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EX-32.2 - VANTAGESOUTH BANCSHARES, INC.v222279_ex32-2.htm
EX-31.1 - VANTAGESOUTH BANCSHARES, INC.v222279_ex31-1.htm
EX-31.2 - VANTAGESOUTH BANCSHARES, INC.v222279_ex31-2.htm
EX-32.1 - VANTAGESOUTH BANCSHARES, INC.v222279_ex32-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2011

¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO ___________

Commission File Number 000-32951

CRESCENT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

NORTH CAROLINA
56-2259050
(State or other jurisdiction of Incorporation
(IRS Employer Identification Number)
or organization)
 

1005 HIGH HOUSE ROAD, CARY, NORTH CAROLINA
27513
(Address of principal executive offices)
(Zip Code)

(919) 460-7770
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common Stock, $1.00 par value 9,664,059 shares outstanding as of May 12, 2011.

 
 

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
TABLE OF CONTENTS


   
Page No.
       
Part I.
FINANCIAL INFORMATION
   
       
Item 1 -
Financial Statements (Unaudited)
   
       
 
Consolidated Balance Sheets March 31, 2011 and December 31, 2010
3
 
       
 
Consolidated Statements of Operations Three Months Ended March 31, 2011 and 2010
4
 
       
 
Consolidated Statements of Comprehensive Income (Loss) Three Months Ended March 31, 2011 and 2010
5
 
       
 
Consolidated Statement of Stockholders’ Equity Three Months Ended March 31, 2011
6
 
       
 
Consolidated Statements of Cash Flows Three Months Ended March 31, 2011 and 2010
7
 
       
 
Notes to Consolidated Financial Statements
8 - 31
 
       
Item 2 -
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32 - 48
 
       
Item 3 -
Quantitative and Qualitative Disclosures about Market Risk
49
 
       
Item 4 -
Controls and Procedures
49
 
       
Part II.
Other Information
   
       
Item 1 -
Legal Proceedings
50
 
       
Item 1a -
Risk Factors
50
 
       
Item 2 -
Unregistered Sales of Equity Securities and Use of Proceeds
50
 
       
Item 3 -
Defaults Upon Senior Debt
50
 
       
Item 4 -
(Removed and Reserved)
50
 
       
Item 5 -
Other Information
50
 
       
Item 6 -
Exhibits
50
 
 
 
- 2 -

 

Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

 
   
March 31, 2011
   
December 31,
 
   
(Unaudited)
   
2010*
 
ASSETS
           
             
Cash and due from banks
  $ 7,985,889     $ 8,372,969  
Interest-earning deposits with banks
    1,836,777       2,663,210  
Federal funds sold
    56,560,000       38,070,000  
Investment securities available for sale, at fair value
    187,996,416       181,916,229  
                 
Mortgage loans held for sale
    805,334       5,689,853  
                 
Loans held for investment
    652,783,299       676,803,069  
Allowance for loan losses
    (23,485,000 )     (20,702,000 )
NET LOANS HELD FOR INVESTMENT
    629,298,299       656,101,069  
                 
Accrued interest receivable
    3,385,428       3,995,242  
Federal Home Loan Bank stock, at cost
    10,521,700       10,521,700  
Bank premises and equipment
    11,393,760       11,585,920  
Investment in life insurance
    18,677,135       18,482,993  
Foreclosed assets
    14,112,547       15,523,592  
Other assets
    16,985,014       20,095,741  
                 
TOTAL ASSETS
  $ 959,558,299     $ 973,018,518  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Deposits:
               
Demand
  $ 59,260,695     $ 62,043,933  
Savings
    57,277,047       64,772,708  
Money market and NOW
    230,432,064       220,749,043  
Time
    378,235,388       376,817,639  
                 
TOTAL DEPOSITS
    725,205,194       724,383,323  
                 
Short-term borrowings
    5,000,000       7,000,000  
Long-term debt
    152,748,000       157,748,000  
Accrued expenses and other liabilities
    4,936,295       4,871,837  
TOTAL LIABILITIES
    887,889,489       894,003,160  
Commitments (Note B)
               
                 
Stockholders’ Equity
               
Preferred stock, no par value, 5,000,000 shares authorized,  24,900 shares issued and outstanding at both  March 31, 2011 and December 31, 2010
    23,495,835       23,379,651  
Common stock, $1 par value, 40,000,000 shares authorized; 9,664,059 and 9,664,059 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively
    9,664,059       9,664,059  
Common stock warrant
    2,367,368       2,367,368  
Additional paid-in capital
    74,668,867       74,634,362  
Accumulated deficit
    (40,080,264 )     (32,917,437 )
Accumulated other comprehensive income
    1,552,945       1,887,355  
                 
TOTAL STOCKHOLDERS’ EQUITY
    71,668,810       79,015,358  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 959,558,299     $ 973,018,518  

*  Derived from audited consolidated financial statements.

See accompanying notes.

 
- 3 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Month Periods Ended March 31, 2011 and 2010

 
   
2011
   
2010
 
             
INTEREST INCOME
           
Loans
  $ 9,077,943     $ 11,484,041  
Investment securities available for sale
    1,662,690       1,936,330  
Federal funds sold and interest-earning deposits
    29,092       4,686  
                 
TOTAL INTEREST INCOME
    10,769,725       13,425,057  
INTEREST EXPENSE
               
Deposits
    3,348,840       4,345,601  
Short-term borrowings
    15,359       206,281  
Long-term borrowings
    1,370,647       1,412,155  
                 
TOTAL INTEREST EXPENSE
    4,734,846       5,964,037  
                 
NET INTEREST INCOME
    6,034,879       7,461,020  
PROVISION FOR LOAN LOSSES
    7,023,511       1,801,177  
                 
NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES
    (988,632 )     5,659,843  
NON-INTEREST INCOME
               
Mortgage loan origination revenue
    74,970       192,909  
Fees on deposit accounts
    447,049       431,939  
Earnings on life insurance
    212,717       217,432  
Gain (loss) on disposal of assets
    (721 )     7,000  
Gain on sale of loans
    91,455       44,200  
Gain on sale of investment securities
    100,631       -  
Other
    116,142       152,229  
                 
TOTAL NON-INTEREST INCOME
    1,042,243       1,045,709  
NON-INTEREST EXPENSE
               
Salaries and employee benefits
    3,347,288       3,129,752  
Occupancy and equipment
    1,012,039       957,180  
Data processing
    420,297       386,328  
FDIC insurance premiums
    448,985       308,680  
Loan related expense
    492,239       354,499  
Other professional services
    543,980       262,464  
Other
    835,427       787,017  
                 
TOTAL NON-INTEREST EXPENSE
    7,100,255       6,185,920  
                 
INCOME (LOSS) BEFORE INCOME TAXES
    (7,046,644 )     519,632  
                 
INCOME TAXES (BENEFIT)
    -       (22,800 )
                 
NET INCOME (LOSS)
    (7,046,644 )     542,432  
                 
Effective dividend on preferred stock (Note G)
    427,434       419,269  
                 
Net income (loss) available to common shareholders
  $ (7,474,078 )   $ 123,163  
                 
NET INCOME (LOSS) PER COMMON SHARE
               
Basic
  $ (0.78 )   $ .01  
Diluted
  $ (0.78 )   $ .01  
                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note C)
               
Basic
    9,581,390       9,574,264  
Diluted
    9,581,390       9,587,748  

See accompanying notes.

 
- 4 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
Three Month Periods Ended March 31, 2011 and 2010

 
   
2011
   
2010
 
             
Net income (loss)
  $ (7,046,644 )   $ 542,432  
                 
Other comprehensive income:
               
                 
Securities available for sale:
               
                 
Unrealized holding gain (loss) on available for sale securities
    (724,878 )     1,265,489  
Tax effect
    279,441       (487,846 )
Reclassification of gains recognized In net income
    100,631       -  
Tax effect
    (38,793 )     -  
                 
Net of tax amount
    (383,599 )     777,643  
                 
Cash flow hedging activities:
               
                 
Unrealized holding gain (loss) on cash flow hedging activities
    80,049       (144,287 )
Tax effect
    (30,859 )     55,623  
                 
Net of tax amount
    49,190       (88,664 )
                 
Total other comprehensive income (loss)
    (334,409 )     688,979  
                 
COMPREHENSIVE INCOME (LOSS)
  $ (7,381,053 )   $ 1,231,411  

See accompanying notes.

 
- 5 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)

 
                                              
Accumulated
       
                           
Common
   
Additional
         
other
   
Total
 
   
Preferred stock
   
Common stock
   
stock
   
paid-in
   
Accumulated
   
comprehensive
   
stockholders’
 
   
Shares
   
Amount
   
Shares
   
Amount
   
warrants
   
capital
   
deficit
   
income
   
equity
 
                                                       
Balance at December 31, 2010
    24,900     $ 23,379,651       9,664,059     $ 9,664,059     $ 2,367,368     $ 74,634,362     $ (32,917,436 )   $ 1,887,354     $ 79,015,358  
                                                                         
Net loss
    -       -       -       -       -       -       (7,046,644 )     -       (7,046,644 )
                                                                         
Other comprehensive loss
    -       -       -       -       -       -       -       (334,409 )     (334,409 )
                                                                         
Stock based compensation
    -       -       -       -       -       34,505       -       -       34,505  
                                                                         
Restricted stock issued
    -       -       -       -       -       -       -       -       -  
                                                                         
Accretion of discount
    -       116,184       -       -       -       -       (116,184 )     -       -  
                                                                         
Preferred stock dividend
    -       -       -       -       -       -       -       -       -  
                                                                         
Balance at March 31, 2011
    24,900     $ 23,495,835       9,664,059     $ 9,664,059     $ 2,367,368     $ 74,668,867     $ (40,080,264 )   $ 1,552,945     $ 71,668,810  

See accompanying notes.

 
- 6 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, 2011 and 2010

 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income (loss)
  $ (7,046,644 )   $ 542,432  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation
    251,800       239,659  
Provision for loan losses
    7,023,511       1,801,177  
Gain on mortgage loan commitments
    (6,334 )     -  
Net gain on sales of mortgage loans
    (85,120 )     (44,200 )
Originations of mortgage loans held-for-sale
    (11,843,128 )     (1,266,561 )
Proceeds from sales of mortgage loans
    16,812,766       1,140,266  
Amortization of core deposit premium
    33,337       33,337  
Deferred income taxes
    31,529       (55,622 )
Gain on sale of available for sale securities
    (100,631 )     -  
Net loss on disposal of and valuation adjustments to - foreclosed assets
    158,876       32,919  
(Gain) loss on disposal of other assets
    721       (7,000 )
Net amortization of premiums/discounts on securities
    494,751       333,781  
Accretion of loan discount
    -       (416,958 )
Amortization of deposit premium
    -       10,108  
Net increase in cash value of life insurance
    (194,142 )     (204,338 )
Stock based compensation
    34,506       31,967  
Change in assets and liabilities:
               
(Increase) decrease in accrued interest receivable
    609,814       139,128  
(Increase) decrease in other assets
    3,293,624       (269,700 )
Increase (decrease) in accrued interest payable
    (24,567 )     25,314  
Increase in accrued expenses and other liabilities
    138,215       141,587  
TOTAL ADJUSTMENTS
    16,629,528       1,664,864  
NET CASH PROVIDED BY OPERATING ACTIVITIES
    9,582,884       2,207,296  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases of investment securities available for sale
    (35,078,914 )     (1,009,241 )
Principal repayments of investment securities available for sale
    7,534,704       6,454,830  
Proceeds from sale of securities available for sale
    20,445,655       -  
Proceeds from disposal of foreclosed real estate
    1,618,919       2,012,883  
Proceeds from sale of loans
    1,950,000       -  
Net decrease in loans
    17,461,008       8,819,668  
Purchases of bank premises and equipment
    (59,641 )     (380,962 )
NET CASH PROVIDED BY INVESTING ACTIVITIES
    13,871,731       15,897,178  
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase (decrease) in deposits:
               
Demand
    (2,783,237 )     (5,620,279 )
Savings
    (7,495,661 )     3,807,760  
Money market and NOW
    9,683,021       16,707,537  
Time deposits
    1,417,749       (23,782,593 )
Net decrease in short-term borrowings
    (2,000,000 )     (17,000,000 )
Net increase (decrease) in long-term borrowings
    (5,000,000 )     3,000,000  
Dividends paid on preferred stock
    -       (311,250 )
NET CASH USED BY FINANCING ACTIVITIES
    (6,178,128 )     (23,198,825 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    17,276,487       (5,094,351 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    49,106,179       31,727,108  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 66,382,666     $ 26,632,757  

See accompanying notes.

 
- 7 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE A - BASIS OF PRESENTATION

In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three month periods ended March 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America. The financial statements include the accounts of Crescent Financial Corporation (the “Company”, “we”, “our”, “Crescent”) and its wholly owned subsidiary, Crescent State Bank (the “Bank”).  All significant inter-company transactions and balances are eliminated in consolidation.  Operating results for the three month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011.

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the consolidated financial statements filed as part of the Company’s 2010 annual report on Form 10-K. This quarterly report should be read in conjunction with such annual report.

NOTE B – COMMITMENTS

At March 31, 2011, commitments are as follows:

Undisbursed lines of credit
  $ 33,281,040  
Commitments to extend credit
    90,919,792  
Stand-by letters of credit
    3,707,959  
Commitments to sell loans held for sale
    805,334  
Commitments to purchase investment securities
    2,190,333  
Undisbursed commitment to purchase additional investment in Small Business Investment Corporation
    363,000  

NOTE C - PER SHARE RESULTS

Basic earnings per share represents income (loss) available to common stockholders divided by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.  Potential common shares that may be issued by the Company relate to outstanding stock options, restricted stock and the common stock warrant issued to the US Treasury and are determined using the treasury stock method.
 
   
Three Months Ended
 
   
March 31
 
   
2011
   
2010
 
Weighted average number of shares used in computing basic net income per share
    9,581,390       9,574,264  
                 
Effect of dilutive stock options
    -       13,484  
                 
Weighted average number of shares used in computing diluted net income per share
    9,581,390       9,587,748  

 
- 8 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE C - PER SHARE RESULTS (Continued)

For the three month period ended March 31, 2011, there were 296,611 options and the warrant for 833,705 shares that were anti-dilutive as the average stock price was below the exercise price,  and 3,000 options that were anti-dilutive due to the net loss.  For the three month period ended March 31, 2010, there were 426,111 options and the warrant for 833,705 shares that were anti-dilutive as the average stock price was below the exercise price.
 
NOTE D - INVESTMENT SECURITIES

The following is a summary of the securities portfolio by major classification.  All mortgage-backed securities and collateralized mortgage obligations represent securities issued by a government sponsored enterprise (i.e. Government National Mortgage Association, Federal Home Loan Mortgage Corporation or Federal National Mortgage Association) where the underlying collateral consists of conforming residential home mortgage loans.
 
   
March 31, 2011
 
         
Gross
   
Gross
       
   
Amortized
   
unrealized
   
unrealized
   
Fair
 
   
cost
   
gains
   
losses
   
value
 
Securities available for sale:
                       
U.S. government securities and obligations of U.S. government agencies
  $ 10,512,100     $ 440,565     $ 7,713     $ 10,944,952  
Mortgage-backed securities
    32,972,287       1,322,532       99,004       34,195,815  
Collateralized mortgage obligations
    91,416,870       1,706,516       183,322       92,940,064  
Municipals, non-taxable
    44,797,358       440,209       693,096       44,544,471  
Municipals, taxable
    2,032,407       -       30,167       2,002,240  
Corporate bonds
    2,787,869       70,101       -       2,857,970  
Marketable equity
    451,368       96,656       37,120       510,904  
    $ 184,970,259     $ 4,076,579     $ 1,050,422     $ 187,966,416  
                                 
   
December 31, 2010
 
         
Gross
    Gross          
   
Amortized
   
unrealized
   
unrealized
   
Fair
 
   
cost
   
gains
   
losses
   
value
 
Securities available for sale:
                               
U.S. government securities and obligations of U.S. government agencies
  $ 9,346,395     $ 492,005     $ -     $ 9,838,400  
Mortgage-backed securities
    38,079,632       1,667,631       22,418       39,724,845  
Collateralized mortgage obligations
    76,553,621       2,022,287       126,224       78,449,684  
Municipals
    51,067,962       442,604       892,203       50,618,363  
Corporate bonds
    2,777,457       15,665       24,322       2,768,800  
Marketable equity
    440,757       121,082       45,702       516,137  
    $ 178,265,824     $ 4,761,274     $ 1,110,869     $ 181,916,229  

 
- 9 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE D - INVESTMENT SECURITIES (Continued)

The following tables show investments’ gross unrealized losses and fair values, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2011 and December 31, 2010. The March 31, 2011 unrealized losses on investment securities relate to two US Government agencies, fourteen collateralized mortgage obligations, four mortgage-backed security, twenty-four non-taxable municipal securities, two taxable municipal securities and one marketable security. The December 31, 2010 unrealized losses on investment securities relate to seven collateralized mortgage obligations, one mortgage-backed security, thirty-six municipal securities, two corporate bonds and one marketable equity security. The unrealized losses relate to debt securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased.  The unrealized losses will reverse at maturity or prior to maturity if market interest rates decline to levels that existed when the securities were purchased.  Since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, none of the securities are deemed to be other than temporarily impaired.

 
   
March 31, 2011
 
   
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
value
   
losses
   
value
   
losses
   
value
   
losses
 
Securities available for sale:
                                   
US Government securities
  $ 2,000,040     $ 7,713     $ -     $ -     $ 2,000,040     $ 7,713  
Mortgage-backed
    7,532,432       99,004       -       -       7,532,432       99,004  
Collateralized mortgage obligations
    18,047,471       183,322       -       -       18,047,471       183,322  
Municipals, non-taxable
    19,433,720       693,096       -       -       19,433,720       693,096  
Municipals, taxable
    2,002,240       30,167       -       -       2,002,240       30,167  
Marketable equity
    -       -       44,704       37,120       44,704       37,120  
                                                 
Total temporarily impaired securities
  $ 49,015,903     $ 1,013,302     $ 44,704     $ 37,120     $ 49,060,607     $ 1,050,422  
                                                 
   
December 31, 2010
 
   
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
value
   
losses
   
value
   
losses
   
value
   
losses
 
Securities available for sale:
                                               
Mortgage-backed
  $ 984,306     $ 22,418     $ -     $ -     $ 984,306     $ 22,418  
Collateralized mortgage obligations
    7,274,222       126,224       -       -       7,274,222       126,224  
Municipals
    27,738,632       823,580       1,006,202       68,623       28,744,834       892,203  
Corporate bonds
    1,831,230       24,322       -       -       1,831,230       24,322  
Marketable equity
    -       -       36,122       45,702       36,122       45,702  
                                                 
Total temporarily impaired securities
  $ 37,828,390     $ 996,544     $ 1,042,324     $ 114,325     $ 38,870,714     $ 1,110,869  
 
 
- 10 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE D - INVESTMENT SECURITIES (Continued)

At March 31, 2011 and December 31, 2010, investment securities with a carrying value of $98,104,548 and $94,085,409 respectively, were pledged to secure public deposits, borrowings and for other purposes required or permitted by law.

The amortized cost and fair values of securities available for sale at March 31, 2011 are shown below by expected maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
   
Amortized
   
Fair
 
   
cost
   
value
 
             
Due within one year
  $ 26,862,850     $ 27,593,246  
Due after one year through five years
    98,499,914       100,827,723  
Due after five years through ten years
    33,753,056       33,797,349  
Due after ten years
    25,403,071       25,267,194  
Other equity securities
    451,368       510,904  
    $ 184,970,259     $ 187,996,416  
 
At March 31, 2011, the balance of Federal Home Loan Bank (“FHLB”) of Atlanta stock held by the Company is $10,521,700.  After a period of suspended dividends the FHLB of Atlanta has declared and paid an annualized dividend for the fourth quarter of 2009 and the all four quarters of 2010 of 0.27%, 0.26%, 0.44%, 0.39% and 0.79%, respectively.  On June 30, 2010 it was announced that the FHLB would resume repurchasing activity-based excess capital stock held by members, on a limited basis.  Share repurchases were made on July 15, 2010, August 17, 2010 and November 15, 2010 for 4,237, 4,200 and 4,111 shares, respectively, with an additional 4,292 shares to scheduled to be repurchased April 8, 2011.  The repurchase of excess capital stock is subject to the FHLB continuing to meet all applicable statutory and regulatory conditions for an excess stock repurchase and all other conditions provided in the FHLB’s Capital Plan. The FHLB will continue to evaluate on a quarterly basis whether to repurchase membership-based excess stock. Management believes that its investment in FHLB stock was not other-than-temporarily impaired as of March 31, 2011 or December 31, 2010.  Further, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not also cause a decrease in the value of the FHLB stock held by the Company.
 
NOTE E - LOANS HELD FOR INVESTMENT

Following is a summary of loans for the period indicated:
 
   
March 31, 2011
   
December 31, 2010
 
Real estate - commercial
  $ 336,006,020     $ 345,902,319  
Real estate - residential
    82,069,448       81,644,508  
Construction loans
    133,069,646       140,848,750  
Commercial and industrial loans
    43,697,294       48,144,401  
Home equity loans and lines of credit
    54,927,058       57,125,274  
Loans to individuals
    3,680,878       3,838,154  
Total loans
    653,450,344       677,503,406  
Less:
               
Deferred loan fees
    (667,045 )     (700,337 )
Allowance for loan losses
    (23,485,000 )     (20,702,000 )
Total
  $ 629,298,299     $ 656,101,069  

 
- 11 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE E - LOANS HELD FOR INVESTMENT (Continued)

Loans are primarily made in the Company’s market area of North Carolina, principally Wake, Johnston, Lee, Moore, and New Hanover counties. Real estate loans can be affected by the condition of the local real estate market. Commercial and consumer and other loans can be affected by the local economic conditions.

To provide greater transparency on non-performing assets, disclosures required by ASU 2010-20 have been included below.  Allowance for loan losses is reported by portfolio segment and further detail of credit quality indicators are provided by class of loans.

Allowance for Loan Losses and Recorded Investment in Loans
As of and for the quarter ended March 31, 2011 and as of December 31, 2010 (in thousands)

The allowance for loan losses represents management’s estimate of an amount adequate to provide for known and inherent losses in the loan portfolio in the normal course of business.  Management evaluates the adequacy of this allowance on a monthly basis during which time those loans that are identified as impaired are evaluated individually.

Following is an analysis of the allowance for loan losses by loan segment:

   
March 31, 2011
 
   
Commercial
   
Commercial
   
Residential
   
Construction
             
   
& Industrial
   
Real Estate
   
Real Estate
   
Dev & Acq
   
Consumer
   
Total
 
Allowance for loan losses:
                                   
Beginning balance
  $ 2,689     $ 5,345     $ 2,814     $ 9,774     $ 80     $ 20,702  
Charge-offs
    (269 )     (216 )     (339 )     (3,761 )     (14 )     (4,599 )
Recoveries
    36       -       10       312       -       358  
Provision
    253       2,134       1,880       2,752       5       7,024  
Ending balance
  $ 2,709     $ 7,263     $ 4,365     $ 9,077     $ 71     $ 23,485  
Ending balance:
                                               
Individually evaluated for impairment
  $ 1,298     $ 3,575     $ 2,475     $ 6,636     $ 35     $ 14,019  
                                                 
Collectively evaluated for impairment
  $ 1,411     $ 3,688     $ 1,890     $ 2,441     $ 36     $ 9,466  
                                                 
Loans:
                                               
Ending balance
  $ 43,697     $ 336,006     $ 136,996     $ 133,070     $ 3,681     $ 653,450  
Ending balance:
                                               
Individually evaluated for impairment
  $ 3,641     $ 18,463     $ 13,772     $ 39,062     $ 37     $ 74,975  
Collectively evaluated for impairment
  $ 40,056     $ 317,543     $ 123,224     $ 94,008     $ 3,644     $ 578,475  

 
- 12 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE E - LOANS HELD FOR INVESTMENT (Continued)

   
December 31, 2010
 
   
Commercial
   
Commercial
   
Residential
   
Construction
             
   
& Industrial
   
Real Estate
   
Real Estate
   
Dev & Acq
   
Consumer
   
Total
 
                                     
Allowance for loan losses:
                                   
Ending balance
  $ 2,689     $ 5,345     $ 2,813     $ 9,775     $ 80     $ 20,702  
Individually evaluated for impairment
  $ 1,094     $ 1,780     $ 882     $ 7,272     $ 10     $ 11,038  
                                                 
Collectively evaluated for impairment
  $ 1,595     $ 3,565     $ 1,931     $ 2,503     $ 70     $ 9,664  
                                                 
Loans:
                                               
Ending balance
  $ 48,144     $ 345,903     $ 138,729     $ 140,889     $ 3,838     $ 677,503  
Ending balance:
                                               
Individually evaluated for impairment
  $ 2,471     $ 10,024     $ 9,531     $ 32,403     $ 13     $ 54,442  
Collectively evaluated for impairment
  $ 45,673     $ 335,879     $ 129,198     $ 108,486     $ 3,825     $ 623,061  

Credit Quality Indicators
As of March 31, 2011 and December 31, 2010 (in thousands)

We use an internal grading system to assign the degree of inherent risk on each individual loan.  The grade is initially assigned by the lending officer and reviewed by the loan administration function throughout the life of the loan.  As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average grade of commercial loans, (ii) the level of classified commercial loans, (iii) charge-offs, (iv) non-performing loans (see details above) and (v) the general economic conditions in the state of North Carolina.  The credit grades have been defined as follows:
 
·
Risk Grade 1 - Minimal credit risk - A loan to a borrower of unquestionable financial strength. Financial information exhibits superior earnings, leverage and liquidity positions, which firmly establish a repayment source that is substantial in relation to debt. These borrowers would generally have access to national credit and equity markets. Also includes a loan fully protected by cash equivalents or high grade, readily marketable securities.
 
·
Risk Grade 2 – Modest credit risk - Loans to borrowers of better than average financial strength.  Earnings performance is consistent and primary and secondary sources of repayment are well established.  Borrower exhibits very good asset quality and liquidity with strong debt servicing capacity.  Company management has depth, is experienced and well regarded in the industry.  This risk grade is reserved for loans secured by readily marketable collateral or is a loan made within guidelines to borrowers with liquid financial statements.

 
- 13 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE E - LOANS HELD FOR INVESTMENT (Continued)
 
·
Risk Grade 3 – Average credit risk - Loans to borrowers involving satisfactory financial strength.  Earnings performance is consistent with primary and secondary sources of repayment well defined and adequate to retire the debt in a timely and orderly fashion.   These businesses would generally exhibit satisfactory asset quality and liquidity with moderate leverage, average performance to their peer group and experienced management in key positions.  This risk grade is reserved for the Bank’s top quality loans.
 
·
Risk Grade 4 – Acceptable credit risk - Loans to borrowers with more than average risk but with little risk of ultimate collection. The loan may contain certain characteristics that require some supervision and attention by the lender.  Asset quality is acceptable, but debt capacity is modest and little excess liquidity is available.  The borrower may be fully leveraged, and unable to overcome major setbacks.  Covenants are structured to ensure adequate protection.  Management may have limited experience and depth.  Includes loans, which are highly leveraged transactions due to regulatory constraints.  Also includes loans involving reasonable exceptions to policy.  This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection.
 
·
Risk Grade 5 – Acceptable credit risk - A loan that is sound yet ultimate collectability may depend on guarantor support or tertiary repayment sources.  Although asset quality remains acceptable, the borrower has a smaller and/or less diverse asset base, very little liquidity and limited debt capacity.  Earnings performance is inconsistent and the borrower may be highly leveraged and below average size or lower-tier competitor.  Limited management experience and depth.  May be well-conceived start-up venture, but repayment is still dependent upon a successful operation.  Includes loans with significant documentation or policy exceptions, improper loan structure or inadequate loan servicing procedures.  May also include a loan in which strong reliance for a secondary repayment source is placed on a guarantor who exhibits the ability and willingness to repay.  These credits require significant supervision by the lender and covenants structured to ensure adequate protection.  Loans which are highly leveraged transactions due to the obligor's financial status.  This grade is given to acceptable loans that show signs of weakness in either sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss.
 
·
Risk Grade 6 – Special mention - Criticized Exposure.  A loan which still has the capacity to perform but contains certain characteristics that require continual supervision and attention from the lender. These characteristics may include but are not limited to (1) adverse trends in financial condition or key operating, liquidity, trading asset turn, or leverage ratios; (2) inconsistent repayment performance; or (3) fatal documentation errors that would prevent the Bank from enforcing its note or security instruments. Material adverse trends have not yet been developed.
 
·
Risk Grade 7 – Substandard - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. A loan classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the collection of all payments contractually due the Bank upon liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
 
·
Risk Grade 8 – Doubtful - Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.

 
- 14 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE E - LOANS HELD FOR INVESTMENT (Continued)
 
·
Risk Grade 9 – Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future.  Probable Loss portions of Doubtful assets are charged against the Allowance for Loan Losses. Loans may reside in this classification for administrative purposes for a period not to exceed the earlier of thirty (30) days or calendar quarter end.
 
·
Other – Ungraded loans.  Overdraft protection accounts are typically not graded at origination, but are assigned a risk grade when credit deterioration is detected.
 
Corporate Credit Exposure
Credit Risk Profile by Creditworthiness Category

   
March 31, 2011
 
         
Commercial
                   
   
Commercial
   
Real Estate
   
Commercial
   
Commercial
       
   
& Industrial
   
Other
   
Construction
   
LOC
   
Total
 
1-Minimal Credit Risk
  $ 2,135     $ -     $ -     $ -     $ 2,135  
2-Modest Credit Risk
    392       -       -       -       392  
3-Average Credit Risk
    507       10,373       2,449       -       13,329  
4-Acceptable Credit Risk
    11,758       158,670       18,588       210       189,226  
5-Acceptable Credit Risk
    22,093       129,231       38,800       109       190,233  
6-Special Mention
    2,603       19,269       27,514       3       49,389  
7-Substandard
    2,857       15,967       36,718       4       55,546  
8-Doubtful
    781       2,496       2,050       -       5,327  
9-Loss
    -       -       -       -       -  
Other
    5       -       -       240       245  
Total
  $ 43,131     $ 336,006     $ 126,119     $ 566     $ 505,822  
                                         
   
December 31, 2010
 
           
Commercial
                         
   
Commercial
   
Real Estate
   
Commercial
   
Commercial
         
   
& Industrial
   
Other
   
Construction
   
LOC
   
Total
 
1-Minimal Credit Risk
  $ 3,704     $ -     $ -     $ -     $ 3,704  
2-Modest Credit Risk
    276       -       -       -       276  
3-Average Credit Risk
    638       11,177       1,850       -       13,665  
4-Acceptable Credit Risk
    13,125       164,402       22,265       173       199,965  
5-Acceptable Credit Risk
    24,025       144,810       51,069       87       219,991  
6-Special Mention
    3,595       15,419       24,150       5       43,169  
7-Substandard
    2,044       8,456       29,911       -       40,411  
8-Doubtful
    132       1,568       2,225       -       3,925  
9-Loss
    -       -       -       -       -  
Other
    67       70       49       273       459  
Total
  $ 47,606     $ 345,902     $ 131,519     $ 538     $ 525,565  

 
- 15 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE E - LOANS HELD FOR INVESTMENT (Continued)

Consumer Credit Exposure
Credit Risk Profile by Creditworthiness Category

   
March 31, 2011
 
   
Residential
                         
   
Real Estate
   
Consumer
                   
   
Other
   
Construction
   
Home Equity
   
Consumer
   
Total
 
1-Minimal Credit Risk
  $ -     $ -     $ -     $ 369     $ 369  
2-Modest Credit Risk
    -       -       67       -       67  
3-Average Credit Risk
    9,759       860       6,897       550       18,066  
4-Acceptable Credit Risk
    34,618       4,651       33,223       998       73,490  
5-Acceptable Credit Risk
    23,960       359       8,829       685       33,833  
6-Special Mention
    4,013       787       1,589       312       6,701  
7-Substandard
    9,619       294       4,152       37       14,102  
8-Doubtful
    -       -       -       -       -  
9-Loss
    -       -       -       -       -  
Other
    100       -       170       730       1,000  
Total
  $ 82,069     $ 6,951     $ 54,927     $ 3,681     $ 147,628  
                                         
   
December 31, 2010
 
   
Residential
                                 
   
Real Estate
   
Consumer
                         
   
Other
   
Construction
   
Home Equity
   
Consumer
   
Total
 
1-Minimal Credit Risk
  $ -     $ -     $ -     $ 421     $ 421  
2-Modest Credit Risk
    -       -       78       -       78  
3-Average Credit Risk
    9,707       2,275       6,440       597       19,019  
4-Acceptable Credit Risk
    34,191       5,297       35,153       1,041       44,682  
5-Acceptable Credit Risk
    24,648       704       10,392       736       36,480  
6-Special Mention
    6,808       788       1,463       377       9,436  
7-Substandard
    5,996       221       3,368       13       9,598  
8-Doubtful
    295       45       167       -       507  
9-Loss
    -       -       -       -       -  
Other
    -       -       64       653       717  
Total
  $ 81,645     $ 9,330     $ 57,125     $ 3,838     $ 151,938  

 
- 16 -

 

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements

 
NOTE E - LOANS HELD FOR INVESTMENT (Continued)

Age Analysis of Past Due Loans
As of March 31, 2011 and December 31, 2010(in thousands)

   
March 31, 2011
 
                                 
Recorded
 
         
Greater than