
Minimum of
Range
     630,000
Options
Granted at
Midpoint of
Range
     724,500
Options
Granted at
Maximum of
Range
     833,175
Options
Granted at
Maximum, as
Adjusted, of
Range
 
              (In thousands, except per share amounts)  
$ 8.00       $ 3.28       $ 1,756       $ 2,066       $ 2,376       $ 2,733   
  10.00         4.11         2,201         2,589         2,978         3,424   
  12.00         4.93         2,640         3,106         3,572         4,108   
  14.00         5.75         3,079         3,623         4,166         4,791   

The following table summarizes at the maximum of the offering range the total number and value of the shares of common stock that the employee stock ownership plan expects to acquire and the total value of all restricted stock awards and stock options that are expected to be available under the equity incentive plan. At the maximum of the offering range, we would sell 7,245,000 shares and have 7,245,000 shares outstanding. The number of shares reflected for the benefit plans in the table below assumes that Asheville Savings Bank’s tangible capital will be 10% or more following the completion of the offering and the application of the net proceeds as described under “Use of Proceeds.”

 

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     Number of Shares to be
Granted or Purchased
       
     At  Maximum
of

Offering
Range
     As a % of
Common Stock
Sold at
Maximum of
Offering Range
    As a % of
Common
Stock
Outstanding
    Total Estimated
Value of Grants

(In thousands)
 

Employee stock ownership plan (1)

     579,600         8.00     8.00   $ 5,796   

Restricted stock awards (1)

     289,800         4.00        4.00        2,898   

Stock options (2)

     724,500         10.00        10.00        2,978   
                                 

Total

     1,593,900         22.00     22.00   $ 11,672   
                                 

 

(1) Assumes the value of ASB Bancorp, Inc. common stock is $10.00 per share for purposes of determining the total estimated value of the grants.
(2) Assumes the value of a stock option is $4.11, which was determined using the Black-Scholes option-pricing formula. See “Pro Forma Data.”

Employment Agreements. ASB Bancorp, Inc. and Asheville Savings Bank intend to enter into (i) a three-year employment agreement with Suzanne S. DeFerie, our President and Chief Executive Officer, and (ii) two-year employment agreements (each with a three-year change in control provision) with Kirby A. Tyndall, our Executive Vice President and Chief Financial Officer, David A. Kozak, our Executive Vice President and Chief Lending Officer, and Fred A. Martin, our Executive Vice President and Chief Information Officer. Based solely on initial cash compensation payable under the employment agreements and excluding any benefits that would be payable under any employee benefit plan, if a change in control of ASB Bancorp, Inc. occurred and we terminated Ms. DeFerie and Messrs. Tyndall, Kozak and Martin the total payments due under the employment agreements would be approximately $2.2 million.

The Offering Is Not Expected to Be Taxable to Persons Receiving or Exercising Subscription Rights (page     )

As a general matter, the offering is not expected to be a taxable transaction for purposes of federal income taxes to persons who receive or exercise subscription rights. We have received an opinion from our special counsel, Kilpatrick Townsend & Stockton LLP, that, for federal income tax purposes:

 

   

it is more likely than not that the members of Asheville Savings Bank will not realize any income upon the issuance or exercise of subscription rights;

 

   

it is more likely than not that the tax basis to the purchasers in the offering will be the amount paid for our common stock, and that the holding period for shares of common stock will begin on the date of completion of the subscription offering; and

 

   

the holding period for shares of common stock purchased in the community offering or syndicated community offering will begin on the day after the date of completion of the purchase.

Persons Who May Order Stock in the Offering (page     )

Note: Subscription rights are not transferable, and persons with subscription rights may not subscribe for shares for the benefit of any other person. If you violate this prohibition, you may lose your rights to purchase shares and may face criminal prosecution and/or other sanctions.

We have granted rights to subscribe for shares of ASB Bancorp, Inc. common stock in a “subscription offering” to the following persons in the following order of priority:

 

  1. Persons with $50 or more on deposit at Asheville Savings Bank as of the close of business on February 28, 2010.

 

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  2. Our employee stock ownership plan, which will provide retirement benefits to our employees.

 

  3. Persons (other than our directors and officers) with $50 or more on deposit at Asheville Savings Bank as of the close of business on                     , 2011.

 

  4. Asheville Savings Bank’s depositors as of the close of business on                     , 2011 who were not able to subscribe for shares under categories 1 or 3 and borrowers of Asheville Savings Bank as of                     ,                      whose borrowings still exist as of the close of business on                     , 2011.

Unlike our employee stock ownership plan, the Asheville Savings Bank 401(k) Plan has not been granted priority subscription rights. Accordingly, a 401(k) plan participant who elects to purchase shares in the offering through self-directed purchases within the 401(k) plan will receive the same subscription priority, and be subject to the same purchase limitations, as if the participant had elected to purchase shares using funds outside the 401(k) plan. See “Executive Compensation—Benefit Plans—401(k) Plan.”

If we receive subscriptions for more shares than are to be sold in this offering, we may be unable to fill or may only partially fill your order. Shares will be allocated in order of the priorities described above under a formula outlined in the plan of conversion. Generally, shares first will be allocated so as to permit each eligible subscriber, if possible, to purchase a number of shares sufficient to make the subscriber’s total allocation equal to 100 shares or the number of shares actually subscribed for, whichever is less. After that, unallocated shares will be allocated among the remaining eligible subscribers whose subscriptions remain unfilled in proportion to the amounts that their respective qualifying deposits bear to the total qualifying deposits of all remaining eligible subscribers whose subscriptions remain unfilled. If we increase the number of shares to be sold above 7,245,000, the employee stock ownership plan will have the first priority right to purchase any shares exceeding that amount to the extent that its subscription has not previously been filled. Any shares remaining will be allocated in the order of priorities described above. See “The Conversion and Stock Offering — Subscription Offering and Subscription Rights” for a description of the allocation procedure.

We may offer shares not sold in the subscription offering, if any, to the general public in a community offering. People and trusts for the benefit of people who are residents of Buncombe, Madison, McDowell, Henderson and Transylvania Counties in North Carolina will be given a first preference to purchase shares in the community offering. We may, in our sole discretion, reject orders received in the community offering either in whole or in part. For example, we would reject an order submitted by a person whom we believe is making false representations or whom we believe is attempting to violate, evade or circumvent the terms and conditions of the plan of conversion. If your order is rejected in part, you cannot cancel the remainder of your order. The community offering may commence concurrently with the subscription offering or at any time thereafter and may terminate at any time without notice until                     , 2011, unless the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks approve a later date, which will not be beyond                     , 2012.

Shares not sold in the subscription offering or the community offering may be offered for sale in a syndicated community offering, which would be an offering to the general public on a best efforts basis managed by Keefe, Bruyette & Woods, Inc. Any syndicated community offering may terminate at any time without notice but not later than                     , 2011, unless the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks approve a later date, which will not be beyond                     , 2012. As in the case of the community offering, we may, in our sole discretion, reject orders received in the syndicated community offering either in whole or in part.

Deadline for Ordering Stock (page     )

The subscription offering will end at 12:00 noon, Eastern time, on                     , 2011. We expect that the community offering will terminate at the same time, although it may continue for up to 45 days after the end of the subscription offering, or longer if the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks approve a later date. No single extension may be for more than 90 days. If we extend the offering beyond                     , 2012, or if we intend to sell fewer than 5,355,000 shares or more than 8,331,750 shares, all subscribers will be notified and given the opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will return your funds promptly with interest at our statement savings rate.

 

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Purchase Limitations (page     )

Our plan of conversion establishes limitations on the purchase of stock in the offering. These limitations include the following:

 

   

The minimum purchase is 25 shares.

 

   

No individual (or individuals on a single deposit account) may purchase more than $300,000 of common stock (which equals 30,000 shares) in the subscription offering.

 

   

No individual may purchase more than $300,000 of common stock (which equals 30,000 shares) in the community offering.

 

   

No individual together with any associates, and no group of persons acting in concert, may purchase more than $500,000 of common stock (which equals 50,000 shares) in all offering categories.

Subject to the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks’ approval, we may increase or decrease the purchase limitations at any time.

How to Purchase Common Stock (page     )

You can subscribe for shares of common stock in the offering by delivering a completed, original stock order and certification form (we are not required to accept copies or facsimiles), together with full payment or authorization to withdraw from one or more of your Asheville Savings Bank savings or certificate of deposit accounts, so that it is received (not postmarked) before 12:00 noon, Eastern time, on                     , which is the expiration of the subscription offering period.

You may submit your stock order by mail using the postage prepaid stock order reply envelope provided, or by overnight delivery to the address noted for that purpose on the top of the stock order and certification form. You may also hand deliver your stock order to our stock information center, located at Asheville Savings Bank’s operations center at 901 Smoky Park Highway, Candler, North Carolina, or to any Asheville Savings Bank full service branch location. Please do not mail order forms to Asheville Savings Bank branch locations. Stock order forms mailed to branch locations may not be accepted.

Once we receive your order, you cannot cancel or change it without our consent.

To ensure that we properly identify your subscription rights, you must list all of your deposit accounts as of the applicable eligibility date on the stock order form. If you fail to do so, your subscription may be reduced or rejected if the offering is oversubscribed. To preserve your purchase priority, only the name(s) of person(s) listed on your deposit account at the applicable date of eligibility should be listed on your order form. You may not add the names of others who were not eligible to purchase common stock in the offering on the applicable date of eligibility.

You may pay for shares in the subscription offering or the community offering in either of the following ways:

 

   

By check or money order made payable to ASB Bancorp, Inc.; or

 

   

By authorizing withdrawal from a savings or certificate of deposit account at Asheville Savings Bank.

 

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To use funds in an Individual Retirement Account at Asheville Savings Bank, you must transfer your account to an unaffiliated institution or broker and open a self-directed Individual Retirement Account. Individual Retirement Accounts at Asheville Savings Bank are not self-directed and common stock may only be purchased using a self-directed Individual Retirement Account. Please contact your broker or financial institution as quickly as possible to determine if you may transfer your Individual Retirement Account from Asheville Savings Bank because the transfer may take significant time.

We will pay interest on your subscription funds at the rate we pay on statement savings accounts, which is currently 0.31% per annum, from the date we receive your funds until the offering is completed or terminated. All funds authorized for withdrawal from deposit accounts with us will earn interest at the applicable account rate until the offering is completed or terminated. If, as a result of a withdrawal from a certificate of deposit, the balance falls below the minimum balance requirement, the remaining funds will earn interest at our statement savings rate. There will be no early withdrawal penalty for withdrawals from certificates of deposit used to pay for stock.

How We Will Use the Proceeds of this Offering (page     )

The following table summarizes how we will use the proceeds of this offering, based on the sale of shares at the minimum and maximum of the offering range.

 

(In thousands)

  Minimum  5,355,000
Shares at
$10.00 Per Share
    Maximum  7,245,000
Shares at
$10.00 Per Share
 

Offering proceeds

  $ 53,550      $ 72,450   

Less estimated offering expenses

    (1,837     (2,010

Net offering proceeds

    51,713        70,440   

Less:

   

Proceeds contributed to Asheville Savings Bank

    (25,857     (35,220

Proceeds used for loan to employee stock ownership plan

    (4,284     (5,796
               

Proceeds remaining for ASB Bancorp, Inc.

  $ 21,572      $ 29,424   
               

ASB Bancorp, Inc. may use the portion of the proceeds that it retains to, among other things, invest in securities, pay cash dividends or repurchase shares of common stock, subject to regulatory restrictions. Asheville Savings Bank may use the portion of the proceeds that it receives, among other things, to fund new loans, open new branches, invest in securities and expand its business activities. ASB Bancorp, Inc. and Asheville Savings Bank may also use the proceeds of the offering to diversify their businesses and acquire other companies, although we have no specific plans to do so at this time. Except as described above, neither ASB Bancorp, Inc. nor Asheville Savings Bank has any specific plans for the investment of the proceeds of this offering and has not allocated a specific portion of the proceeds to any particular use. For a discussion of our business reasons for undertaking this offering, see “The Conversion and Stock Offering — Reasons for the Conversion.”

Purchases by Directors and Executive Officers (page     )

We expect that our directors and executive officers, together with their associates, will subscribe for 160,500 shares, which equals 3.0% of the shares that would be sold at the minimum of the offering range. Our directors and executive officers, together with their associates, will pay the same $10.00 price per share as everyone else who purchases shares in the offering. Like all of our depositors, our directors and executive officers and their associates have subscription rights based on their deposits and, if there is an oversubscription, their orders will be subject to the allocation provisions set forth in our plan of conversion, unless waived by the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. Purchases by our directors and executive officers and their associates will count towards the minimum number of shares we must sell to close the offering.

Market for ASB Bancorp, Inc.’s Common Stock (page     )

We have received conditional approval to list the common stock of ASB Bancorp, Inc. for trading on the Nasdaq Global Market under the symbol “ASBB.” Keefe, Bruyette & Woods, Inc. currently intends to become a market maker in the common stock, but it is under no obligation to do so. In addition, if needed, Keefe, Bruyette &

 

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Woods, Inc. will assist us in obtaining additional market makers. We cannot assure you that other market makers will be obtained or that an active and liquid trading market for our common stock will develop or, if developed, will be maintained. After shares of the common stock begin trading, you may contact a stock broker to buy or sell shares.

ASB Bancorp, Inc.’s Dividend Policy (page     )

Following the offering, our board of directors will consider adopting a policy of paying cash dividends. We cannot guarantee that we will pay dividends or that, if paid, we will not reduce or eliminate dividends in the future. Our ability to pay dividends will depend on a number of factors, including capital requirements, regulatory limitations and our operating results and financial condition.

Delivery of Prospectus

To ensure that each person receives a prospectus at least 48 hours before the offering deadline, we may not mail prospectuses any later than five days before such date or hand-deliver prospectuses later than two days before that date. Stock order forms may only be delivered if accompanied or preceded by a prospectus. We are not obligated to deliver a prospectus or order form by means other than U.S. mail.

We will make reasonable attempts to provide a prospectus and offering materials to holders of subscription rights. The subscription offering and all subscription rights will expire at 12:00 noon, Eastern time, on                     , 2011 whether or not we have been able to locate each person entitled to subscription rights.

Delivery of Stock Certificates (page     )

Certificates representing shares of common stock issued in the offering will be mailed to purchasers at the address provided by them on the order form as soon as practicable following completion of the offering. Until certificates for common stock are available and delivered to subscribers, subscribers may not be able to sell their shares, even though trading of the common stock will have commenced.

Stock Information Center

If you have any questions regarding the offering, please call the stock information center at (        )              -              to speak to a registered representative of Keefe, Bruyette & Woods, Inc. Representatives are available by telephone Monday through Friday, 10:00 a.m. to 6:00 p.m., Eastern time. You may also meet in person with a representative by visiting our stock information center located at our operations center at 901 Smoky Park Highway, Candler, North Carolina. The stock information center will be open Monday, 12:00 noon to 5:00 p.m. Eastern time, Tuesday through Thursday, 9:00 a.m. to 5:00 p.m., Eastern time, and Friday, 9:00 a.m. to 12:00 noon, Eastern time. The stock information center will be closed on weekends and bank holidays.

 

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RISK FACTORS

You should consider carefully the following risk factors before purchasing ASB Bancorp, Inc. common stock.

Risks Related to Our Business

Significant loan losses could require us to increase our allowance for loan losses through a charge to earnings.

When we loan money we incur the risk that our borrowers will not repay their loans. We provide for loan losses by establishing an allowance through a charge to earnings. The amount of this allowance is based on our assessment of loan losses inherent in our loan portfolio. The process for determining the amount of the allowance is critical to our financial condition and results of operations. It requires subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans. We might underestimate the loan losses inherent in our loan portfolio and have loan losses in excess of the amount recorded in our allowance for loan losses. In addition, we might increase the allowance because of changing economic conditions. For example, in a rising interest rate environment, borrowers with adjustable-rate loans could see their payments increase. There may be a significant increase in the number of borrowers who are unable or unwilling to repay their loans, resulting in our charging off more loans and increasing our allowance. Furthermore, when real estate values decline, the potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios. The recent decline in the national economy and the local economies of the areas in which our loans are concentrated could result in an increase in loan delinquencies, foreclosures or repossessions resulting in increased charge-off amounts and the need for additional loan loss allowances in future periods. In addition, our determination as to the amount of our allowance for loan losses is subject to review by our primary regulators, the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks, as part of their examination process, which may result in the establishment of an additional allowance based upon the judgment of the Federal Deposit Insurance Corporation and/or the North Carolina Commissioner of Banks after a review of the information available at the time of their examination. Our allowance for loan losses amounted to $12.6 million and $12.7 million, or 2.6% and 2.5% of total loans outstanding and 89.0% and 94.4% of non-performing loans, at March 31, 2011 and December 31, 2010, respectively. Our allowance for loan losses at March 31, 2011 may not be sufficient to cover future loan losses. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would decrease our earnings. In addition, at March 31, 2011, we had 73 loan relationships with outstanding balances that exceeded $1.0 million, eight of which, with loan balances totaling $21.2 million, were not performing according to their original terms. The deterioration of one or more of these loans could result in a significant increase in our non-performing loans and our provision for loan losses, which would negatively impact our results of operations.

Our commercial lending activities have exposed us to losses in recent periods and our continued emphasis on commercial lending may expose us to future lending risks.

Our emphasis on commercial mortgage, commercial construction and commercial land development loans has exposed us to losses as the recent economic recession has adversely affected businesses and developers in our market area. We are continuing to emphasize our commercial mortgage and commercial and industrial lending activities. However, due to recent economic conditions, we have stopped financing the construction of any properties built on a speculative basis and are emphasizing the origination of commercial mortgage loans secured by owner-occupied properties.

At March 31, 2011, our loan portfolio included $162.7 million, or 33.5% of total loans, of commercial mortgage loans, $27.8 million, or 5.74% of total loans, of commercial construction and land development loans, and $15.8 million, or 3.2% of total loans, of commercial and industrial loans. Commercial mortgage loans, commercial construction and land development loans and commercial and industrial loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of these loans often depends on the successful operation of the property and the income stream of the borrowers, and in the case of commercial construction and land development loans, the successful completion and sale of the project. Such loans

 

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typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Commercial and industrial loans also expose us to additional risks since they typically are made on the basis of the borrower’s ability to make repayments from the cash flow of the borrower’s business and are secured by non-real estate collateral that may depreciate over time. In addition, since such loans generally entail greater risk than one- to four-family residential mortgage loans, we may need to increase our allowance for loan losses in the future to account for the likely increase in probable credit losses associated with the growth of such loans. Also, many of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.

In addition, much of the loans in our commercial loan portfolio were originated in recent years and are unseasoned. Our commercial loan portfolio increased from $137.5 million or 28.4% of total loans, at December 31, 2006 to $250.2 million or 41.8% of total loans at December 31, 2009 and was $206.3 million, or 42.5% of total loans, at March 31, 2011. During this period, the largest increase in our commercial loan portfolio was in commercial mortgage loans, which increased from $87.1 million, or 18.0% of total loans, at December 31, 2006 to $162.7 million, or 33.5% of total loans, at March 31, 2011. Given the large portion of our commercial loan portfolio that is unseasoned, we do not have a significant payment history pattern from which to judge future collectability, particularly in this period of unfavorable economic conditions. As a result, it may be difficult to predict the future performance of this component of our loan portfolio and these loans may have high delinquency or charge-off levels above our historical experience, which could adversely impact our future performance.

A continuation or worsening of national and local economic conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which may negatively impact our financial condition and results of operations.

Our business activities and earnings are affected by general business conditions in the United States and in our primary market area. These conditions include short-term and long-term interest rates, inflation, unemployment levels, monetary supply, consumer confidence and spending, fluctuations in both debt and equity capital markets and the strength of the economy in the United States generally and in our primary market area in particular. In recent years, the national economy has experienced recessionary conditions that have resulted in general economic downturns, with rising unemployment levels, declines in real estate values and an erosion in consumer confidence. The economic recession has also had a negative impact on our primary market area. Based on published statistics as of March 2011, twelve counties in western North Carolina, including three of the five counties in our primary market area (Madison, McDowell and Transylvania Counties), had unemployment rates that exceeded both the national and state unemployment rates. In addition, our primary market area has experienced a softening of the local real estate market, including reductions in local property values, and a decline in the local manufacturing industry, which employs many of our borrowers. A prolonged or more severe economic downturn, continued elevated levels of unemployment, further declines in the values of real estate, or other events that affect household and/or corporate incomes could impair the ability of our borrowers to repay their loans in accordance with their terms. Continued or further deterioration in local economic conditions could also drive the level of loan losses beyond the level we have provided for in our allowance for loan and lease losses, which could necessitate increasing our provision for loans losses and reduce our earnings. Additionally, the demand for our products and services could be reduced, which would adversely impact our liquidity and the level of revenues we generate.

The geographic concentration of our loan portfolio and lending activities makes us vulnerable to a downturn in the local economy.

Nearly all of our loans are secured by real estate or made to businesses in our primary market area, which consists of Buncombe, Madison, McDowell, Henderson and Transylvania Counties in North Carolina and the surrounding areas. This concentration makes us vulnerable to a downturn in the local economy and real estate markets. Adverse conditions in the local economy such as inflation, unemployment, recession or other factors beyond our control could impact the ability of our borrowers to repay their loans, which could impact our net interest income. Decreases in local real estate values could adversely affect the value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure.

 

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Changes in interest rates may hurt our profits and asset value.

Our net interest income is the interest we earn on loans and investments less the interest we pay on our deposits and borrowings. Our interest rate spread is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our borrowings. Changes in interest rates could adversely affect our interest rate spread and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our interest rate spread to expand or contract. Our liabilities are shorter in duration than our assets, so they will adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs will rise faster than the yield we earn on our assets, causing our interest rate spread to contract until the yield catches up. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—will also reduce our interest rate spread. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities are shorter in duration than our assets, when the yield curve flattens or even inverts, we will experience pressure on our interest rate spread as our cost of funds increases relative to the yield we can earn on our assets.

Our business strategy includes moderate growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

Over the long term, we expect to experience growth in our assets, our deposits and the scale of our operations, whether through organic growth or acquisitions. However, achieving our growth targets requires us to successfully execute our business strategies. Our business strategies include continuing to diversify our loan portfolio by increasing our commercial and industrial lending activities and introducing new and competitive deposit products. Our ability to successfully grow will also depend on the continued availability of loan opportunities that meet our stringent underwriting standards. If we do not manage our growth effectively, we may not be able to achieve our business plan, and our business and prospects could be adversely affected.

Financial reform legislation recently enacted by Congress will, among other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new laws and regulations that are expected to increase our costs of operations.

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) will significantly change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository institutions, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

The Dodd-Frank Act also creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Asheville Savings Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10.0 billion in assets. Banks and savings institutions with $10.0 billion or less in assets will be examined by their applicable bank regulators.

In addition, the Dodd-Frank Act will increase shareholder influence over boards of directors by requiring certain public companies to give shareholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and by authorizing the Securities and Exchange Commission to promulgate rules that would allow shareholders to nominate and solicit votes for their own candidates using a company’s proxy materials.

 

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We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

Asheville Savings Bank is subject to extensive government regulation, supervision and examination by the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. ASB Bancorp, Inc. will also be subject to regulation and supervision by the Federal Reserve Board upon the consummation of the conversion and offering. Such regulation, supervision and examination govern the activities in which we may engage, and is intended primarily for the protection of the deposit insurance fund and our depositors. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

We may have credit risk in our investment and mortgage-backed securities portfolio.

At March 31, 2011, $204.3 million, or 27.2% of our assets, consisted of investment and mortgage-backed securities, many of which were issued by, or have principal and interest payments guaranteed by Fannie Mae or Freddie Mac. On September 7, 2008, the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac into federal conservatorship. Although the federal government has committed substantial capital to Fannie Mae and Freddie Mac, these credit facilities and other capital infusions may not be adequate for their needs. If the financial support is inadequate, or if additional support is not provided when needed, these companies could continue to suffer losses and could fail to honor their guarantees and other obligations. As a result, the future roles of Fannie Mae and Freddie Mac could be significantly altered. Failure by Fannie Mae or Freddie Mac to honor their guarantees or obligations, or a significant restructuring of their roles, could have a significant adverse affect on the market value and cash flows of the investment and mortgage-backed securities we hold, resulting in substantial losses. We also maintain an investment in Federal Home Loan Bank of Atlanta stock, which totaled $4.0 million at March 31, 2011. In response to unprecedented market conditions and potential future losses, the Federal Home Loan Bank of Atlanta has implemented an initiative to preserve capital by significantly reducing the amount of its cash dividend payments, which has adversely affected our income. If the Federal Home Loan Bank of Atlanta is unable to meet minimum regulatory capital requirements or is required to aid the remaining Federal Home Loan Banks, our holding of Federal Home Loan Bank of Atlanta stock may be determined to be other-than-temporarily impaired and may require a charge to earnings.

If we continue to experience reduced loan demand, we will be required to invest a significant percentage of the offering proceeds in investment securities, which typically have a lower yield than our loan portfolio.

In recent periods, we have experienced a decline in loan demand as deteriorating economic conditions have resulted in elevated unemployment rates, reductions in property values and a decline in the manufacturing industry within certain segments of our primary market area. If we continue to experience reduced loan demand upon consummation of the offering, we will be required to invest a significant percentage of the offering proceeds in investment securities, which generally yield substantially less than the loans we hold in our portfolio. This would negatively impact our results of operations, which are substantially dependent on our net interest income, or the difference between the interest income earned on our interest-earning assets and the interest expense paid on our interest-bearing liabilities.

Increased and/or special Federal Deposit Insurance Corporation assessments will hurt our earnings.

The recent economic recession has caused a high level of bank failures, which has dramatically increased Federal Deposit Insurance Corporation resolution costs and led to a significant reduction in the balance of the Deposit Insurance Fund. As a result, the Federal Deposit Insurance Corporation has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. Increases in the base assessment rate have increased our deposit insurance costs and negatively impacted our earnings. In addition, in May 2009, the Federal Deposit Insurance Corporation imposed a special assessment on all insured institutions. Our special assessment, which was reflected in earnings for the quarter ended June 30, 2009, was approximately $334,000. In December 2009, in lieu of imposing an additional special assessment, the Federal Deposit Insurance Corporation required all institutions to prepay their assessments for all of 2010, 2011 and 2012, which for us totaled $3.6 million. Additional increases in the base assessment rate or additional special assessments would negatively impact our earnings.

 

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Strong competition within our market area could hurt our profits and slow growth.

Although we consider ourselves competitive in our primary market area of Buncombe, Madison, McDowell, Henderson and Transylvania Counties in North Carolina and the surrounding areas, we face intense competition both in making loans and attracting deposits. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which reduces net interest income. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market area.

Risks Related to this Offering

Our stock price may decline when trading commences.

If you purchase shares in the offering, you may not be able to sell them at or above the $10.00 purchase price. After the shares of our common stock begin trading, the trading price of the common stock will be determined by the marketplace, and will be influenced by many factors outside of our control, including prevailing interest rates, investor perceptions, securities analyst research reports and general industry, geopolitical and economic conditions. Publicly traded stocks, including stocks of financial institutions, often experience substantial market price volatility. These market fluctuations might not be related to the operating performance of particular companies whose shares are traded.

There may be a limited market for our common stock, which may adversely affect our stock price.

Although we have received conditional approval to list our shares of common stock for trading on the Nasdaq Global Market, our shares of common stock may not be actively traded. If an active trading market for our common stock does not develop, you may not be able to sell all of your shares of common stock on short notice and the sale of a large number of shares at one time could temporarily depress the market price. There also may be a wide spread between the bid and asked price for our common stock. When there is a wide spread between the bid and asked price, the price at which you may be able to sell our common stock may be significantly lower than the price at which you could buy it at that time.

Additional expenses following the offering from operating as a public company will adversely affect our profitability.

Following the offering, our noninterest expenses will increase as a result of the additional financial accounting, legal and various other additional expenses usually associated with operating as a public company and complying with public company disclosure obligations. These obligations, including the substantial public reporting requirements, will also place additional demands on our existing management team.

Additional expenses following the offering from the implementation of new equity benefit plans will adversely affect our profitability.

We will recognize additional annual employee compensation and benefit expenses stemming from options and shares of common stock granted to employees, directors and executives under new benefit plans. These additional expenses will adversely affect our profitability. We cannot determine the actual amount of these new stock-related compensation and benefit expenses at this time because applicable accounting practices generally require that they be based on the fair market value of the options or shares of common stock at the date of the grant; however, we expect them to be material. We will recognize expenses for our employee stock ownership plan when shares are committed to be released to participants’ accounts and will recognize expenses for restricted stock awards

 

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and stock options generally over the vesting period of awards made to recipients. These benefit expenses in the first year following the offering have been estimated to be approximately $1.1 million after taxes at the maximum of the offering range as set forth in the pro forma financial information under “Pro Forma Data” assuming the $10.00 per share purchase price as fair market value. Actual expenses, however, may be higher or lower, depending on the price of our common stock. For further discussion of these plans, see “Our Management — Benefit Plans.”

Our low return on equity may negatively impact the value of our common stock.

Return on equity, which equals net income divided by average equity, is a ratio used by many investors to compare the performance of a particular company with other companies. For the three months ended March 31, 2011, our annualized return on average equity was 3.73% and our return on average equity for the year ended December 31, 2010 was (13.01)%. Our pro forma return on equity for the same periods is estimated to be 1.21% and (8.31)%, respectively, and our pro forma shareholders’ equity to assets ratio at March 31, 2011 is estimated to be 15.39%, assuming the sale of shares at the maximum of the offering range. Our publicly traded thrift peers used in the independent appraisal as of May 9, 2011 had an average return on equity of (2.73)% for the twelve months ended March 31, 2011. Over time, we intend to use the net proceeds from this offering to increase earnings per share and book value per share, without assuming undue risk, with the goal of achieving a return on equity that is competitive with other publicly held companies. This goal could take a number of years to achieve, and it may not be attained, and the expected increase in our noninterest expenses following the offering due to operating as a public company and from new equity benefit plans will likely further deter our ability to achieve a competitive return on equity. Consequently, you should not expect a competitive return on equity in the near future. Failure to achieve a competitive return on equity might make an investment in our common stock unattractive to some investors and might cause our common stock to trade at lower prices than comparable companies with higher returns on equity. See “Pro Forma Data” for an illustration of the financial impact of this offering.

We have broad discretion in allocating the proceeds of the offering. Our failure to effectively utilize such proceeds would reduce our profitability.

We intend to contribute approximately 50% of the net proceeds of the offering to Asheville Savings Bank. ASB Bancorp, Inc. may use the portion of the proceeds that it retains to, among other things, invest in securities, pay cash dividends or repurchase shares of common stock, subject to regulatory restrictions. Asheville Savings Bank may use the portion of the proceeds that it receives to, among other things, fund new loans, open new branches, invest in securities and expand its business activities. ASB Bancorp, Inc. and Asheville Savings Bank may also use the proceeds of the offering to diversify their businesses and acquire other companies, although we have no specific plans to do so at this time. We have not allocated specific amounts of proceeds for any of these purposes, and we will have significant flexibility in determining how much of the net proceeds we apply to different uses and the timing of such applications. Our failure to utilize these funds effectively would reduce our profitability.

A significant percentage of our common stock will be held or controlled by our directors and executive officers and benefit plans.

We expect that our directors and executive officers, together with their associates, will subscribe for 160,500 shares in the offering. In addition, we intend to establish an employee stock ownership plan that will purchase an amount of shares equal to 8.0% of the shares sold in the offering. As a result, upon consummation of the offering, a total of up to 588,900, or 11.0%, and 740,100, or 10.2%, of our outstanding shares will be held by our directors and executive officers and our employee stock ownership plan at the minimum and maximum of the offering range, respectively. Furthermore, additional shares will be held by directors and management following the implementation of an equity incentive plan, which we intend to implement no earlier than six months following the completion of the offering. The articles of incorporation and bylaws of ASB Bancorp, Inc. contain supermajority voting provisions that require that the holders of at least 80% of ASB Bancorp, Inc.’s outstanding shares of voting stock approve certain actions including, but not limited to, the consummation of a business combination with an interested shareholder and the amendment of certain provisions of ASB Bancorp, Inc.’s articles of incorporation and bylaws. Because our directors and executive officers and benefit plans will hold a significant percentage of our outstanding common stock following the completion of the offering, the shares held by those individuals and benefit plans could be voted in a manner that would help ensure that the 80% supermajority needed to approve such actions could not be attained. For more information on the restrictions included in the articles of incorporation and bylaws of ASB Bancorp, Inc., see “Restrictions on the Acquisition of ASB Bancorp, Inc. and Asheville Savings Bank.”

 

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Issuance of shares for benefit programs may dilute your ownership interest.

We intend to adopt an equity incentive plan following the offering. If shareholders approve the new equity incentive plan, we intend to issue shares to our officers, employees and directors through this plan. If the restricted stock awards under the equity incentive plan are funded from authorized but unissued stock, your ownership interest in the shares could be diluted by up to approximately 3.8%, assuming awards of common stock equal to 4% of the shares sold in the offering are awarded under the plan. If the shares issued upon the exercise of stock options under the equity incentive plan are issued from authorized but unissued stock, your ownership interest in the shares could be diluted by up to approximately 9.1%, assuming stock option grants equal to 10% of the shares sold in the offering are granted under the plan. See “Pro Forma Data” and “Our Management — Benefit Plans.”

The articles of incorporation and bylaws of ASB Bancorp, Inc. and certain regulations may prevent or make more difficult certain transactions, including a sale or merger of ASB Bancorp, Inc.

Provisions of the articles of incorporation and bylaws of ASB Bancorp, Inc. may make it more difficult for companies or persons to acquire control of ASB Bancorp, Inc. Consequently, our shareholders may not have the opportunity to participate in such a transaction and the trading price of our common stock may not rise to the level of other institutions that are more vulnerable to hostile takeovers. These provisions also make more difficult the removal of current directors or management, or the election of new directors. These provisions include:

 

   

an 80% supermajority voting requirement for shareholders to approve certain business combinations, which may have the effect of preventing a business combination which a majority of shareholders deem desirable but that is opposed by the board of directors;

 

   

a limitation on the right to vote shares by any person who directly or indirectly beneficially owns more than 10% of ASB Bancorp, Inc.’s common stock by prohibiting the person from voting any shares held in excess of the 10% limit, which will prevent greater than 10% shareholders from voting all of their shares in favor of a proposed transaction or a nominee for director that is opposed by the board of directors;

 

   

a provision that permits the board of directors to consider a variety of factors, including the social or economic effects of the transaction and the earnings prospects, experience and integrity of the acquirer, when evaluating a transaction that may involve a change in control of ASB Bancorp, Inc., which may enable the board of directors to oppose a transaction even if the price offered is significantly greater than the market price of ASB Bancorp, Inc.’s common stock;

 

   

the election of directors to staggered terms of three years, which will prevent shareholders from effecting a change in the composition of the entire board of directors at any annual shareholders’ meeting;

 

   

a requirement that director vacancies may only be filled by a majority vote of the board of directors, which prevents shareholders from nominating themselves or persons of their choosing to fill any vacancies on the board of directors;

 

   

certain director eligibility requirements, including age, share ownership, residency and integrity requirements, which may perpetuate the terms of incumbent directors by preventing some individuals from serving as directors;

 

   

a requirement that directors may be removed only for cause, which may perpetuate the terms of incumbent directors by preventing shareholders from voting to remove directors for reasons other than cause;

 

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the absence of cumulative voting by shareholders in the election of directors, which, by preventing shareholders from voting their shares for or against a single nominee, makes it more difficult for shareholders to elect nominees opposed by the board of directors;

 

   

a requirement that special meetings of shareholders may only be called by the board of directors, which prevents shareholders from calling a special meeting of shareholders to vote on a proposed transaction opposed by the board of directors;

 

   

a requirement that shareholder proposals and nominations must generally be received not less than ninety days before the date of the annual meeting of shareholders and be subject to certain procedural and content requirements, which affords ASB Bancorp, Inc. additional time to rebut proposals that it opposes but that may be favored by shareholders;

 

   

the ability of the board of directors to issue additional shares of common stock or shares of preferred stock without the prior approval of shareholders, which may enable the board of directors to impede a merger, tender offer or other takeover attempt that it opposes by making the transaction more expensive for the potential acquiror; and

 

   

an 80% supermajority voting requirement to (i) amend the articles of incorporation provisions regarding the size and election of the board of directors, removal of directors, elimination of directors’ liability, indemnification, limitations on shareholder voting rights, approval of certain business combinations, calling of special meetings of shareholders and the evaluation of business combinations; and (ii) approve any amendment to the bylaws, which may make it more difficult to modify or eliminate such anti-takeover provisions included in the articles of incorporation and bylaws.

For further information, see “Restrictions on Acquisition of ASB Bancorp, Inc. and Asheville Savings Bank.

 

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A WARNING ABOUT FORWARD-LOOKING STATEMENTS

This prospectus 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:

 

   

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 prospectus 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.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The summary consolidated financial information presented below is derived in part from our consolidated financial statements. The following is only a summary and you should read it in conjunction with the consolidated financial statements and notes beginning on page F-1. The information at December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009 and 2008 is derived in part from the audited consolidated financial statements of Asheville Savings Bank that appear elsewhere in this prospectus. The information at December 31, 2008, 2007 and 2006 and for the years ended December 31, 2007 and 2006 is derived in part from audited financial statements of Asheville Savings Bank and subsidiaries that do not appear in this prospectus.

The selected data at March 31, 2011 and for the three months ended March 31, 2011 and 2010 was not audited, but in the opinion of management, represents all adjustments necessary for a fair presentation. All of these adjustments are normal and recurring. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results of operations that may be expected for the entire year.

 

     At March 31,      At December 31,  

(In thousands)

   2011      2010      2009      2008      2007      2006  
     (Unaudited)                                     

Selected Financial Condition Data:

                 

Total assets

   $ 750,709       $ 749,965       $ 749,307       $ 705,095       $ 638,656       $ 597,034   

Cash and cash equivalents

     26,436         24,234         23,176         39,384         54,789         54,006   

Securities available-for-sale

     198,596         175,445         90,057         37,362         26,996         23,930   

Investment securities held-to-maturity

     5,720         5,948         6,958         5,442         10,856         12,523   

Federal Home Loan Bank stock

     3,970         3,970         3,993         5,020         3,325         2,952   

Loans receivable, net

     472,097         487,327         588,607         583,692         516,080         478,981   

Loans held for sale

     1,263         8,386         3,890         2,926         2,548         2,107   

Foreclosed real estate

     10,506         10,650         3,699         6,272         —           —     

Deposits

     616,586         619,757         608,538         535,640         505,290         482,000   

Overnight and short-term borrowings

     1,404         1,008         1,694         31,219         4,561         1,704   

Advances from Federal Home Loan Bank

     60,000         60,000         60,000         60,000         50,000         40,000   

Total equity

     63,295         62,881         73,649         69,921         71,059         66,822   

 

     For the Three Months
Ended March 31,
     For the Year Ended December 31,  

(In thousands)

   2011      2010      2010     2009      2008      2007      2006  
     (Unaudited)                                    

Selected Operating Data:

                   

Interest and dividend income

   $ 7,382       $ 8,678       $ 32,815      $ 35,654       $ 36,683       $ 39,091       $ 35,126   

Interest expense

     2,304         3,051         11,444        14,772         16,745         19,116         15,751   
                                                             

Net interest income

     5,078         5,627         21,371        20,882         19,938         19,975         19,375   

Provision for loan losses

     657         1,859         22,419        4,655         3,049         932         647   
                                                             

Net interest income (loss) after provision for loan losses

     4,421         3,768         (1,048     16,227         16,889         19,043         18,728   

Noninterest income

     1,680         2,058         7,683        7,166         5,286         5,686         5,920   

Noninterest expenses

     5,232         5,154         22,167        21,071         18,361         17,395         16,402   
                                                             

Income (loss) before income tax provision

     869         672         (15,532     2,322         3,814         7,334         8,246   

Income tax provision (benefit)

     284         242         (6,074     791         1,382         2,642         2,983   
                                                             

Net income (loss)

   $ 585       $ 430       $ (9,458   $ 1,531       $ 2,432       $ 4,692       $ 5,263   

 

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     At or For the Three
Months Ended

March 31,
    At or For the Year Ended December 31,  
     2011     2010     2010     2009     2008     2007     2006  
     (Unaudited)                                

Performance Ratios (1):

            

Return on average assets

     0.32     0.23     (1.25 )%      0.21     0.37     0.75     0.90

Return on average equity

     3.73        2.32        (13.01     2.14        3.33        6.70        8.10   

Interest rate spread (2)

     2.76        2.93        2.73        2.69        2.74        2.83        3.06   

Net interest margin (3)

     2.92        3.17        2.95        2.98        3.15        3.33        3.49   

Other expenses to average assets

     2.85        2.78        2.92        2.88        2.77        2.77        2.81   

Efficiency ratio (4)

     77.42        66.95        76.18        75.07        72.79        67.79        64.84   

Average interest-earning assets to average interest-bearing liabilities

     111.72        114.00        113.85        113.87        115.38        115.57        114.89   

Average equity to average assets

     8.55        9.98        9.57        9.78        11.01        11.14        11.13   

Capital Ratios:

              

Total risk-based capital (to risk-weighted assets)

     14.94        15.03        14.31        14.98        15.03        16.51        16.67   

Tier I risk-based capital (to risk-weighted assets)

     13.67        13.78        13.04        13.72        13.84        15.42        15.59   

Tier I leverage capital (to total assets)

     8.60        10.13        8.33        10.13        10.98        11.16        11.34   

Tangible capital (to adjusted total assets)

     8.43        9.73        8.38        9.83        9.92        11.13        11.19   

Asset Quality Ratios:

              

Allowance for loan losses as a percent of total loans

     2.61        1.56        2.54        1.51        1.09        0.97        0.96   

Allowance for loan losses as a percent of non-performing loans

     89.02        52.18        94.43        39.90        180.26        102.98        192.45   

Net charge-offs to average outstanding loans during the period

     0.58        1.22        3.37        0.34        0.31        0.10        0.13   

Non-performing loans as a percent of total loans

     2.93        2.98        2.68        3.77        0.60        0.95        0.50   

Non-performing assets as a percent of total assets

     3.29        2.82        3.21        3.50        1.39        0.77        0.40   

Other Data:

              

Number of offices

     13        13        13        13        13        12        12   

Number of deposit accounts

     71,389        64,965        72,297        64,623        55,572        49,614        49,654   

Number of loans

     10,356        12,871        10,417        13,766        15,449        21,816        21,585   

 

(1) Performance ratios for the three months ended March 31, 2011 and 2010 are annualized.
(2) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost on average interest-bearing liabilities. Tax exempt income is reported on a tax equivalent basis using a federal marginal tax rate of 34%.
(3) Represents net interest income as a percent of average interest-earning assets. Tax exempt income is reported on a tax equivalent basis using a federal marginal tax rate of 34%.
(4) Represents other expenses divided by the sum of net interest income and other income.

 

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USE OF PROCEEDS

The following table shows how we intend to use the net proceeds of the offering. The actual net proceeds will depend on the number of shares of common stock sold in the offering and the actual expenses incurred in connection with the offering. Payments for shares made through withdrawals from deposit accounts at Asheville Savings Bank will reduce deposits and will not result in the receipt of new funds for investment. See “Pro Forma Data” for the assumptions used to arrive at these amounts.

 

     Minimum of
Offering Range
    Midpoint of
Offering Range
    Maximum of
Offering Range
    Maximum,
as Adjusted,
of Offering Range
 

(Dollars in thousands)

   5,355,000
Shares at
$10.00
Per Share
    Percent
of
Net
Proceeds
    6,300,000
Shares at
$10.00
Per Share
    Percent
of
Net
Proceeds
    7,245,000
Shares at
$10.00
Per Share
    Percent
of
Net
Proceeds
    8,331,750
Shares at
$10.00
Per Share
    Percent
of
Net
Proceeds
 

Offering proceeds

   $ 53,550        $ 63,000        $ 72,450        $ 83,318     

Less: estimated offering expenses

     (1,837       (1,924       (2,010       (2,110  
                                                                

Net offering proceeds

   $ 51,713        100.0   $ 61,076        100.0   $ 70,440        100.0   $ 81,208        100.0

Less:

                

Proceeds contributed to Asheville Savings Bank

   $ (25,857     (50.0 )%    $ (30,538     (50.0 )%    $ (35,220     (50.0 )%    $ (40,604     (50.0 )% 

Proceeds used for loan to employee stock ownership plan

     (4,284     (8.3     (5,040     (8.3     (5,796     (8.2     (6,665     (8.2
                                                                

Proceeds remaining for ASB Bancorp, Inc. (1)

   $ 21,572        41.7   $ 25,498        41.7   $ 29,424        41.8   $ 33,938        41.8

 

(1) Following the completion of the stock offering and in accordance with applicable regulations, ASB Bancorp, Inc. may purchase shares of its common stock in the open market in order to grant awards of restricted stock under its proposed equity incentive plan. Assuming a market price of $10.00 per share at the time of purchase, the cost of acquiring the shares would be approximately $4.3 million (428,400 shares) at the minimum of the offering range, $5.0 million (504,000 shares) at the midpoint of the offering range, $5.8 million (579,600 shares) at the maximum of the offering range and $6.7 million (666,540 shares) at the maximum, as adjusted, of the offering range. See “Pro Forma Data” and “Our Management — Benefit Plans — Nonqualified Deferred Compensation — Future Equity Incentive Plan.”

ASB Bancorp, Inc. intends to invest the proceeds it retains from the offering initially in short-term, liquid investments. Over time, ASB Bancorp, Inc. may use the proceeds it retains from the offering:

 

   

to invest in securities;

 

   

to repurchase shares of its common stock, subject to regulatory restrictions;

 

   

to finance the possible acquisition of financial institutions or other businesses that are related to banking, although we currently have no definitive plans or commitments regarding potential acquisition opportunities;

 

   

for the possible payment of dividends to shareholders; and

 

   

for general corporate purposes.

Under current Federal Deposit Insurance Corporation regulations, ASB Bancorp, Inc. may not repurchase shares of its common stock during the first year following the offering, except to fund shareholder-approved equity benefit plans or, with prior regulatory approval, when extraordinary circumstances exist.

 

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Asheville Savings Bank may use the proceeds that it receives from the offering, which is shown in the table above as the amount contributed to Asheville Savings Bank:

 

   

to fund new loans;

 

   

to finance the possible expansion of its business activities through the establishment or acquisition of new branch offices and/or the acquisition of other financial institutions or financial services companies, including through Federal Deposit Insurance Corporation assisted transactions, although we currently have no definitive plans or commitments regarding potential expansion or acquisition opportunities;

 

   

to invest in securities; and

 

   

for general corporate purposes.

We may need regulatory approvals to engage in some of the activities listed above.

Except as described above, neither ASB Bancorp, Inc. nor Asheville Savings Bank has any specific plans for the investment of the proceeds of this offering and has not allocated a specific portion of the proceeds to any particular use. For a discussion of our business reasons for undertaking the offering, see “The Conversion and Stock Offering — Reasons for the Conversion.”

 

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OUR DIVIDEND POLICY

Following the offering, our board of directors will consider adopting a policy of paying cash dividends. We cannot guarantee that we will pay dividends or that, if paid, we will not reduce or eliminate dividends in the future.

The board of directors may declare and pay periodic special cash dividends in addition to, or in lieu of, regular cash dividends. In determining whether to declare or pay any dividends, whether regular or special, the board of directors will take into account our financial condition and results of operations, tax considerations, capital requirements, industry standards, and economic conditions. We will also consider the regulatory restrictions that affect the payment of dividends by Asheville Savings Bank to us, discussed below.

ASB Bancorp, Inc. is subject to North Carolina law, which generally prohibits ASB Bancorp, Inc. from paying dividends on its common stock if, after giving effect to the distribution, it would be unable to pay its debts as they become due in the usual course of business or if its total assets would be less than the sum of its liabilities and the amount that would be needed, if ASB Bancorp, Inc. were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of any holders of capital stock who have a preference upon dissolution.

ASB Bancorp, Inc. will not be subject to Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks regulatory restrictions on the payment of dividends. However, our ability to pay dividends may depend, in part, upon dividends we receive from Asheville Savings Bank because we initially will have no source of income other than dividends from Asheville Savings Bank and earnings from the investment of the net proceeds from the offering that we retain. North Carolina banking law and Federal Deposit Insurance Corporation regulations limit dividends and other distributions from Asheville Savings Bank to us. For example, Asheville Savings Bank may not declare or pay a cash dividend on its capital stock if its effect would be to reduce the regulatory capital of Asheville Savings Bank below the amount required for the liquidation account to be established as required by Asheville Savings Bank’s plan of conversion. Similarly, no insured depository institution may make a capital distribution if, after making the distribution, the institution would be undercapitalized. See “Regulation and Supervision — North Carolina Banking Laws and Supervision — Dividends” and “The Conversion and Stock Offering — Effects of Conversion to Stock Form — Liquidation Account.”

Any payment of dividends by Asheville Savings Bank to us that would be deemed to be drawn out of Asheville Savings Bank’s bad debt reserves would require Asheville Savings Bank to pay federal income taxes at the then current income tax rate on the amount deemed distributed. See “Federal and State Taxation — Federal Income Taxation.” ASB Bancorp, Inc. does not contemplate any distribution by Asheville Savings Bank that would result in this type of tax liability.

 

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MARKET FOR THE COMMON STOCK

We have not previously issued common stock and there is currently no established market for the common stock. We have received conditional approval to list our common stock for trading on the Nasdaq Global Market under the symbol “ASBB” upon completion of the offering. Keefe, Bruyette & Woods, Inc. intends to become a market maker in our common stock following the offering, but it is under no obligation to do so. Keefe, Bruyette & Woods, Inc. also will assist us, if needed, in obtaining other market makers after the offering. We will try to obtain at least three market makers for our stock, but we cannot assure you that other market makers will be obtained or that an active and liquid trading market for the common stock will develop or, if developed, will be maintained.

The development of a public market having the desirable characteristics of depth, liquidity and orderliness depends on the existence of willing buyers and sellers, the presence of which is not within our control or that of any market maker. The number of active buyers and sellers of our common stock at any particular time may be limited, which may have an adverse effect on the price at which our common stock can be sold. There can be no assurance that persons purchasing the common stock will be able to sell their shares at or above the $10.00 price per share in the offering. Purchasers of our common stock should recognize that there may be a limited trading market in the common stock and, therefore, should have the financial ability to withstand a longer-term investment horizon.

 

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CAPITALIZATION

The following table presents the historical capitalization of Asheville Savings Bank at March 31, 2011 and the capitalization of ASB Bancorp, Inc. reflecting the offering (referred to as “pro forma” information). The pro forma capitalization gives effect to the assumptions listed under “Pro Forma Data,” based on the sale of the number of shares of common stock indicated in the table. This table does not reflect the issuance of additional shares as a result of the exercise of options granted under the proposed equity incentive plan. A change in the number of shares to be issued in the offering may materially affect pro forma capitalization. We are offering our common stock on a best efforts basis. We must sell a minimum of 5,355,000 shares to complete the offering.

 

           Pro Forma
Capitalization Based Upon the Sale of
 

(Dollars in thousands, except per share amounts)

   Capitalization
as of
March 31, 2011
    5,355,000
Shares at
$10.00
Per Share
    6,300,000
Shares at
$10.00
Per Share
    7,245,000
Shares at
$10.00
Per Share
    8,331,750
Shares at
$10.00
Per Share
 

Deposits (1)

   $ 616,586      $ 616,586      $ 616,586      $ 616,586      $ 616,586   

Borrowings

     61,404        61,404        61,404        61,404        61,404   
                                        

Total deposits and borrowed funds

   $ 677,990      $ 677,990      $ 677,990      $ 677,990      $ 677,990   
                                        

Shareholders’ equity:

          

Preferred stock:

          

10,000,000 shares, $0.01 par value per share, authorized; none issued or outstanding

   $ —        $ —        $ —        $ —        $ —     

Common stock:

          

60,000,000 shares, $0.01 par value per share, authorized; specified number of shares assumed to be issued and outstanding (2)

     —          54        63        72        83   

Additional paid-in capital

     —          51,659        61,013        70,368        81,124   

Retained earnings (3)

     67,106        67,106        67,106        67,106        67,106   

Accumulated other comprehensive (loss), net of tax

     (3,811     (3,811     (3,811     (3,811     (3,811

Less :

          

Common stock acquired by employee stock ownership plan (4)

     —          (4,284     (5,040     (5,796     (6,665

Common stock to be acquired by equity incentive plan (5)

     —          (2,142     (2,520     (2,898     (3,333
                                        

Total shareholders’ equity

   $ 63,295      $ 108,582      $ 116,811      $ 125,041      $ 134,504   
                                        

Shareholders’ equity to assets (1)

     8.43     13.64     14.52     15.39     16.36

 

(1) Does not reflect withdrawals from deposit accounts for the purchase of common stock in the offering. Withdrawals to purchase common stock will reduce pro forma deposits and assets by the amounts of the withdrawals.
(2) Reflects total issued and outstanding shares of 5,355,000, 6,300,000, 7,245,000 and 8,331,750 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively.
(3) Retained earnings are restricted by applicable regulatory capital requirements.
(4) Assumes that 8% of the shares of common stock sold in the offering will be acquired by the employee stock ownership plan in the offering with funds borrowed from ASB Bancorp, Inc. Under generally accepted accounting principles, the amount of common stock to be purchased by the employee stock ownership plan represents unearned compensation and is, accordingly, reflected as a reduction of capital and a liability to the employee stock ownership plan. As shares are released to plan participants’ accounts, a compensation expense will be charged, along with related tax benefit, and a reduction in the charge against capital will occur in the amount of the compensation expense recognized. Since the funds are borrowed from ASB Bancorp, Inc., the borrowing will be eliminated in consolidation and no liability or interest expense will be reflected in the financial statements of Asheville Savings Bank. The loan will be repaid principally through Asheville Savings Bank’s contributions to the employee stock ownership plan and dividends payable on common stock held by the plan over the anticipated 15-year term of the loan. See “Our Management — Benefit Plans — Employee Stock Ownership Plan.”

 

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(5) Assumes the purchase in the open market at $10.00 per share, for restricted stock awards under the proposed equity incentive plan, of a number of shares equal to 4% of the shares of common stock sold in the offering. The shares are reflected as a reduction of shareholders’ equity. The equity incentive plan will be submitted to shareholders for approval at a meeting following the offering. See “Risk Factors — Issuance of shares for benefit programs may dilute your ownership interest,” “Pro Forma Data” and “Our Management — Benefit Plans — Future Equity Incentive Plan.”

 

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REGULATORY CAPITAL COMPLIANCE

At March 31, 2011, Asheville Savings Bank exceeded all regulatory capital requirements. The following table presents Asheville Savings Bank’s capital position relative to its regulatory capital requirements at March 31, 2011, on a historical and a pro forma basis. The table reflects receipt by Asheville Savings Bank of 50% of the net proceeds of the offering. For purposes of the table, the amount expected to be borrowed by the employee stock ownership plan is deducted from pro forma regulatory capital. For a discussion of the assumptions underlying the pro forma capital calculations presented below, see “Use of Proceeds,” “Capitalization” and “Pro Forma Data.” The definitions of the terms used in the table are those provided in the capital regulations issued by the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. For a discussion of the capital standards applicable to Asheville Savings Bank, see “Regulation and Supervision — Federal Banking Regulations — Capital Requirements.”

 

                  Pro Forma at March 31, 2011  
                  Minimum of
Offering Range
    Midpoint of
Offering Range
    Maximum of
Offering Range
    Maximum, as
Adjusted, of

Offering Range
 
     Historical at
March 31, 2011
    5,355,000 Shares
At $10.00 Per Share
    6,300,000 Shares
At $10.00 Per Share
    7,245,000 Shares
At $10.00 Per Share
    8,331,750 Shares
At $10.00 Per Share
 

(Dollars in thousands)

   Amount      Percent
of
Assets (1)
    Amount     Percent
of
Assets
    Amount     Percent
of
Assets
    Amount     Percent
of
Assets
    Amount     Percent
of
Assets
 

Total capital under generally accepted accounting principles

   $ 63,295         8.43   $ 84,868        10.93   $ 88,793        11.37   $ 92,719        11.80   $ 97,234        12.29

Tier 1 Leverage Capital:

                     

Capital level (2)

   $ 64,241         8.60   $ 85,814        11.11   $ 89,739        11.54   $ 96,665        11.98   $ 98,180        12.47

Requirement

     29,871         4.00        30,905        4.00        31,092        4.00        31,280        4.00        31,495        4.00   
                                                                                 

Excess

   $ 34,370         4.60   $ 54,909        7.11   $ 58,647        7.54   $ 62,385        7.98   $ 66,685        8.47
                                                                                 

Tier 1 Risk–Based Capital:

                     

Capital level (2)

   $ 64,241         13.67   $ 85,814        18.07   $ 89,739        18.85   $ 93,665        19.64   $ 98,180        20.54

Requirement

     18,794         4.00        19,000        4.00        19,038        4.00        19,075        4.00        19,118        4.00   
                                                                                 

Excess

   $ 45,447         9.67   $ 66,814        14.07   $ 70,701        14.85   $ 74,500        15.64   $ 79,062        16.54
                                                                                 

Total Risk-Based Capital:

                     

Total risk-based capital (3)

   $ 70,207         14.94   $ 91,780        19.32   $ 95,705        20.11   $ 99,631        20.89   $ 104,146        21.79

Requirement

     37,587         8.00        38,001        8.00        38,076        8.00        38,151        8.00        38,237        8.00   
                                                                                 

Excess

   $ 32,620         6.94   $ 53,779        11.32   $ 57,629        12.11   $ 61,480        12.89   $ 65,909        13.79
                                                                                 

North Carolina Savings Bank Capital:

                     

Capital (2)

   $ 76,873         10.24   $ 98,466        20.73   $ 102,371        21.51   $ 106,297        22.29   $ 110,812        23.18

Requirement

     37,541         5.00        38,834        5.00        39,068        5.00        39,302        5.00        39,572        5.00   
                                                                                 

Excess

   $ 39,332         8.37   $ 59,612        12.55   $ 63,303        13.30   $ 66,995        14.05   $ 71,240        14.91
                                                                                 

Reconciliation of capital infusion to Asheville Savings Bank:

                     

Net proceeds of offering

        $ 51,713        $ 61,076        $ 70,440        $ 81,207     

Proceeds to Asheville Savings Bank

          25,857          30,538          35,220          40,604     

Less: stock acquired by ESOP

          (4,284       (5,040       (5,796       (6,665  
                                             

Pro forma increase in GAAP and regulatory capital

        $ 21,573        $ 25,498        $ 29,424        $ 33,939     
                                             

 

(1) Tangible capital and core capital levels are shown as a percentage of adjusted total assets of $750.7 million. Risk-based capital levels are shown as a percentage of risk-weighted assets of $469.8 million.
(2) See note 11 of the notes to consolidated financial statements for a reconciliation of total capital under generally accepted accounting principles and each of tangible capital, core capital, Tier 1 risked based capital and total risk-based capital.
(3) Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk-weighting.

 

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PRO FORMA DATA

The following tables show information about our net income and shareholders’ equity reflecting the sale of common stock in the offering. The information provided illustrates our pro forma net income and shareholders’ equity based on the sale of common stock at the minimum of the offering range, the midpoint of the offering range, the maximum of the offering range and the maximum, as adjusted, of the offering range. The actual net proceeds from the sale of the common stock cannot be determined until the offering is completed. Net proceeds indicated in the following tables are based upon the following assumptions:

 

   

All shares of stock will be sold in the subscription and community offerings;

 

   

Our employee stock ownership plan will purchase a number of shares equal to 8% of the shares sold in the offering with a loan from ASB Bancorp, Inc. that will be repaid in equal installments over 15 years;

 

   

Keefe, Bruyette & Woods, Inc. will receive a success fee equal to 1.00% of the aggregate dollar amount of the common stock sold in the subscription and community offerings, except that no fee will be paid with respect to shares purchased by the employee stock ownership plan or by our officers, directors and employees and members of their immediate families; and

 

   

Total expenses of the offering, excluding fees paid to Keefe, Bruyette & Woods, Inc., will be approximately $1.36 million.

Actual expenses may vary from this estimate, and the amount of fees paid to Keefe, Bruyette & Woods, Inc. (and potentially other broker-dealers) will depend upon whether a syndicate of broker-dealers or other means is necessary to sell the shares, and other factors.

Pro forma net income for the three months ended March 31, 2011 and the year ended December 31, 2010 has been calculated as if the offering were completed at the beginning of the period, and the net proceeds had been invested at 0.80% for the three months ended March 31, 2011 and 0.61% for the year ended December 31, 2010, which represents the two-year treasury rate at March 31, 2011.

A pro forma after-tax return of 0.50% and 0.38% is used for the three months ended March 31, 2011 and the year ended December 31, 2010, respectively, after giving effect to a combined federal and state income tax rate of 38.0% for each period. Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the number of shares of common stock indicated in the tables.

When reviewing the following tables you should consider the following:

 

   

The final column gives effect to a 15% increase in the offering range, which may occur without any further notice if Feldman Financial increases its appraisal to reflect the results of this offering, changes in our financial condition or results of operations or changes in market conditions after the offering begins. See “The Conversion and Stock Offering — How We Determined the Offering Range and the $10.00 Per Share Purchase Price.”

 

   

Since funds on deposit at Asheville Savings Bank may be withdrawn to purchase shares of common stock, the amount of funds available for investment will be reduced by the amount of withdrawals for stock purchases. The pro forma tables do not reflect withdrawals from deposit accounts.

 

   

Historical per share amounts have been computed as if the shares of common stock expected to be issued in the offering had been outstanding at the beginning of the period covered by the table. However, neither historical nor pro forma shareholders’ equity has been adjusted to reflect the investment of the estimated net proceeds from the sale of the shares in the offering, the additional employee stock ownership plan expense or the proposed equity incentive plan.

 

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Pro forma shareholders’ equity (“book value”) represents the difference between the stated amounts of our assets and liabilities. Book value amounts do not represent fair market values or amounts available for distribution to shareholders in the unlikely event of liquidation. The amounts shown do not reflect the federal income tax consequences of the restoration to income of Asheville Savings Bank’s special bad debt reserves for income tax purposes or give effect to the liquidation account in the event of liquidation, which would be required in the unlikely event of liquidation. See “Federal and State Taxation” and “The Conversion and Stock Offering — Effects of Conversion to Stock Form — Liquidation Account.”

 

   

The amounts shown as pro forma shareholders’ equity per share do not represent possible future price appreciation of our common stock.

The following pro forma data may not represent the actual financial effects of the offering or our operating results after the offering. The pro forma data relies exclusively on the assumptions outlined above and in the notes to the pro forma tables. The pro forma data does not represent the fair market value of our common stock, the current fair market value of our assets or liabilities, or the amount of money that would be available for distribution to shareholders if we are liquidated after the offering.

 

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We are offering our common stock on a best efforts basis. We must sell a minimum of 5,355,000 shares to complete the offering.

 

     Three Months Ended March 31, 2011  
     Minimum of
Offering
Range
    Midpoint of
Offering
Range
    Maximum of
Offering
Range
    Maximum, as
Adjusted,  of

Offering
Range
 

(Dollars in thousands, except per share amounts)

   5,355,000
Shares
at $10.00
Per Share
    6,300,000
Shares
at $10.00
Per Share
    7,245,000
Shares
at $10.00
Per Share
    8,331,750
Shares
at $10.00
Per Share
 

Gross proceeds

   $ 53,550      $ 63,000      $ 72,450      $ 83,318   

Less: estimated offering expenses

     (1,837     (1,924     (2,010     (2,111

Estimated net conversion proceeds

     51,713        61,076        70,440        81,207   

Less: common stock acquired by employee stock ownership plan (1)

     (4,284     (5,040     (5,796     (6,665

Less: common stock to be acquired by equity incentive plan (2)

     (2,142     (2,520     (2,898     (3,333
                                

Net investable proceeds

   $ 45,287      $ 53,516      $ 61,746      $ 71,209   
                                

Pro Forma Net Income:

        

Pro forma net income:

        

Historical

   $ 585      $ 585      $ 585      $ 585   

Pro forma income on net investable proceeds

     57        67        77        89   

Less: pro forma employee stock ownership plan adjustments (1)

     (44     (52     (60     (69

Less: pro forma restricted stock award expense (2)

     (66     (78     (90     (103

Less: pro forma stock option expense (3)

     (100     (117     (135     (155
                                

Pro forma net income (loss)

   $ 432      $ 405      $ 377      $ 347   
                                

Pro forma net income per share:

        

Historical

   $ 0.12      $ 0.10      $ 0.09      $ 0.08   

Pro forma income on net investable proceeds

     0.01        0.01        0.01        0.01   

Less: pro forma employee stock ownership plan adjustments (1)

     (0.01     (0.01     (0.01     (0.01

Less: pro forma restricted stock award expense (2)

     (0.01     (0.01     (0.01     (0.01

Less: pro forma stock option expense (3)

     (0.02     (0.02     (0.02     (0.02
                                

Pro forma net income per share

   $ 0.09      $ 0.07      $ 0.06      $ 0.05   
                                

Offering price as a multiple of pro forma net income per share (annualized)

     27.8x        35.7x        41.7x        50.0x   

Number of shares used to calculate pro forma net income per share (4)

     4,933,740        5,804,400        6,675,060        7,676,319   

Pro Forma Shareholders’ Equity:

        

Pro forma shareholders’ equity (book value) (4):

        

Historical

   $ 63,295      $ 63,295      $ 63,295      $ 63,295   

Estimated net proceeds

     51,713        61,076        70,440        81,207   

Less: common stock acquired by employee stock ownership plan (1)

     (4,284     (5,040     (5,796     (6,665

Less: common stock to be acquired by equity incentive plan (2)

     (2,142     (2,520     (2,898     (3,333
                                

Pro forma shareholders’ equity

   $ 108,582      $ 116,811      $ 125,041      $ 134,504   
                                

Pro forma shareholders’ equity per share (4):

        

Historical

   $ 11.82      $ 10.05      $ 8.74      $ 7.60   

Estimated net proceeds

     9.66        9.69        9.72        9.75   

Less: common stock acquired by employee stock ownership plan (1)

     (0.80     (0.80     (0.80     (0.80

Less: common stock to be acquired by equity incentive plan (2)

     (0.40     (0.40     (0.40     (0.40
                                

Pro forma shareholders’ equity per share

   $ 20.28      $ 18.54      $ 17.26      $ 16.14   
                                

Offering price as a percentage of pro forma shareholders’ equity per share

     49.3     53.9     57.9     62.0

Number of shares used to calculate pro forma shareholders’ equity per share (4)

     5,355,000        6,300,000        7,245,000        8,331,750   

(footnotes on pages          and         )

 

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     Year Ended December 31, 2010  
     Minimum of
Offering
Range
    Midpoint of
Offering
Range
    Maximum of
Offering
Range
    Maximum, as
Adjusted, of

Offering
Range
 

(Dollars in thousands, except per share amounts)

   5,355,000
Shares
at $10.00
Per Share
    6,300,000
Shares
at $10.00
Per Share
    7,245,000
Shares
at $10.00
Per Share
    8,331,750
Shares
at $10.00
Per Share
 

Gross proceeds

   $ 53,550      $ 63,000      $ 72,450      $ 83,318   

Less: estimated offering expenses

     (1,834     (1,924     (2,010     (2,111

Estimated net conversion proceeds

     51,713        61,076        70,440        81,207   

Less: common stock acquired by employee stock ownership plan (1)

     (4,284     (5,040     (5,796     (6,665

Less: common stock to be acquired by equity incentive plan (2)

     (2,142     (2,520     (2,898     (3,333
                                

Net investable proceeds

   $ 45,287      $ 53,516      $ 61,746      $ 71,209   
                                

Pro Forma Net Income (Loss):

        

Pro forma net income (loss):

        

Historical

   $ (9,458   $ (9,458   $ (9,458   $ (9,458

Pro forma income on net investable proceeds

     172        203        235        271   

Less: pro forma employee stock ownership plan adjustments (1)

     (177     (208     (240     (276

Less: pro forma restricted stock award expense (2)

     (266     (312     (359     (413

Less: pro forma stock option expense (3)

     (398     (469     (539     (620
                                

Pro forma net income (loss)

   $ (10,127   $ (10,244   $ (10,361   $ (10,496
                                

Pro forma net income (loss) per share:

        

Historical

   $ (1.91   $ (1.62   $ (1.41   $ (1.23

Pro forma income on net investable proceeds

     0.04        0.03        0.03        0.04   

Less: pro forma employee stock ownership plan adjustments (1)

     (0.04     (0.04     (0.04     (0.04

Less: pro forma restricted stock award expense (2)

     (0.05     (0.05     (0.05     (0.05

Less: pro forma stock option expense (3)

     (0.08     (0.08     (0.08     (0.08
                                

Pro forma net income (loss) per share

   $ (2.04   $ (1.76   $ (1.55   $ (1.36
                                

Offering price as a multiple of pro forma net income (loss) per share

     (4.9)x        (5.7)x        (6.5)x        (7.4)x   

Number of shares used to calculate pro forma net income per share (4)

     4,955,160        5,829,600        6,704,040        7,709,646   

Pro Forma Shareholders’ Equity:

        

Pro forma shareholders’ equity (book value) (4):

        

Historical

   $ 62,881      $ 62,881      $ 62,881      $ 62,881   

Estimated net proceeds

     51,713        61,076        70,440        81,207   

Less: common stock acquired by employee stock ownership plan (1)

     (4,284     (5,040     (5,796     (6,665

Less: common stock to be acquired by equity incentive plan (2)

     (2,142     (2,520     (2,898     (3,333
                                

Pro forma shareholders’ equity

   $ 108,168      $ 116,397      $ 124,627      $ 134,090   
                                

Pro forma shareholders’ equity per share (4):

        

Historical

   $ 11.74      $ 9.99      $ 8.68      $ 7.54   

Estimated net proceeds

     9.66        9.69        9.72        9.75   

Less: common stock acquired by employee stock ownership plan (1)

     (0.80     (0.80     (0.80     (0.80

Less: common stock to be acquired by equity incentive plan (2)

     (0.40     (0.40     (0.40     (0.40
                                

Pro forma shareholders’ equity per share

   $ 20.20      $ 18.48      $ 17.20      $ 16.09   
                                

Offering price as a percentage of pro forma shareholders’ equity per share

     49.5     54.1     58.1     62.2

Number of shares used to calculate pro forma shareholders’ equity per share (4)

     5,355,000        6,300,000        7,245,000        8,331,750   

(footnotes on pages          and         )

 

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(1) Assumes that the employee stock ownership plan will acquire a number of shares of stock equal to 8% of the shares sold in the offering (428,400, 504,000, 579,600 and 666,540 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively). The employee stock ownership plan will borrow the funds to acquire these shares from the net offering proceeds retained by ASB Bancorp, Inc. The amount of this borrowing has been reflected as a reduction from gross proceeds to determine estimated net investable proceeds. This borrowing will have an interest rate equal to the prime rate as published in The Wall Street Journal, which is currently 3.25%, and a term of 15 years. Asheville Savings Bank intends to make contributions to the employee stock ownership plan in amounts at least equal to the principal and interest requirement of the debt. Interest income that ASB Bancorp, Inc. will earn on the loan will offset a portion of the compensation expense recorded by Asheville Savings Bank as it contributes to the employee stock ownership plan. As the debt is paid down, shares will be released for allocation to participants’ accounts and shareholders’ equity will be increased. The adjustment to pro forma net income for the employee stock ownership plan reflects the after-tax compensation expense associated with the plan. Applicable accounting principles require that compensation expense for the employee stock ownership plan be based upon the market value of shares committed to be released and that unallocated shares be excluded from earnings per share computations. An equal number of shares (1/15th of the total, based on a 15-year loan) will be released each year over the term of the loan. The valuation of shares committed to be released would be based upon the average market value of the shares during the year, which, for purposes of this calculation, was assumed to be equal to the $10.00 per share purchase price. If the average market value per share is greater than $10.00 per share, total employee stock ownership plan expense would be greater. See “Our Management — Benefit Plans — Employee Stock Ownership Plan.”
(2) Assumes that ASB Bancorp, Inc. will purchase in the open market a number of shares of stock equal to 4% of the shares sold in the offering (214,200, 252,000, 289,800 and 333,270 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively), that will be reissued as restricted stock awards under an equity incentive plan to be adopted following the offering. Purchases will be funded with cash on hand at ASB Bancorp, Inc. or with dividends paid to ASB Bancorp, Inc. by Asheville Savings Bank. The cost of these shares has been reflected as a reduction from gross proceeds to determine estimated net investable proceeds. In calculating the pro forma effect of the restricted stock awards, it is assumed that the required shareholder approval has been received, that the shares used to fund the awards were acquired at the beginning of the respective period and that the shares were acquired at the $10.00 per share purchase price. The issuance of authorized but unissued shares of the common stock instead of shares repurchased in the open market would dilute the ownership interests of existing shareholders by approximately 3.8%. The adjustment to pro forma net income for the restricted stock awards reflects the after-tax compensation expense associated with the awards. It is assumed that the fair market value of a share of ASB Bancorp, Inc. common stock was $10.00 at the time the awards were made, that shares of restricted stock issued under the equity incentive plan vest 20% per year, that compensation expense is recognized on a straight-line basis over each vesting period so that 20% of the value of the shares awarded was an amortized expense during each year, and that the combined federal and state income tax rate was 34%. If the fair market value per share is greater than $10.00 per share on the date shares are awarded under the equity incentive plan, total equity incentive plan expense would be greater.
(3) The adjustment to pro forma net income for stock options reflects the after-tax compensation expense associated with the stock options that may be granted under the equity incentive plan expected to be adopted following the offering. If the equity incentive plan is approved by shareholders, a number of shares equal to 10% of the shares sold in the offering (535,000, 630,000, 724,500 and 833,175 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively) will be reserved for future issuance upon the exercise of stock options that may be granted under the plan. Using the Black-Scholes option-pricing formula, the options are assumed to have a value of $4.11 for each option, based on the following assumptions: exercise price, $10.00; trading price on date of grant, $10.00; dividend yield, 0%; expected life, 10 years; expected volatility, 22.56%; and risk-free interest rate, 3.47%. Because there currently is no market for ASB Bancorp, Inc. common stock, the assumed expected volatility is based on the SNL Index for all publicly-traded thrifts. The dividend yield is assumed to be 0% because there is no history of dividend payments and the board of directors has not expressed an intention to commence dividend payments upon completion of the offering. It is assumed that stock options granted under the equity incentive plan vest 20% per year, that compensation expense is recognized on a straight-line basis over each vesting period so that 20% of the value of the options awarded was an amortized expense during each year, that 25% of the options awarded are non-qualified options and that the combined federal and state income tax rate was 34%. If the fair market value per share is different than $10.00 per share on the date options are awarded under the equity incentive plan, or if the assumptions used in the option-pricing formula are different from those used in preparing this pro forma data, the value of the stock options and the related expense would be different. Applicable accounting standards do not prescribe a specific valuation technique to be used to estimate the fair value of employee stock options. ASB Bancorp, Inc. may use a valuation technique other than the Black-Scholes option-pricing formula and that technique may produce a different value. The issuance of authorized but unissued shares of common stock to satisfy option exercises instead of shares repurchased in the open market would dilute the ownership interests of existing shareholders by approximately 9.1%.
(4) The number of shares used to calculate pro forma net income per share is equal to the total number of shares to be outstanding upon completion of the offering, less the number of shares purchased by the employee stock ownership plan not committed to be released within six months or one year following the offering. The number of shares used to calculate pro forma shareholders’ equity per share equals the total number of shares to be outstanding upon completion of the offering.

 

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OUR BUSINESS

General

ASB Bancorp, Inc., a North Carolina corporation, was incorporated in May 2011 to become the holding company for Asheville Savings Bank upon completion of the conversion. Before the completion of the conversion, ASB Bancorp, Inc. has not engaged in any significant activities other than organizational activities. Following completion of the conversion, ASB Bancorp, Inc.’s business activity will be the ownership of the outstanding capital stock of Asheville Savings Bank. ASB Bancorp, Inc. will not own or lease any property but will instead use the premises, equipment and other property of Asheville Savings Bank with the payment of appropriate rental fees, as required by applicable law and regulations, under the terms of an expense allocation agreement that ASB Bancorp, Inc. and Asheville Savings Bank will enter into upon completion of the conversion. The expense allocation agreement generally provides that ASB Bancorp, Inc. will pay to Asheville Savings Bank, on a quarterly basis, fees for its use of Asheville Savings Bank’s premises, furniture, equipment and employees in an amount to be determined by the board of directors of ASB Bancorp, Inc. and Asheville Savings Bank. Such fees shall not be less than the fair market value received for such goods or services. In addition, ASB Bancorp, Inc. and Asheville Savings Bank will also enter into a tax allocation agreement upon completion of the conversion as a result of their status as members of an affiliated group under the Internal Revenue Code. The tax allocation agreement generally provides that ASB Bancorp, Inc. will file consolidated federal income tax returns with Asheville Savings Bank and its subsidiaries. The tax allocation agreement also formalizes procedures for allocating the consolidated tax liability of the group among its members and establishes procedures for the future payments by Asheville Savings Bank to ASB Bancorp, Inc. for tax liabilities attributable to Asheville Savings Bank and its subsidiaries. In the future, ASB Bancorp, Inc. may acquire or organize other operating subsidiaries; however, there are no current plans, arrangements, agreements or understandings, written or oral, to do so.

Founded in 1936, Asheville Savings Bank is a North Carolina chartered savings bank headquartered in Asheville, North Carolina. We operate as a community-oriented financial institution offering traditional financial services to consumers and businesses in our primary market area. We attract deposits from the general public and use those funds to originate primarily one-to four-family residential mortgage loans and commercial real estate loans, and, to a lesser extent, home equity loans and lines of credit, consumer loans, construction and land development loans, and commercial and industrial loans. We conduct our lending and deposit activities primarily with individuals and small businesses in our primary market area.

Our primary market area is Asheville, North Carolina and the rest of Buncombe County where we have eight branch offices, as well as Henderson, Madison, McDowell and Transylvania Counties where we have five branch offices.

Our emphasis on commercial mortgage, and commercial construction and land development loans has exposed us to losses as the recent economic recession, whose adverse effects were delayed in impacting western North Carolina, has adversely affected businesses and developers in our market area. In 2010, we charged-off $7.9 million of our commercial construction and land development loan portfolio and $6.1 million of our commercial mortgage portfolio. We have also suffered recent losses in our residential mortgage loan portfolio. In 2010, we charged-off $1.8 million of our residential mortgage loan portfolio and $1.1 million of our consumer loan portfolio. The losses in our consumer loan portfolio have been related primarily to our indirect financing of automobile loans and, as a result of such losses, we have suspended our indirect automobile financing activities. We are continuing to emphasize our commercial mortgage lending activities. However, due to recent economic conditions, we have also suspended financing the construction of any properties built on a speculative basis and are emphasizing the origination of commercial mortgage loans secured by owner-occupied properties.

Our website address is www.ashevillesavingsbank.com. Information on our website should not be considered a part of this prospectus.

 

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Market Area

We are headquartered in Asheville, North Carolina, which is the county seat of Buncombe County, North Carolina and consider Buncombe, Madison, McDowell, Henderson and Transylvania Counties in western North Carolina and the surrounding areas to be our primary market area. Asheville is situated in the Blue Ridge Mountains at the confluence of the Swannanoa River and French Broad River and is known for its natural beauty and scenic surroundings. In addition, the Asheville metropolitan area has a vibrant cultural and arts community that parallels that of many larger cities in the United States and is home to a number of historical attractions, the most prominent of which is the Biltmore Estate, a historic mansion with gardens and a winery that draws approximately 900,000 tourists each year. Due to its scenic location and diverse cultural and historical offerings, the Asheville metropolitan area has become a popular destination for tourists, which has historically positively impacted our local economy. In addition, affordable housing prices, combined with the region’s favorable climate, scenic surroundings and cultural attractions, have also made the Asheville metropolitan area an increasingly attractive destination for retirees seeking to relocate from other parts of the United States.

The Asheville metropolitan area benefits from a diverse economy, and there is no single employer or industry upon which a significant number of our customers are dependent. In addition to the tourism industry, Western North Carolina is also home to a number of manufacturing and technology companies, including Wilsonart International, Inc., Eaton Corporation, Thermo Fischer Scientific and Arvato Digital Services. Furthermore, the region is home to a number of educational organizations, private colleges and large public universities, such as the University of North Carolina at Asheville. Mission Health System, a leading employer in the Asheville metropolitan area, has also been nationally recognized as a top hospital network for cardiovascular and orthopedic medicine.

The recent economic recession has caused the Asheville metropolitan area to experience a decline in tourism and a reduced influx of retirees from other parts of the country, which has negatively impacted our local economy. In addition, the recent economic recession has also resulted in increased job losses in the manufacturing services sector. Over the course of the past year, the tourism industry in the Asheville metropolitan area has largely recovered, which has positively impacted the economy in a number of our local markets, such as Buncombe and Henderson Counties, that directly benefit from this industry and has caused the overall unemployment rate in the Asheville metropolitan area to decrease from 9.7% in March 2010 to 8.1% in March 2011. However, the Asheville metropolitan area has continued to experience a reduced number of relocating retirees and a decline in the manufacturing industry. As a result of such decline, as of March 2011, published statistics reflect that twelve counties in western North Carolina, including three of the five counties in our primary market area (Madison, McDowell and Transylvania Counties), had unemployment rates that exceeded both the national and state unemployment rates.

Competition

We face significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the several financial institutions operating in our primary market area and from other financial service companies such as securities brokerage firms, credit unions and insurance companies. We also face competition for investors’ funds from money market funds, mutual funds and other corporate and government securities. At June 30, 2010, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation, we held approximately 10.85% of the deposits in Buncombe County, North Carolina, 23.31% of the deposits in Madison County, North Carolina, 16.49% of the deposits in McDowell County, North Carolina, 3.42% of the deposits in Henderson County, North Carolina and 4.92% of the deposits in Transylvania County, North Carolina. This data does not reflect deposits held by credit unions with which we also compete. In addition, banks owned by large national and regional holding companies and other community-based banks also operate in our primary market area. Some of these institutions are larger than us and, therefore, may have greater resources.

Our competition for loans comes primarily from financial institutions, including credit unions, in our primary market area and from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from non-depository financial service companies entering the mortgage market, such as insurance companies, securities companies and specialty finance companies.

 

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We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the Internet, and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Competition for deposits and the origination of loans could limit our growth in the future.

Lending Activities

General. The largest component of our loan portfolio is real estate mortgage loans, primarily one- to four-family residential mortgage loans and commercial mortgage loans, and to a lesser extent, revolving mortgage loans (which consist of home equity loans and lines of credit), consumer loans, construction and land development loans, and commercial and industrial loans. We originate loans for investment purposes, although we generally sell our fixed-rate residential mortgage loans into the secondary market with servicing released.

We intend to continue to emphasize residential and commercial mortgage lending, while also concentrating on ways to expand our commercial and industrial lending activities with a focus on serving small businesses and emphasizing relationship banking in our primary market area. We do not offer Alt-A, sub-prime or no-documentation mortgage loans.

One-to Four-Family Residential Loans. At March 31, 2011, we had $177.8 million in one- to four-family residential loans, which represented 36.7% of our total loan portfolio. Our origination of residential mortgage loans enables borrowers to purchase or refinance existing homes located in our primary market area.

Our residential lending policies and procedures generally conform to the secondary market guidelines. We generally offer a mix of adjustable rate mortgage loans and fixed-rate mortgage loans with terms of up to 30 years. Borrower demand for adjustable-rate loans compared to fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans as compared to an initially discounted interest rate and loan fees for multi-year adjustable-rate mortgages. The relative amount of fixed-rate mortgage loans and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment. We determine the loan fees, interest rates and other provisions of mortgage loans based on our own pricing criteria and competitive market conditions.

Interest rates and payments on our adjustable-rate mortgage loans generally adjust annually after an initial fixed period that typically ranges from one to seven years. Interest rates and payments on our adjustable-rate loans generally are indexed to the one year U.S. Treasury Constant Maturity Index.

While one-to four-family residential real estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full either upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans on a regular basis. We do not offer residential mortgage loans with negative amortization and generally do not offer interest-only residential mortgage loans.

We generally do not make owner occupied one- to four-family residential real estate loans with loan-to-value ratios exceeding 95%. Loans with loan-to-value ratios in excess of 80% typically require private mortgage insurance. In addition, we generally do not make non-owner occupied one- to four-family residential real estate loans with loan-to-value ratios exceeding 80%. We require all properties securing mortgage loans to be appraised by a board-approved independent appraiser. We also require title insurance on all mortgage loans. Borrowers must obtain hazard insurance, and flood insurance is required for all loans located in flood hazard areas.

Commercial Mortgage Loans. We offer fixed- and adjustable-rate mortgage loans secured by non-residential real estate and multi-family properties. At March 31, 2011, commercial mortgage loans totaled $162.7 million, or 33.5% of our total loan portfolio. Our commercial mortgage loans are generally secured by commercial,

 

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industrial and manufacturing, small to moderately-sized office and retail properties, hotels, multi-family properties and hospitals and churches located in our primary market area. Although we have historically made commercial mortgage loans that are secured by both owner-occupied and non-owner-occupied properties, we are currently emphasizing the origination of commercial mortgage loans that are secured by owner-occupied properties. At March 31, 2011, $35.6 million or 21.9% of our commercial real estate loans were secured by owner-occupied properties.

We originate fixed-rate and adjustable-rate commercial mortgage loans, generally with terms of three to five years and payments based on an amortization schedule of up to 25 years, resulting in “balloon” balances at maturity. For our adjustable-rate commercial mortgage loans, interest rates are typically equal to the prime lending rate as reported in The Wall Street Journal plus an applicable margin. Currently, our adjustable-rate commercial mortgage loans typically provide for an interest rate floor. Loans are secured by first mortgages, generally are originated with a maximum loan-to-value ratio of 85% and may require specified debt service coverage ratios depending on the characteristics of the project. Rates and other terms on such loans generally depend on our assessment of credit risk after considering such factors as the borrower’s financial condition, credit history, loan-to-value ratio, debt service coverage ratio and other factors, including whether the property securing the loan will be owner occupied.

At March 31, 2011, our largest commercial mortgage loan had an outstanding balance of $7.0 million. This loan was originated in November 2009 and is secured by a multi-use property, including a warehouse and office space, located in Fletcher, North Carolina. The loan is currently performing in accordance with its original terms.

Construction and Land Development Loans. We have originated construction and land development loans for commercial properties, such as retail shops and office units, and multi-family properties, and construction and land development loans for one-to four-family homes. At March 31, 2011, commercial construction and land development loans totaled $27.8 million, which represented 5.7% of our total loan portfolio, and residential construction and land development loans totaled $7.9 million, which represented 1.6% of our total loan portfolio. Residential construction loans are typically for a term of 12 months with monthly interest only payments, and generally are followed by an automatic conversion to a 15-year to 30-year permanent loan with monthly payments of principal and interest. Except for speculative loans, discussed below, residential construction loans are generally only made to homeowners and the repayment of such loans generally comes from the proceeds of a permanent mortgage loan for which a commitment is typically in place when the construction loan is originated. Interest rates on construction loans are generally tied to an index plus an applicable margin. We generally require a maximum loan-to-value ratio of 80% for all construction loans. We generally disburse funds on a percentage-of-completion basis following an inspection by a third party inspector.

In the past, we have originated speculative construction loans to builders who have not identified a buyer for the completed property at the time of origination. However, due to recent economic conditions, we are no longer emphasizing the origination of speculative construction loans. At March 31, 2011, we had speculative residential construction loans of $3.1 million and speculative commercial construction loans of $9.6 million.

At March 31, 2011, our largest construction loan secured by a project being built on speculation was an $8.6 million loan secured by a mixed-use residential condominium, commercial office and retail project located in western North Carolina. The borrower is in Chapter 11 bankruptcy. Through the bankruptcy process, we made an additional loan to a third party totaling $2.3 million. That third party then made a $2.9 million “debtor in possession” loan to the original borrower to facilitate the completion of the building. An interest reserve for our $8.6 million loan was created with a portion of the proceeds of the additional $2.9 million debtor in possession loan. The $2.3 million loan to the third party debtor in possession lender is secured by an assignment of the debtor in possession note. Both of these loans are performing in accordance with their terms. The mixed-use condominium, commercial office and retail project serving as collateral for the original $8.6 million loan consists of 29 residential condominiums, of which one has been sold, 11 commercial office condominiums, of which three have been sold, and eight commercial retail spaces, of which four are currently leased.

We also selectively originate loans to individuals and developers for the purpose of developing vacant land in our primary market area, typically for building an individual’s future residence or, in the case of a developer, residential subdivisions. Land development loans, which are offered for terms of up to 18 months, are generally

 

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indexed to the prime rate as reported in The Wall Street Journal plus an applicable margin. We generally require a maximum loan-to-value ratio to 75% of the discounted market value based upon expected cash flows upon completion of the project. We also originate loans to individuals secured by undeveloped land held for investment purposes. These loans are typically amortized for no more than fifteen years with a three or five-year balloon payment. At March 31, 2011, our largest land development loan had an outstanding balance of $3.9 million and was performing in accordance with its original terms at March 31, 2011.

Revolving Mortgages and Consumer Loans. We offer revolving mortgage loans, which consist of home equity loans and lines of credit, and various consumer loans, including automobile loans and loans secured by deposits. At March 31, 2011, revolving mortgage loans totaled $52.0 million, or 10.7% of our total loan portfolio, and consumer loans totaled $41.1 million, or 8.5% of our total loan portfolio. Our revolving mortgage loans consist of both home equity loans with fixed-rate amortizing term loans with terms of up to 15 years and adjustable rate lines of credit with interest rates indexed to the prime rate, as published in The Wall Street Journal, plus an applicable margin. Consumer loans typically have shorter maturities and higher interest rates than traditional one- to four-family lending. We typically do not originate home equity loans with loan-to-value ratios exceeding 80%, including any first mortgage loan balance. The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Until recently, we originated indirect financing for automobile loans. However, this product was suspended because we began experiencing substantial losses on that component of our portfolio. Any future reinstatement of this lending program will be conducted in accordance with prudent underwriting standards.

Commercial and Industrial Loans. We typically offer commercial and industrial loans to small businesses located in our primary market area. At March 31, 2011, commercial and industrial loans totaled $15.8 million, which represented 3.2% of our total loan portfolio. Commercial and industrial loans consist of floating rate loans indexed to the prime rate as published in The Wall Street Journal plus an applicable margin and fixed-rate loans for terms of up to 25 years, depending on the collateral type. Our commercial and industrial loan portfolio consists primarily of loans that are secured by equipment, accounts receivable and inventory, but also includes a smaller amount of unsecured loans for purposes of financing expansion or providing working capital for general business purposes. Key loan terms vary depending on the collateral, the borrower’s financial condition, credit history and other relevant factors.

At March 31, 2011, our largest commercial and industrial loan was the $2.3 million loan we made to a third party to finance a debtor in possession loan in connection with our largest speculative construction loan, which is performing in accordance with its original terms. At March 31, 2011, our second largest commercial and industrial loan had an outstanding balance of $1.4 million. This loan was originated in October 2009 and is secured by the borrower’s inventory of automobile parts. The loan is currently performing in accordance with its original terms.

Loan Underwriting

Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, an increased monthly mortgage payment required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.

Commercial Mortgage Loans. Loans secured by commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in commercial mortgage lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income producing properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. We apply what we believe to be conservative underwriting standards when originating commercial mortgage loans and seek to limit our exposure to lending concentrations to related borrowers, types of business and geographies, as well as seeking to participate with other banks in both buying and selling larger loans of this nature. Management has hired additional experienced lending officers and credit

 

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management personnel over the past several years in order to continue to safely manage this type of lending. To monitor cash flows on income producing properties, we require borrowers and loan guarantors, if any, to provide annual financial statements on commercial real estate loans. In reaching a decision on whether to make a commercial real estate loan, we consider and review a global cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability, and the value of the underlying property. An environmental survey is obtained when the possibility exists that hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that handled hazardous materials.

Construction and Land Development Loans. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the building. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a building having a value which is insufficient to assure full repayment if liquidation is required. If we are forced to foreclose on a building before or at completion due to a default, we may be unable to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, speculative construction loans, which are loans made to home builders who, at the time of loan origination, have not yet secured an end buyer for the home under construction, typically carry higher risks than those associated with traditional construction loans. These increased risks arise because of the risk that there will be inadequate demand to ensure the sale of the property within an acceptable time. As a result, in addition to the risks associated with traditional construction loans, speculative construction loans carry the added risk that the builder will have to pay the property taxes and other carrying costs of the property until an end buyer is found. Land development loans have substantially similar risks to speculative construction loans. To monitor cash flows on construction properties, we require borrowers and loan guarantors, if any, to provide annual financial statements and, in reaching a decision on whether to make a construction or land development loan, we consider and review a global cash flow analysis of the borrower and consider the borrower’s expertise, credit history and profitability. We also generally disburse funds on a percentage-of-completion basis following an inspection by a third party inspector.

Revolving Mortgages and Consumer Loans. Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are secured by assets that depreciate rapidly, such as motor vehicles. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. In the case of home equity loans, real estate values may be reduced to a level that is insufficient to cover the outstanding loan balance after accounting for the first mortgage loan balance. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Commercial and Industrial Loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment income or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial and industrial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial and industrial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by our board of directors and management. Selected employees have been granted individual lending limits, which vary depending on the individual, the type of loan and whether the loan is secured or unsecured. Currently, our Executive Vice President and Chief Lending Officer and our President and Chief Executive Officer each have aggregate secured lending authority up to $750,000 per loan and unsecured lending authority up to $250,000 per loan. Any single transaction of $250,000 or less, when

 

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the total relationship exposure is greater than $1,500,000, can be approved by either our Executive Vice President and Chief Lending Officer or our President and Chief Executive Officer. In addition, our Senior Vice President and Senior Credit Manager has secured lending authority up to $500,000 and unsecured lending authority up to $150,000 and our Vice President of Mortgage Lending has secured mortgage lending authority up to $350,000. Loan requests between $750,000 and $1,500,000 may be approved jointly by our Executive Vice President and Chief Lending Officer and our President and Chief Executive Officer. For loans in excess of $1,500,000, Asheville Savings Bank’s Loan Committee has final approval authority.

Loans to One Borrower. The maximum amount that we may lend to one borrower and the borrower’s related entities is generally limited, by regulation, to 15% of our unimpaired capital and surplus. At March 31, 2011, our regulatory limit on loans to one borrower was $12.0 million. At that date, our largest lending relationship was also our largest commercial construction loan, an $8.6 million loan coupled with a “debtor in possession” loan to a third party in the amount of $2.3 million for a total related debt of $10.9 million. Both loans are currently performing in accordance with their terms.

Loan Commitments. We typically issue commitments for most loans conditioned upon the occurrence of certain events. Commitments to originate loans are legally binding agreements to lend to our customers. Generally, our loan commitments expire after 45 to 60 days. See note 13 to the notes to consolidated financial statements appearing elsewhere in this prospectus.

Investment Activities

We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various government-sponsored agencies and of state and municipal governments, mortgage-backed securities and certificates of deposit of federally insured institutions. Within certain regulatory limits, we also may invest a portion of our assets in other permissible securities. As a member of the Federal Home Loan Bank of Atlanta, we also are required to maintain an investment in Federal Home Loan Bank of Atlanta stock, which is not publicly traded.

At March 31, 2011, our investment portfolio consisted primarily of U.S. government and agency securities, mortgage-backed securities and securities issued by government sponsored enterprises, and municipal securities. We do not currently invest in trading account securities.

Our investment objectives are: (i) to provide and maintain liquidity within the guidelines of North Carolina banking law and the regulations of the Federal Deposit Insurance Corporation and (ii) to manage interest rate risk. Our board of directors has the overall responsibility for the investment portfolio, including approval of the investment policy. Our President and Chief Executive Officer, our Chief Financial Officer and our Treasurer are responsible for implementation of the investment policy and monitoring our investment performance. Our board of directors reviews the status of our investment portfolio on a monthly basis.

Deposit Activities and Other Sources of Funds

General. Deposits, borrowings and loan repayments are the major sources of our funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.

Deposit Accounts. Deposits are attracted from within our primary market area through the offering of a broad selection of deposit instruments, including noninterest-bearing demand deposits (such as checking accounts), interest-bearing demand accounts (such as NOW and money market accounts), regular savings accounts and certificates of deposit. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability to us, matching deposit and loan products and customer preferences and concerns. We generally review our deposit mix and pricing weekly. Our deposit pricing strategy has typically been to offer competitive rates on all types of deposit products, and to periodically offer special rates in order to attract deposits of a specific type or term.

 

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Borrowings. We use advances from the Federal Home Loan Bank of Atlanta to supplement our investable funds. The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank of Atlanta and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth, the Federal Home Loan Bank’s assessment of the institution’s creditworthiness, collateral value and level of Federal Home Loan Bank stock ownership. We also utilize securities sold under agreements to repurchase and overnight repurchase agreements to supplement our supply of investable funds and to meet deposit withdrawal requirements.

Properties

We conduct our business through our main office, banking centers and other offices. The following table sets forth certain information relating to these facilities as of March 31, 2011.

 

Location

   Year
Opened
     Square
Footage
     Owned/
Leased
     Lease
Expiration  Date
     Net Book  Value
at
March 31, 2011
 
                                 (In thousands)  

Banking Centers:

              

Downtown Asheville (Main Office)

     1936         24,124         Owned         —         $ 3,662   

11 Church Street

Asheville, North Carolina 28801

              

Black Mountain

     1960         4,500         Owned         —           322   

300 West State Street

Black Mountain, North Carolina 28711

              

Mars Hill

     1974         2,500         Owned         —           1,373   

105 North Main Street

Mars Hill, North Carolina 28754

              

Skyland

     1976         3,108         Owned         —           706   

1879 Hendersonville Road

Asheville, North Carolina 28803

              

East Asheville

     1978         3,570         Owned         —           133   

10 South Tunnel Road

Asheville, North Carolina 28805

              

North Asheville

     1979         9,846         Owned         —           447   

778 Merrimon Avenue

Asheville, North Carolina 28804

              

West Asheville

     1981         3,670         Owned         —           383   

1012 Patton Avenue

Asheville, North Carolina 28806

              

Marion

     1981         6,000         Owned         —           197   

162 North Main Street

Marion, North Carolina 28752

              

Hendersonville

     1992         4,000         Owned         —           660   

601 North Main Street

Hendersonville, North Carolina 28792

              

Brevard

     1995         2,100         Owned         —           869   

2 Market Street

Straus Park

Brevard, North Carolina 28712

              

 

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Location

   Year
Opened
     Square
Footage
     Owned/
Leased
   Lease
Expiration  Date
     Net Book  Value
at
March 31, 2011
 
                               (In thousands)  

Reynolds

     2001         3,500       Owned      —         $ 1,069   

5 Olde Eastwood Village Boulevard

US 74 East

Asheville, North Carolina 28803

              

Enka-Candler

     2003         3,500       Owned      —           1,080   

907 Smoky Park Highway

Candler, North Carolina 28715

              

Fletcher

     2008         3,415       Lot Leased

Structure

Owned

     1/31/2027         1,017   

3551 Hendersonville Road

Fletcher, North Carolina 28732

              

Other Offices:

              

Operations Center

     2003         46,000       Leased      4/30/2017         465   

901 Smoky Park Highway

Candler, North Carolina 28715

              

Commercial Lending

     1998         1,940       Owned      —           —   (1) 

11 Church Street

Asheville, North Carolina 28801

              

 

(1) Net book value is reflected in net book value for our main office located at 11 Church Street, Asheville, North Carolina.

Personnel

As of March 31, 2011, we had 153 full-time employees and 13 part-time employees, none of whom is represented by a collective bargaining unit. We believe our relationship with our employees is good.

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.

Subsidiaries

Asheville Savings Bank has two subsidiaries, Appalachian Financial Services, Inc., which was formed to engage in investment activities but is currently inactive, and Wenoca, Inc., which serves as Asheville Savings Bank’s trustee regarding deeds of trust. Both subsidiaries are organized as North Carolina corporations.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The objective of this section is to help potential investors understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the consolidated financial statements and the notes to consolidated financial statements that appear at the end of this prospectus.

Operating Strategy

Our primary objective is to operate and grow a profitable community-oriented financial institution serving customers in our primary market areas. We have sought to achieve this through the adoption of a business strategy designed to maintain a strong capital position and high asset quality. We have implemented a plan to resolve our asset quality problems and have hired senior management with backgrounds in consumer and commercial banking to help us diversify our product offerings and expand our commercial deposit and lending products and expand our consumer deposit and lending products, while emphasizing high asset quality standards. Our operating strategy includes the following:

 

   

continuing to provide products and services to individuals and businesses in the communities served by our branch offices;

 

   

continuing to originate residential and commercial mortgage loans;

 

   

expanding our commercial and industrial lending activities and emphasizing the origination of small business loans;

 

   

emphasizing lower cost core deposits to maintain low funding costs;

 

   

expanding our market share within our primary market area; and

 

   

seeking to enhance fee income through providing investment advisory services.

Continuing to provide products and services to individuals and businesses in the communities served by our branch offices.

We have operated continuously as a community-oriented financial institution since we were established in 1936. We are committed to meeting the financial needs of the communities in which we operate, and we are dedicated to providing quality personal service to our customers. We provide a broad range of consumer and business financial services through our network of branches and will continually seek out ways to improve convenience, safety and service through our product offerings.

Continuing to originate residential and commercial mortgage loans.

Our primary lending focus has been, and will continue to be, on operating as a residential and commercial mortgage lender. We originate fixed and adjustable-rate residential and commercial mortgage loans that are retained in our loan portfolio. However, most of the fixed-rate residential mortgage loans that we originate are sold into the secondary market with servicing released in order to better serve our customer base. At March 31, 2011, residential mortgage loans totaled $177.8 million, or 36.7% of our total loan portfolio, and commercial mortgage loans totaled $162.7 million, or 33.5% of our total loan portfolio. Although our total residential and commercial mortgage loans have decreased from a high of $388.2 million at December 31, 2009 to $340.5 million at March 31, 2011 as we dealt with some asset quality problems throughout 2009 and 2010 and experienced lower demand for commercial mortgage loans, we intend to continue to emphasize our residential and commercial mortgage lending activities.

 

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Expanding our commercial and industrial lending activities and emphasizing the origination of small business loans.

We are seeking to expand our commercial and industrial lending activities and to originate an increased number of small business loans. Management has hired additional experienced lending officers and credit management personnel over the past several years in order to continue to safely manage this type of lending. Although commercial and industrial lending has decreased recently as we have addressed asset quality issues and experienced decreased loan demand, our goal is to increase this portion of our portfolio using our conservative underwriting practices to increase the yield in our loan portfolio.

Emphasizing lower cost core deposits to maintain low funding costs.

We seek to increase net interest income by controlling costs of funding. As a traditional thrift institution, a greater percentage of our deposit accounts have been higher balance, higher cost certificates of deposits. Over the past several years, we have sought to reduce our dependence on traditional higher cost deposits in favor of stable lower cost demand deposits. We have utilized additional product offerings, technology and a focus on customer service in working toward this goal. In addition, we intend to seek demand deposits by growing commercial banking relationships.

Expanding our market share within our primary market area.

We intend to expand our market share in our primary market area by evaluating additional branch expansion opportunities. Subject to favorable market conditions, it is currently our goal to continue to open additional branch offices in our primary market area in the years following the offering. In addition, we are interested in pursuing opportunities to acquire other financial institutions, including through FDIC assisted transactions, and branches of financial institutions, in our primary market area and surrounding areas, although we currently have no definitive plans or commitments regarding potential acquisition opportunities.

Seeking to enhance fee income through providing investment advisory services.

Through a relationship with LPL Financial Services (formerly UVEST Investment Services), we currently provide a full array of investment services for individuals and small businesses, including full access to financial market instruments such as mutual funds and equities. For the three months ended March 31, 2011 and 2010, commission income relating to our investment advisory services totaled $65,000 and $49,000, respectively. In the future, we intend to continue to enhance our fee income by providing investment advisory services to our customers through our relationship with LPL Financial Services.

Overview

Income. Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and securities, and interest expense, which is the interest that we pay on our deposits and borrowings. Other significant sources of pre-tax income are deposit and other service charge income, mortgage banking income derived from the sale of loans in the secondary market, income from debit card services, and income from the sale of securities.

Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a monthly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

Expenses. The noninterest expense we incur in operating our business consists of salaries and employee benefits expenses, occupancy expenses, federal deposit insurance premiums and assessments, data processing expenses and other miscellaneous expenses. Following the offering, our noninterest expenses are likely to increase as a result of expenses related to shareholder communications and meetings, stock exchange listing fees, the employee stock ownership plan and additional accounting services.

 

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Salaries and employee benefits expenses consist primarily of: salaries, wages and bonuses paid to our employees; payroll taxes; and expenses for health insurance, retirement plans and other employee benefits. Following the offering, we will recognize additional annual employee compensation expenses stemming from the adoption of new equity benefit plans. We cannot determine the actual amount of these new stock-related compensation and benefit expenses at this time because applicable accounting practices require that they be based on the fair market value of the shares of common stock at specific points in the future. For an illustration of these expenses, see “Pro Forma Data.”

Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, rental expenses, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using the straight-line method based on the useful lives of the related assets, which range from three to forty years.

Data processing expenses are the fees we pay to third parties for processing customer information, deposits and loans.

Federal deposit insurance premiums and assessments are payments we make to the Federal Deposit Insurance Corporation for insurance of our deposit accounts.

Other expenses include expenses for professional services, advertising, office supplies, postage, telephone, foreclosed properties, insurance and other miscellaneous operating expenses.

Critical Accounting Policies

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 impacted 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 this 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 this prospectus.

 

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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.

Balance Sheet Analysis

General. Total assets increased $744,000, or 0.10%, to $750.7 million at March 31, 2011 from $749.9 million at December 31, 2010. Total loans, net decreased $15.3 million, or 3.1%, securities increased $22.9 million to $204.3 million due to proceeds from the repayment of loans and loan sales being used to purchase securities, and cash and cash equivalents increased $2.2 million to $26.4 million. Asset growth was funded through an increase in overnight and short-term borrowings and other liabilities.

Loans. Loans receivable decreased $15.3 million to $484.7 million at March 31, 2011 from $500.0 million at December 31, 2010. Loan originations totaled $32.9 million for the three months ended March 31, 2011 compared to $32.4 million in the three months ended March 31, 2010. Residential mortgage loan originations totaled $29.5 million, residential construction and land development loan originations totaled $618,000 and commercial mortgage loans, commercial construction and land development and commercial and industrial loan originations totaled $1.5 million, $586,000 and $450,000, respectively for the three months ended March 31, 2011 compared to $1.2 million, $54,000, and $881,000, respectively for the three months ended March 30, 2010. Origination activity was partially offset by $29.0 million of normal loan payments and payoffs and $25.5 million in loan sales for the three months ended March 31, 2011 compared to $28.0 million and $16.0 million, respectively, for the three months ended March 31, 2010.

Loans receivable decreased $97.6 million, or 16.3%, in 2010 to $500.0 million. Residential mortgage loan originations accounted for $121.4 million, or 61.6%, of the year’s $197.1 million total loan originations, down from $131.0 million in residential mortgage loan originations in 2009. Commercial mortgage loan originations totaled $43.5 million in 2010, down $30.9 million from the $74.4 million in commercial mortgage loan originations in 2009. Commercial and industrial loan originations totaled $7.7 million in 2010 compared to $10.7 million in 2009. There were no commercial construction and land development loan originations in 2010 or 2009; however residential construction and land development loan originations increased $3.7 million, or 30.6%, to $15.8 million in 2010 compared to $12.1 million in 2009. Revolving mortgage originations totaled $8.0 million in 2010 compared to $20.5 million in 2009 and consumer loan originations totaled $523,000 in 2010 compared to $26.2 million in 2009 due to management’s decision to suspend indirect automobile loan financing originations.

 

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The following table sets forth the composition of our loan portfolio at the dates indicated.

 

     At March 31,     At December 31,  
     2011     2010     2009     2008  

(Dollars in thousands)

   Amount      Percent     Amount      Percent     Amount      Percent     Amount      Percent  

Commercial:

                    

Commercial mortgage

   $ 162,675         33.53   $ 164,553         32.88   $ 197,239         32.98   $ 141,565         23.97

Construction and land development

     27,830         5.74        28,473         5.69        30,158         5.04        28,998         4.91   

Commercial and industrial

     15,764         3.25        17,656         3.53        22,794         3.81        27,367         4.63   
                                                                    

Total

     206,269         42.52        210,682         42.10        250,191         41.83        197,930         33.51   
                                                                    

Non-commercial:

                    

Residential mortgage

     177,846         36.65        180,439         36.06        190,965         31.93        201,160         34.06   

Construction and land development 1-4 family residential

     7,864         1.62        8,670         1.73        15,141         2.53        23,491         3.98   

Revolving mortgage

     52,042         10.73        53,432         10.68        55,038         9.20        53,834         9.10   

Consumer

     41,135         8.48        47,212         9.43        86,768         14.51        114,268         19.35   
                                                                    

Total

     278,887         57.48        289,753         57.90        347,912         58.17        392,753         66.49