Attached files
file | filename |
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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
¨
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO ___________
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Commission File Number 000-32951
CRESCENT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
NORTH CAROLINA
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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 x 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 ¨
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Accelerated filer ¨
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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.
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|||
Part I.
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FINANCIAL INFORMATION
|
||
Item 1 -
|
Financial Statements (Unaudited)
|
||
Consolidated Balance Sheets March 31, 2011 and December 31, 2010
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3
|
||
Consolidated Statements of Operations Three Months Ended March 31, 2011 and 2010
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4
|
||
Consolidated Statements of Comprehensive Income (Loss) Three Months Ended March 31, 2011 and 2010
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5
|
||
Consolidated Statement of Stockholders’ Equity Three Months Ended March 31, 2011
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6
|
||
Consolidated Statements of Cash Flows Three Months Ended March 31, 2011 and 2010
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7
|
||
Notes to Consolidated Financial Statements
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8 - 31
|
||
Item 2 -
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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32 - 48
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|
Item 3 -
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Quantitative and Qualitative Disclosures about Market Risk
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49
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|
Item 4 -
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Controls and Procedures
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49
|
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Part II.
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Other Information
|
||
Item 1 -
|
Legal Proceedings
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50
|
|
Item 1a -
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Risk Factors
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50
|
|
Item 2 -
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Unregistered Sales of Equity Securities and Use of Proceeds
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50
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Item 3 -
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Defaults Upon Senior Debt
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50
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Item 4 -
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(Removed and Reserved)
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50
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Item 5 -
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Other Information
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50
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Item 6 -
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Exhibits
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50
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- 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
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629,298,299 | 656,101,069 | ||||||
Accrued interest receivable
|
3,385,428 | 3,995,242 | ||||||
Federal Home Loan Bank stock, at cost
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10,521,700 | 10,521,700 | ||||||
Bank premises and equipment
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11,393,760 | 11,585,920 | ||||||
Investment in life insurance
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18,677,135 | 18,482,993 | ||||||
Foreclosed assets
|
14,112,547 | 15,523,592 | ||||||
Other assets
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16,985,014 | 20,095,741 | ||||||
TOTAL ASSETS
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$ | 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
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378,235,388 | 376,817,639 | ||||||
TOTAL DEPOSITS
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725,205,194 | 724,383,323 | ||||||
Short-term borrowings
|
5,000,000 | 7,000,000 | ||||||
Long-term debt
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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
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
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Additional
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other
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Total
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|||||||||||||||||||||||||||||||||
Preferred stock
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Common stock
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stock
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paid-in
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Accumulated
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comprehensive
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stockholders’
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||||||||||||||||||||||||||||||
Shares
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Amount
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Shares
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Amount
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warrants
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capital
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deficit
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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
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- | - | - | - | - | - | (7,046,644 | ) | - | (7,046,644 | ) | |||||||||||||||||||||||||
Other comprehensive loss
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- | - | - | - | - | - | - | (334,409 | ) | (334,409 | ) | |||||||||||||||||||||||||
Stock based compensation
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- | - | - | - | - | 34,505 | - | - | 34,505 | |||||||||||||||||||||||||||
Restricted stock issued
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- | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Accretion of discount
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- | 116,184 | - | - | - | - | (116,184 | ) | - | - | ||||||||||||||||||||||||||
Preferred stock dividend
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- | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
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:
- 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
- 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 -
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
|
Investment >
|
|||||||||||||||||||||||
30-89 Days
|
90 Days
|
Total
|
Total
|
90 Days &
|
||||||||||||||||||||
Past Due(1)
|
Past Due(2)
|
Past Due
|
Current
|
Loans
|
Accruing
|
|||||||||||||||||||
Commercial & Industrial
|
$ | 1,423 | $ | 79 | $ | 1,502 | $ | 41,629 | $ | 43,131 | $ | - | ||||||||||||
Commercial – Construction
|
4,328 | 16,978 | 21,306 | 104,813 | 126,119 | - | ||||||||||||||||||
Commercial - Real Estate
|
2,261 | 11,412 | 13,673 | 322,333 | 336,006 | - | ||||||||||||||||||
Commercial - Lines of Credit
|
12 | - | 12 | 554 | 566 | - | ||||||||||||||||||
Commercial – Other
|
- | - | - | - | - | - | ||||||||||||||||||
Consumer
|
- | - | - | 3,681 | 3,681 | - | ||||||||||||||||||
Consumer – Construction
|
166 | - | 166 | 6,785 | 6,951 | - | ||||||||||||||||||
Consumer – Other
|
- | - | - | - | - | - | ||||||||||||||||||
Home Equity
|
545 | 1,137 | 1,682 | 53,245 | 54,927 | - | ||||||||||||||||||
Residential Real Estate
|
3,298 | 1,956 | 5,254 | 76,815 | 82,069 | - | ||||||||||||||||||
Total
|
$ | 12,033 | $ | 31,562 | $ | 43,595 | $ | 609,855 | $ | 653,450 | $ | - |
(1) Total loans past due 30 to 89 days includes approximately $8.4 million of loans in nonaccrual status.
(2) All loans past due 90 days or more were in nonaccrual status.
December 31, 2010
|
||||||||||||||||||||||||
Recorded
|
||||||||||||||||||||||||
Greater than
|
Investment >
|
|||||||||||||||||||||||
30-89 Days
|
90 Days
|
Total
|
Total
|
90 Days &
|
||||||||||||||||||||
Past Due(1)
|
Past Due(2)
|
Past Due
|
Current
|
Loans
|
Accruing
|
|||||||||||||||||||
Accruing | ||||||||||||||||||||||||
Commercial & Industrial
|
$ | 469 | $ | 167 | $ | 636 | $ | 46,970 | $ | 47,606 | $ | - | ||||||||||||
Commercial – Construction
|
6,118 | 8,649 | 14,767 | 116,752 | 131,519 | - | ||||||||||||||||||
Commercial - Real Estate
|
3,943 | 7,301 | 11,244 | 334,658 | 345,902 | - | ||||||||||||||||||
Commercial - Lines of Credit
|
- | - | - | 538 | 538 | - | ||||||||||||||||||
Commercial – Other
|
- | - | - | - | - | - | ||||||||||||||||||
Consumer
|
- | 5 | 5 | 3,833 | 3,838 | - | ||||||||||||||||||
Consumer – Construction
|
221 | 45 | 266 | 9,064 | 9,330 | - | ||||||||||||||||||
Consumer – Other
|
- | - | - | - | - | - | ||||||||||||||||||
Home Equity
|
350 | 881 | 1,231 | 55,894 | 57,125 | - | ||||||||||||||||||
Residential Real Estate
|
3,601 | 2,093 | 5,694 | 75,951 | 81,645 | - | ||||||||||||||||||
Total
|
$ | 14,702 | $ | 19,141 | $ | 33,843 | $ | 643,660 | $ | 677,503 | $ | - |
(1) Total loans past due 30 to 89 days includes approximately $9.4 million of loans in nonaccrual status.
(2) All loans past due 90 days or more were in nonaccrual status.
- 17 -
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE E - LOANS HELD FOR INVESTMENT (Continued)
Impaired Loans
For the Quarters Ended March 31, 2011 and December 31, 2010 (in thousands)
March 31, 2011
|
||||||||||||||||||||
Unpaid
|
Average
|
Interest
|
||||||||||||||||||
Recorded
|
Principal
|
Related
|
Recorded
|
Income
|
||||||||||||||||
Investment
|
Balance
|
Allowance
|
Investment
|
Recognized
|
||||||||||||||||
With no related allowance recorded:
|
||||||||||||||||||||
Consumer
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Commercial & industrial
|
79 | 88 | - | 231 | 4 | |||||||||||||||
Commercial construction
|
5,944 | 7,298 | - | 7,192 | 99 | |||||||||||||||
Commercial real estate - other
|
4,304 | 4,305 | - | 3,735 | 56 | |||||||||||||||
Consumer construction
|
- | - | - | 15 | - | |||||||||||||||
Home equity lines/loans
|
422 | 484 | - | 1,357 | 16 | |||||||||||||||
Residential real estate - other
|
2,211 | 2,211 | - | 2,355 | 38 | |||||||||||||||
Sub-Total
|
12,960 | 14,386 | - | 14,885 | 213 | |||||||||||||||
With an allowance recorded:
|
||||||||||||||||||||
Consumer
|
37 | 37 | 35 | 37 | 1 | |||||||||||||||
Commercial & industrial
|
3,562 | 3,562 | 1,298 | 2,957 | 47 | |||||||||||||||
Commercial construction
|
32,824 | 35,158 | 6,577 | 34,031 | 475 | |||||||||||||||
Commercial real estate – other
|
14,158 | 15,044 | 3,575 | 13,379 | 212 | |||||||||||||||
Consumer construction
|
295 | 294 | 59 | 330 | 6 | |||||||||||||||
Home equity lines/loans
|
3,730 | 4,106 | 1,570 | 2,747 | 38 | |||||||||||||||
Residential real estate - other
|
7,409 | 9,360 | 905 | 6,453 | 98 | |||||||||||||||
Sub-Total
|
62,015 | 67,561 | 14,019 | 59,934 | 877 | |||||||||||||||
Totals:
|
||||||||||||||||||||
Commercial
|
3,641 | 3,650 | 1,298 | 3,188 | 51 | |||||||||||||||
Commercial real estate
|
18,463 | 19,349 | 3,575 | 17,114 | 268 | |||||||||||||||
Construction
|
39,062 | 42,750 | 6,636 | 41,568 | 580 | |||||||||||||||
Consumer
|
37 | 37 | 35 | 37 | 1 | |||||||||||||||
Residential real estate
|
13,772 | 16,161 | 2,475 | 12,912 | 190 | |||||||||||||||
Grand Total
|
$ | 74,975 | $ | 81,947 | $ | 14,019 | $ | 74,819 | $ | 1,090 |
- 18 -
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE E - LOANS HELD FOR INVESTMENT (Continued)
December 31, 2010
|
||||||||||||||||||||
Unpaid
|
Average
|
Interest
|
||||||||||||||||||
Recorded
|
Principal
|
Related
|
Recorded
|
Income
|
||||||||||||||||
Investment
|
Balance
|
Allowance
|
Investment
|
Recognized
|
||||||||||||||||
With no related allowance recorded:
|
||||||||||||||||||||
Consumer
|
$ | - | $ | - | $ | - | $ | 49 | $ | 1 | ||||||||||
Commercial & industrial
|
83 | 92 | - | 1,200 | 3 | |||||||||||||||
Commercial construction
|
2,649 | 4,475 | - | 11,132 | 354 | |||||||||||||||
Commercial real estate - other
|
3,366 | 3,366 | - | 6,154 | 226 | |||||||||||||||
Consumer construction
|
45 | 133 | - | 258 | 15 | |||||||||||||||
Home equity lines/loans
|
1,883 | 2,032 | - | 1,780 | 74 | |||||||||||||||
Residential real estate - other
|
2,820 | 2,820 | - | 1,894 | 58 | |||||||||||||||
Sub-Total
|
10,846 | 12,918 | - | 22,467 | 731 | |||||||||||||||
With an allowance recorded:
|
||||||||||||||||||||
Consumer
|
13 | 13 | 10 | 220 | 8 | |||||||||||||||
Commercial & industrial
|
2,093 | 2,093 | 984 | 2,261 | 96 | |||||||||||||||
Commercial construction
|
29,488 | 30,529 | 7,251 | 17,409 | 677 | |||||||||||||||
Commercial real estate – other
|
6,658 | 7,328 | 1,780 | 9,730 | 230 | |||||||||||||||
Consumer construction
|
221 | 221 | 20 | 367 | 9 | |||||||||||||||
Home equity lines/loans
|
1,652 | 1,879 | 547 | 1,099 | 14 | |||||||||||||||
Residential real estate - other
|
3,471 | 5,197 | 446 | 6,107 | 223 | |||||||||||||||
Sub-Total
|
43,596 | 47,260 | 11,038 | 37,193 | 1,257 | |||||||||||||||
Totals:
|
||||||||||||||||||||
Commercial
|
2,176 | 2,185 | 984 | 3,461 | 99 | |||||||||||||||
Commercial real estate
|
10,024 | 10,694 | 1,780 | 15,884 | 456 | |||||||||||||||
Construction
|
32,403 | 35,358 | 7,271 | 29,166 | 1,055 | |||||||||||||||
Consumer
|
13 | 13 | 10 | 269 | 9 | |||||||||||||||
Residential real estate
|
9,826 | 11,928 | 993 | 10,880 | 369 | |||||||||||||||
Grand Total
|
$ | 54,442 | $ | 60,178 | $ | 11,038 | $ | 59,660 | $ | 1,988 |
At March 31, 2011, the recorded investment in loans considered impaired totaled $75.0 million. Of the total investment in loans considered impaired, $60.1 million were found to show specific impairment for which $14.0 million in valuation allowance was recorded; the remaining $14.9 million in impaired loans required no specific valuation allowance because either previously established valuation allowances had been absorbed by partial charge-offs or loan evaluations had no indication of impairment. For the 3 months ended March 31, 2011, the average recorded investment in impaired loans was approximately $74.8 million. The amount of interest recognized on impaired loans during the portion of the year that they were considered impaired was approximately $1.1 million.
At December 31, 2010, the recorded investment in loans considered impaired totaled $54.4 million. Of the total investment in loans considered impaired, $43.6 million were found to show specific impairment for which $11.0 million in valuation allowance was recorded; the remaining $10.8 million in impaired loans required no specific valuation allowance because either previously established valuation allowances had been absorbed by partial charge-offs or loan evaluations had no indication of impairment. For the year ended December 31, 2010, the average recorded investment in impaired loans was approximately $59.7 million. The amount of interest recognized on impaired loans during the portion of the year that they were considered impaired was approximately $2.0 million.
- 19 -
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE E - LOANS HELD FOR INVESTMENT (Continued)
Loans on Nonaccrual Status
As of March 31, 2011 and December 31, 2010(in thousands)
March 31, 2011
|
||||
Commercial
|
||||
Commercial & industrial
|
$ | 1,044 | ||
Commercial LOC
|
4 | |||
Commercial other
|
- | |||
Commercial real estate
|
||||
Commercial construction
|
26,277 | |||
Commercial real estate – other
|
13,035 | |||
Consumer
|
||||
Consumer LOC
|
- | |||
Consumer other
|
- | |||
Residential real estate
|
||||
Consumer construction
|
- | |||
Home equity loans/lines
|
1,909 | |||
Residential real estate – other
|
4,401 | |||
Total
|
$ | 46,670 | ||
Dec 31, 2010
|
||||
Commercial
|
||||
Commercial & industrial
|
$ | 616 | ||
Commercial LOC
|
- | |||
Commercial other
|
- | |||
Commercial real estate
|
||||
Commercial construction
|
16,614 | |||
Commercial real estate – other
|
7,633 | |||
Consumer
|
||||
Consumer LOC
|
5 | |||
Consumer other
|
- | |||
Residential real estate
|
||||
Consumer construction
|
221 | |||
Home equity loans/lines
|
1,314 | |||
Residential real estate – other
|
4,166 | |||
Total
|
$ | 30,569 |
NOTE F – DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, currently in the form of interest rate swaps, to manage its interest rate risk. These instruments carry varying degrees of credit, interest rate, and market or liquidity risks. Derivative instruments are recognized as either assets or liabilities in the accompanying financial statements and are measured at fair value. Subsequent changes in the derivatives’ fair values are recognized in earnings unless specific hedge accounting criteria are met.
- 20 -
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE F – DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
Crescent has established objectives and strategies that include interest-rate risk parameters for maximum fluctuations in net interest income and market value of portfolio equity. Interest rate risk is monitored via simulation modeling reports. The goal of the Company’s asset/liability management efforts is to maintain profitable financial leverage within established risk parameters. Crescent entered into several financial arrangements using derivatives during 2009 to add stability to interest income and to manage its exposure to interest rate movements.
Cash Flow Hedges
Through a special purpose entity (see Note H of Item 8 in Crescent’s 2010 Form 10-K) the Company issued trust preferred debentures in 2003. In 2007, the Company entered into a subordinated term loan agreement with a non-affiliated financial institution. These instruments, as more fully described in the Note H of Item 8 in the Company’s 2010 Form 10-K, were issued as part of its capital management strategy. These instruments are variable rate and expose the Company to interest rate risk caused by the variability of expected future interest expense attributable to changes in 3-month LIBOR. To mitigate this exposure to fluctuations in cash flows resulting from changes in interest rates, the Company entered into four pay-fixed interest rate swap agreements in June 2009.
There were two interest rate swaps entered into for each of the two instruments. The notional amount of each instrument was split in two equal halves with one half being swapped for a three year period and the second for a four year period. The trust preferred debentures and the subordinated loan carry contractual variable rates of interest based on the three-month London Inter Bank Offered Rate (LIBOR) plus 300 and 410 basis points respectively. The weighted average fixed rates resulting from the swap transactions are 5.73% and 6.63%, respectively.
Based on the evaluation performed at inception and through the current date, these derivative instruments qualify for cash flow hedge accounting. Therefore, the cumulative change in fair value of the interest rate swaps, to the extent that it is expected to be offset by the cumulative change in anticipated interest cash flows from the hedged trust preferred debenture and subordinated term loan, will be deferred and reported as a component of other comprehensive income (“OCI”). Any hedge ineffectiveness will be charged to current earnings.
Since the floating index and reset dates are based on identical terms, management believes that the hedge relationship of the cumulative changes in expected future cash flows from the interest rate swaps and the cumulative changes in expected interest cash flows from the trust-preferred debentures and subordinated term loan agreement will be highly effective. For the three month periods ended March 31, 2011 and 2010, management has determined that there is no hedge ineffectiveness.
The notional amount of the debt obligations being hedged was $15.5 million and the fair value of the interest rate swap liability, which is recorded in accrued expenses and other liabilities at March 31, 2011, was an unrealized loss of $498,988.
- 21 -
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE F – DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
The following tables disclose the location and fair value amounts of derivative instruments designated as hedging instruments in the consolidated balance sheets.
See Note G for additional information.
- 22 -
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE F – DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
The following table discloses activity in accumulated Other Comprehensive Income (“OCI”) related to the interest rate swaps during the three month period ended March 31, 2011.
March 31, 2011
|
||||
Accumulated OCI resulting from interest rate swaps as of January 1, 2011, net of tax
|
$ | (355,818 | ) | |
Other comprehensive gain recognized during the three month period ended March 31, 2011, net of tax
|
49,190 | |||
Accumulated OCI resulting from interest rate swaps as of March 31, 2011, net of tax
|
$ | (306,628 | ) |
The following table discloses activity in accumulated OCI related to the interest rate swaps during the year ended December 31, 2010.
December 31, 2010
|
||||
Accumulated OCI resulting from interest rate swaps as of January 1, 2010, net of tax
|
$ | (181,237 | ) | |
Other comprehensive loss recognized, net of tax
|
(174,581 | ) | ||
Accumulated OCI resulting from interest rate swaps as of December 31, 2010, net of tax
|
$ | (355,818 | ) |
The Company monitors the credit risk of the interest rate swap counterparty.
NOTE G - FAIR VALUE MEASUREMENT
Fair value is a market-based measurement and is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the assets or owes the liability. In general, the transaction price will equal the exit price and, therefore, represent the fair value of the asset or liability at initial recognition. In determining whether a transaction price represents the fair value of the asset or liability at initial recognition, each reporting entity is required to consider factors specific to the transaction and the asset or liability, the principal or most advantageous market for the asset or liability, and market participants with whom the entity would transact in the market. In order to determine the fair value or the exit price, entities must determine the unit of account, highest and best use, principal market, and market participants.
These determinations allow the reporting entity to define the inputs for fair value and level of hierarchy.
- 23 -
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE G - FAIR VALUE MEASUREMENT (Continued)
Outlined below is the application of the fair value hierarchy.
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. As of March 31, 2011 and December 31, 2010, the Company carried certain marketable equity securities at fair value hierarchy Level 1.
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. As of March 31, 2011 and December 31, 2010, the types of financial assets and liabilities the Company carried at fair value hierarchy Level 2 included securities available for sale and derivative liabilities.
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs are supported by little or no market activity or by the entity’s own assumptions. As of March 31, 2011 and December 31, 2010, while the Company did not carry any financial assets or liabilities, measured on a recurring basis, at fair value hierarchy Level 3, the Company did value impaired loans and other real estate owned, measured on a non-recurring basis, at fair value hierarchy Level 3.
Fair Value on a Recurring Basis
The Company measures certain assets and liabilities at fair value on a recurring basis, as described below.
Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Derivative Liabilities
Derivative instruments at March 31, 2011 and 2010 include interest rate swaps and are valued using models developed by third-party providers. This type of derivative is classified as Level 2 within the hierarchy.
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
- 24 -
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE G - FAIR VALUE MEASUREMENT (Continued)
Fair Value on a Recurring Basis (Continued)
Mortgage Banking Activity
The Company enters into interest rate lock commitments and commitments to sell mortgages. At March 31, 2011, the amount of fair value associated with these interest rate lock commitments was $62,000, which is included in other assets. The fair value associated with interest rate lock commitments at December 31, 2010 was $53,000. Forward loan sale commitments have been deemed insignificant.
Fair Value on a Nonrecurring Basis
The Company measures certain assets at fair value on a nonrecurring basis, as described below.
Loans Held for Investment
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2011, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. There were $75.0 million in impaired loans at March 31, 2011, of which $62.0 million in loans showed impairment and had a specific reserve of $14.0 million. Impaired loans totaled $54.4 million at December 31, 2010. Of such loans, $43.6 million had specific loss allowances aggregating $11.0 million at that date.
Foreclosed Assets
Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at lower of cost or net realizable value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3
- 25 -
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE G - FAIR VALUE MEASUREMENT (Continued)
There were no significant transfers between the valuation of financial assets or liabilities between levels 1 and 2 in the valuation hierarchy. Below is a table that presents information about assets measured at fair value at March 31, 2011, and December 31, 2010:
Fair Value Measurements at
|
||||||||||||||||
March 31, 2011, Using
|
||||||||||||||||
Quoted Prices
|
Significant
|
|||||||||||||||
Assets/(Liabilities)
|
in Active
|
Other
|
Significant
|
|||||||||||||
Measured at
|
Markets for
|
Observable
|
Unobservable
|
|||||||||||||
Fair Value
|
Identical Assets
|
Inputs
|
Inputs
|
|||||||||||||
Description
|
3/31/2011
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||||||||||
Securities available for sale:
|
||||||||||||||||
U.S. Government obligations and agency
|
$ | 10,944,952 | $ | - | $ | 10,944,952 | $ | - | ||||||||
Mortgage-backed
|
34,195,815 | - | 34,195,815 | - | ||||||||||||
Collateralized mortgage obligations
|
92,940,064 | - | 92,940,064 | - | ||||||||||||
Municipals
|
46,546,711 | - | 46,546,711 | - | ||||||||||||
Corporate bonds
|
2,857,970 | - | 2,857,970 | - | ||||||||||||
Marketable equity
|
510,904 | 510,904 | - | - | ||||||||||||
Foreclosed assets
|
14,112,547 | - | - | 14,112,547 | ||||||||||||
Impaired loans
|
60,956,699 | - | - | 60,956,699 | ||||||||||||
Interest rate lock commitments
|
62,414 | - | - | 62,414 | ||||||||||||
Derivative liabilities
|
(498,988 | ) | - | (498,988 | ) | - |
Fair Value Measurements at
|
||||||||||||||||
December 31, 2010, Using
|
||||||||||||||||
Quoted Prices
|
Significant
|
|||||||||||||||
Assets/(Liabilities)
|
in Active
|
Other
|
Significant
|
|||||||||||||
Measured at
|
Markets for
|
Observable
|
Unobservable
|
|||||||||||||
Fair Value
|
Identical Assets
|
Inputs
|
Inputs
|
|||||||||||||
Description
|
12/31/2010
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||||||||||
Securities available for sale:
|
||||||||||||||||
U.S. Government obligations and agency
|
$ | 9,838,400 | $ | - | $ | 9,838,400 | $ | - | ||||||||
Mortgage-backed
|
39,724,845 | - | 39,724,845 | - | ||||||||||||
Collateralized mortgage obligations
|
78,449,684 | - | 78,449,684 | - | ||||||||||||
Municipals
|
50,618,363 | - | 50,618,363 | - | ||||||||||||
Corporate bonds
|
2,768,800 | - | 2,768,800 | - | ||||||||||||
Marketable equity
|
516,137 | 516,137 | - | - | ||||||||||||
Foreclosed assets
|
15,523,592 | - | - | 15,523,592 | ||||||||||||
Impaired loans
|
43,404,439 | - | - | 43,404,439 | ||||||||||||
Interest rate lock commitments
|
53,185 | - | - | 53,185 | ||||||||||||
Derivative liabilities
|
(579,038 | ) | - | (579,038 | ) | - |
- 26 -
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE G - FAIR VALUE MEASUREMENT (Continued)
The following table provides information regarding the activity in assets and liabilities measured at a fair value Level 3 on a recurring basis per ASU No 2010-06, Fair Value Measurements and Disclosures:
Level 3
|
||||
Interest Rate
|
||||
Lock Commitments
|
||||
Beginning balance December 31, 2010
|
$ | 53,185 | ||
Realized gain on commitments
|
(85,120 | ) | ||
Expired commitments
|
(16,680 | ) | ||
New commitments entered into
|
111,029 | |||
Ending balance March 31, 2011
|
$ | 62,414 |
ASC Topic 825 Financial Instruments requires disclosure of fair value information about financial instruments on an interim basis, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. In addition to the valuation methods previously described for investments available for sale and derivative assets and liabilities, the following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amounts for cash and cash equivalents approximate fair value because of the short maturities of those instruments.
Investment Securities
Fair value for investment securities equals quoted market price if such information is available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans Held For Sale
The fair value of loans held for sale is based on commitments on hand from investors within the secondary market for loans with similar characteristics.
Loans Held for Investment
For certain homogenous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Additional adjustments are estimated by applying a reasonable discount to reflect the current market for and illiquid nature of bank loan portfolios.
- 27 -
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE G - FAIR VALUE MEASUREMENT (Continued)
Federal Home Loan Bank Stock
The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.
Investment in Life Insurance
The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurers.
Deposits
The fair value of demand deposits, savings, money market and NOW accounts is the amount payable on demand at the reporting date. The fair value of time deposits is estimated using the rates currently offered for instruments of similar remaining maturities.
Short-term Borrowings and Long-term Debt
The fair value of short-term borrowings and long-term debt are based upon the discounted value when using current rates at which borrowings of similar maturity could be obtained.
Accrued Interest Receivable and Accrued Interest Payable
The carrying amounts of accrued interest receivable and payable approximate fair value, because of the short maturities of these instruments.
Derivative financial instruments
Fair values for interest rate swaps are based upon the estimated amounts required to settle the contracts.
The carrying amounts and estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, are as follows at March 31, 2011 and December 31, 2010:
- 28 -
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE H - CUMULATIVE PERPETUAL PREFERRED STOCK
Under the United States Treasury’s Capital Purchase Program (CPP), the Company issued $24.9 million in Fixed Rate Cumulative Perpetual Preferred Stock, Series A, on January 9, 2009. In addition, the Company provided a warrant to the Treasury to purchase 833,705 shares of the Company’s common stock at an exercise price of $4.48 per share. These warrants are immediately exercisable and expire ten years from the date of issuance. The preferred stock is non-voting, other than having class voting rights on certain matters, and pays cumulative dividends quarterly at a rate of 5% per annum for the first five years and 9% per annum thereafter. The preferred shares are redeemable at the option of the Company subject to regulatory approval.
Based on a Black-Scholes option pricing model, the common stock warrants have been assigned a fair value of $2.28 per share or $2.4 million in the aggregate as of January 9, 2009. Based on relative fair value, $2.4 million has been recorded as the discount on the preferred stock and will be accreted as a reduction in net income available for common shareholders over the next five years at approximately $0.5 million per year. Correspondingly, $22.5 million was initially assigned to the preferred stock. Through the discount accretion over the next five years, the preferred stock will be accreted up to the redemption amount of $24.9 million. For purposes of these calculations, the fair value of the common stock warrant as of January 9, 2009 was estimated using the Black-Scholes option pricing model and the following assumptions:
Risk-free interest rate
|
2.49 | % | ||
Expected life of warrants
|
10 years
|
|||
Expected dividend yield
|
0.00 | % | ||
Expected volatility
|
37.27 | % |
The Company’s computation of expected volatility is based on daily historical volatility since January 1999. The risk-free interest rate is based on the market yield for ten year U.S. Treasury securities as of January 9, 2009.
As a condition of the CPP, the Company must obtain consent from the United States Department of the Treasury to repurchase its common stock or to pay a cash dividend on its common stock. Furthermore, the Company has agreed to certain restrictions on executive compensation and corporate governance.
The Company deferred the payment of the January 2011 quarterly cash dividend of $311,250 on its Fixed Rate Cumulative Perpetual Preferred Stock, Series A. Under the terms of the TARP Preferred Stock, the Company is required to pay quarterly dividends at a rate of 5 percent per year for the first five years following the Treasury investment, after which the dividend rate automatically increases to 9 percent per year. The Company may defer dividend payments for up to six consecutive quarters without default or penalty.
NOTE I - RECENT ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB issued Accounting Standards Update (ASU) No 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820-10) – “Improving Disclosures about Fair Value Measurements”. This ASU requires some new disclosures in Codification Subtopic 820-10. The FASB’s objective was to improve these disclosures and, thus, increase the transparency in financial reporting.
- 29 -
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE I – RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
For assets and liabilities measured at a fair value Level 3 on a recurring basis, the reporting entity must disclose the following information for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years
A reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following –
|
·
|
Total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets) and a description of where those gain or losses included in earnings are reported in the Standard of income;
|
|
·
|
Purchases, sales, issuances and settlements (net); and
|
|
·
|
Transfers in and / or out of Level 3 (e.g. transfers due to changes in the observability of significant inputs).
|
Additional disclosures related to the activity in Level 3 assets and liabilities have been considered in this report.
ASU 2010-20, Receivables (Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The objective of this ASU is for an entity to provide disclosures that facilitate financial statement users’ evaluation of the following:
|
·
|
The nature of credit risk inherent in the entity’s portfolio of financing receivables;
|
|
·
|
How that risk is analyzed and assessed in arriving at the allowance for credit losses; and
|
|
·
|
The changes and reasons for those changes in the allowance for credit losses.
|
To achieve these objectives, an entity should provide disclosures on a disaggregated basis on two defined levels: (1) portfolio segment; and (2) class of financing receivable. The ASU makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including:
|
·
|
A roll forward of the allowance for credit losses related to financing receivables from the beginning to the end of the reporting period by portfolio segment;
|
|
·
|
Credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables;
|
|
·
|
The aging of past due financing receivables at the end of the reporting period by class of financing receivables; and
|
For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company has provided the required interim period disclosures in Note E.
- 30 -
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE I - RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
ASU 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this Update apply to all public-entity creditors that modify financing receivables within the scope of the disclosure requirements about troubled debt restructurings in Update 2010-20. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011.
ASU 2011-02, Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this Update provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring.
In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist:
1. The restructuring constitutes a concession.
2. The debtor is experiencing financial difficulties.
The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The appropriate disclosures will be included as specified.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.
From time to time the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.
- 31 -
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis is intended to assist readers in the understanding and evaluation of the financial condition and consolidated results of operations of Crescent Financial Corporation (the “Company”). The analysis includes detailed discussions for each of the factors affecting Crescent Financial Corporation’s operating results for the three-month periods ended March 31, 2011 and 2010 and financial condition for the periods ended March 31, 2011 and December 31, 2010. It should be read in conjunction with the unaudited consolidated financial statements and accompanying notes included in this report and the supplemental financial data appearing throughout this discussion and analysis. Because the Company has no operations and conducts no business on its own other than owning Crescent State Bank, the discussion contained in this Management's Discussion and Analysis concerns primarily the business of the Bank. However, for ease of reading and because the financial statements are presented on a consolidated basis, the Company and the Bank are collectively referred to herein as the Company unless otherwise noted. All significant intercompany transactions and balances are eliminated in consolidation.
COMPARISON OF FINANCIAL CONDITION AT
MARCH 31, 2011 AND DECEMBER 31, 2010
Total assets decreased by approximately $13.5 million or 1% to $959.6 million at March 31, 2011 compared to $973.0 million at December 31, 2010. Earning assets are $910.5 million or 95% of total assets at March 31, 2011 compared to $915.7 million or 94% at December 31, 2010. Components of earning assets at March 31, 2011 are $652.8 million in gross loans held for investment, $198.5 million in investment securities and Federal Home Loan Bank (FHLB) stock and $58.4 in overnight investments and interest-earning deposits with correspondent banks and $805,000 in mortgage loans held for sale. Earning assets at December 31, 2010 consisted of $676.8 million in gross loans held for investment, $192.4 million in investment securities and FHLB stock and $40.7 million in overnight investments and interest-earning deposits and $5.7 million in mortgage loans held for sale. Total deposits and stockholders’ equity at March 31, 2011 are $725.2 million and $71.7 million, respectively, compared to $724.4 million and $79.0 million at December 31, 2010.
Gross loans held for investment, net of deferred loan fees declined by $24.0 million over the first three months of 2011. All loan categories with the exception of residential one-to-four family first trust mortgage experienced a decline due in part to normal principal payments and the continued softness in loan demand. The net decline by loan category is as follows: $9.9 million in commercial real estate, $7.8 million in construction, land acquisition and development, $4.5 million in commercial and industrial, $2.2 million in home equity loans and lines and $157,000 in consumer loans. The residential one-to-four family first trust mortgage category experienced a net increase of $427,000. The net $24.0 million decrease is comprised of $28.4 million in normal principal payments and payoffs, $4.6 million in loan charge-offs, $1.6 million in loan sales and $368,000 of loans transferred to foreclosed property, and are partially offset by $11.0 million in new loan production. The composition of the loan portfolio, by category, as of March 31, 2011 is 51% commercial mortgage loans, 20% construction loans, 13% residential mortgage loans, 8% home equity loans and lines, 7% commercial loans and 1% consumer loans. The composition of the loan portfolio, by category, as of December 31, 2010 was 51% commercial real estate mortgage loans, 21% construction and land development loans, 12% residential one-to-four family first deed of trust mortgage loans, 8% home equity lines and loans, 7% commercial and industrial loans and 1% consumer loans.
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Loans for commercial real estate, construction, acquisition and development and land comprised 72% of the total loan portfolio at March 31, 2011. A more detailed breakdown of loans in those sectors is presented in the table below:
Breakdown of Commercial Real Estate
Total Aggregate
|
||||
Exposure
|
||||
Loan Type
|
(in thousands)
|
|||
Non owner occupied investment property
|
$ | 185,191 | ||
Owner occupied commercial property
|
133,118 | |||
Multi-family investment property
|
17,083 | |||
Agriculture/Farmland
|
614 | |||
Subtotal
|
336,006 | |||
Deferred unearned interest
|
(442 | ) | ||
Total commercial real estate loans
|
$ | 335,564 |
Breakdown of Construction, Acquisition & Development
Total Aggregate
|
||||
Exposure
|
||||
Loan Type
|
(in thousands)
|
|||
Land acquisition and development - commercial purposes
|
$ | 64,285 | ||
Land acquisition and development - residential purposes
|
38,652 | |||
1 to 4 family residential construction
|
13,533 | |||
Commercial construction
|
16,600 | |||
Subtotal
|
133,070 | |||
Deferred unearned interest
|
(116 | ) | ||
Total construction, acquistition & development
|
$ | 132,954 |
The Company’s allowance for loan losses at March 31, 2011 is $23.5 million or 3.60% of outstanding loans held for investment compared to $20.7 million or 3.06% at December 31, 2010. The net increase is due to a $7.0 million provision for loan losses partially offset by $4.2 million in net charge-offs. The loan loss reserve is adjusted monthly to a level that management believes is appropriate given the current risk profile of the portfolio. Economic conditions in our markets over the past two plus years have had a significant impact on the housing market and general business conditions. As a result, we have experienced a deterioration of asset quality and an increase in loan charge-offs and asset foreclosures and repossessions. There is a more detailed discussion of the methodology in the section entitled “Analysis of Allowance for Loan Losses.”
At March 31, 2011, there were 95 loans totaling $46.7 million in non-accrual status. There were no loans past due 90 days or more still accruing interest at March 31, 2011. Non-performing loans as a percentage of total loans held for investment at March 31, 2011 is 7.15%. At December 31, 2010, there were 63 loans totaling approximately $30.6 million in non-accrual status. During the first quarter of 2011, of those loans in nonaccrual status at December 31, 2010, one loan was paid in full, one loan was returned to accrual status based on payment history, four loans were charged-off, collateral securing four loans was foreclosed and moved to other real estate owned and 53 loans remained in nonaccrual status. The percentage of non-performing loans to total loans held for investment at December 31, 2010 was 4.52%. For a more detailed discussion, see the section entitled Nonperforming Assets.
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Loans are classified as Troubled Debt Restructurings (“TDRs”) by the Company when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. Of the $17.2 million of TDRs at March 31, 2011, $5.8 million were accruing interest and were not past due 30 days or more. The remaining $11.4 million were nonperforming loans and included in the nonaccrual figures presented previously. At December 31, 2010, there were $17.2 million in TDRs of which $8.6 million were accruing interest and were not past due 30 days or more and $8.6 million were nonperforming loans and included in the non-accrual figures. The Company only restructures loans for borrowers in financial difficulty that have designed a viable business plan to fully pay off all obligations, including outstanding debt, interest, and fees, either by generating additional income from the business or through liquidations of assets. Generally these loans are restructured to provide the borrower additional time to execute their plans. The TDRs were not placed in nonaccrual status prior to the restructuring, and since the Company expects the borrowers to perform after the restructuring (based on modified note terms), the loans continue to accrue interest at the restructured rate. The Company closely monitors these loans and will cease accruing interest on them if and when management believes that the borrowers may not continue performing based on the restructured note terms. All TDR’s are considered impaired and at March 31, 2011 and December 31, 2010 there were $12.4 million and $13.1 million, respectively, in TDRs which demonstrated impairment and accordingly were evaluated as such in the allowance calculation. As of March 31, 2011 and December 31, 2010, the allowance for loan losses allocated to TDRs totaled approximately $2.9 million and $2.6 million, respectively.
The Company has investment securities with an amortized cost of $185.0 million at March 31, 2011. All investments are accounted for as available for sale and are presented at their fair market value of $188.0 million compared with $181.9 million at year-end 2010. The Company’s investment securities at March 31, 2011, consist of U.S. Government agency securities, collateralized mortgage obligations, mortgage-backed securities, corporate bonds, municipal bonds and marketable equity securities. The increase in the available for sale portfolio during the first quarter of 2011 was the net result of $35.1 million in new purchases and $101,000 in gains on sales of available for sale securities, less $20.4 million in proceeds from sales, $7.5 million in normal principal payments, $624,000 decline in the fair value of the portfolio and $495,000 in net amortization of premiums. The Company owned $10.5 million of Federal Home Loan Bank stock at both March 31, 2011 and December 31, 2010.
There were $56.6 million in Federal funds sold at March 31, 2011 compared to $38.1 million at December 31, 2010. Fed funds sold represents one form of on-balance sheet liquidity used to redeem maturing time deposits and borrowings, fund new loan production and for deposit fluctuations of non-maturing deposit types. The increase in Fed funds sold is primarily due to the decrease in the loan portfolio.
Interest-earning deposits held at correspondent banks declined from $2.7 million at December 31, 2010 to $1.8 million at March 31, 2011. Interest-earning funds held at correspondent bank accounts are a source of on-balance sheet liquidity and typically are deployed to the investment portfolio.
Non-earning and other assets declined by approximately $5.5 million from $78.1 million at December 31, 2010 to $72.5 million at March 31, 2011. There were decreases in accrued interest receivable, cash and noninterest bearing deposits and premises and equipment of $610,000, $387,000 and $192,000, respectively. Foreclosed property declined by $1.4 million as the net result of receiving $1.6 million in proceeds from dispositions, plus $166,000 in net losses on dispositions and valuation write-downs less $367,000 of new transfers into other real estate owned. The deferred tax asset increased by $209,000 during the first quarter of 2011. The increase was the net result of an increase to the combined deferred tax asset associated with taxes, available for sale securities and interest rate derivatives of $3.0 million, offset by an increase in the deferred tax asset valuation allowance of $2.8 million. The cash surrender value of bank owned life insurance increased by $194,000 during the three-month period.
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Total deposits increased by $822,000 between December 31, 2010 and March 31, 2011 from $724.4 million to $725.2 million. The Company has continued to focus on reducing its reliance on brokered deposits and shifting its deposit mix to favor more stable, core deposit types. Brokered time deposits have decreased by $11.3 million from $160.5 million at year end 2010 to $149.2 million at March 31, 2011. Other retail time deposits increased by $12.3 million from $197.2 million to $209.5 million. Interest bearing demand deposits have increased by $6.6 million during the first quarter primarily as a result of a $3.3 million increase in Crescent Rewards checking, a premium-yielding checking account for individuals, and a $3.5 million increase related to property tax receipts for a municipal customer. Money market balances have increased by $3.1 million and savings balances have declined by $7.5 million between year-end 2010 and March 31, 2011. We made a strategic decision to lower our business and personal premium savings rates and transition business customers into a money market account. The $3.4 million decline in business savings is offset by a $3.5 million increase in business money market. Both personal savings and other nonpersonal savings balances declined by $2.2 million each. The nonpersonal savings decline was primarily due to the funding needs of one municipality during the first quarter. Non-interest bearing deposit balances declined by $2.8 million due primarily to a $3.0 million reduction in one governmental account.
The composition of the deposit base, by category, at March 31, 2011 is as follows: 52% time deposits, 21% interest-bearing demand deposits, 11% money market, 8% statement savings accounts and 8% non-interest-bearing demand deposits. The composition of the deposit base, by category, at December 31, 2010 was as follows: 52% in time deposits, 20% in interest-bearing deposits, 10% in money market, and 9% in both non interest-bearing demand deposits and statement savings. Time deposits of $100,000 or more totaled $293.1 million at March 31, 2011 compared to $302.9 million at December 31, 2010.
The Company has total borrowings of $157.7 million at March 31, 2011 compared with $164.7 million at December 31, 2010. The composition of borrowings is $137.0 million in long-term advances and $5.0 million in short-term advances from the Federal Home Loan Bank of Atlanta (FHLB), $8.2 million in junior subordinated debt issued to an unconsolidated subsidiary and $7.5 million in a subordinated term loan issued to a non-affiliated financial institution. Borrowings at December 31, 2010 consisted of $142.0 million in long-term FHLB advances, $7.0 million in short-term FHLB advances, $8.2 million in junior subordinated debt issued to an unconsolidated subsidiary, and $7.5 million in a subordinated term loan. There were no Federal funds purchased at either balance sheet date.
Accrued interest payable and other liabilities increased by $64,000 to $4.9 million at March 31, 2011.
Between December 31, 2010 and March 31, 2011, total stockholders’ equity declined by $7.3 million. The decrease was primarily due to the $7.0 million net loss and a $344,000 decline in accumulated comprehensive income.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2011 AND 2010
Net Income/Loss. Net loss for the three-month period ended March 31, 2011, before adjusting for the effective dividend on preferred stock, was $7.0 million compared to net income of $542,000 for the prior year three-month period ended March 31, 2010. After adjusting for $427,000 and $419,000 in dividends and discount accretion on preferred stock for the two respective periods, net loss attributable to common shareholders for the current period was $7.5 million or ($0.78) per diluted share compared with net income available for common shareholders of $123,000 or $0.01 per diluted share for the first quarter of the prior year. Annualized return on average assets declined to (2.96%) from 0.21% for the prior period. Performance in the current period was negatively impacted by larger loan loss provisions, declining net interest margin due to a higher level of nonaccrual loans and increased noninterest operating expenses. Return on average equity for the current period was (36.52%) compared to 2.36% for the prior period. The decrease in return on average equity is due to the net loss for the period.
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Net Interest Income. Net interest income declined by 19% or more than $1.4 million from $7.5 million for the prior year three-month period to $6.0 million for the current period ended March 31, 2011. The decrease was attributable to a larger decline in interest income from an overall lower volume of earning assets and the negative impact on loan yields due to the increase in nonaccrual loans, than the decline in interest expense from a lower cost of funds and the reduced volume of interest-bearing liabilities. The tighter spread between the yield on earning assets and the cost of interest-bearing liabilities, combined with a decline in the relative average of earning assets funded by interest-bearing liabilities, caused a decrease in tax equivalent net interest margin from 3.27% for the prior three-month period to 2.82% for the current period.
Total interest income decreased by 20% or approximately $2.7 million to $10.8 million for the current three-month period compared to $13.4 million for the prior year period. The results were comprised of a $1.4 million decrease due to lower yields on earning assets and a $1.3 million decrease due to a drop in volume of average earning assets. Total interest expense for the current period declined by $1.2 million to $4.7 million from $6.0 million. The decrease was comprised of a $1.1 million decline due to the lower cost of funding and a $123,000 decline due to a lower volume of interest-bearing funds.
Total average earning assets decreased $53.2 million or 6% from an average of $960.9 million for the prior three-month period to an average of $907.8 million for the current three-month period. The composition of the decrease was as follows: the average balance of loans outstanding decreased by 11% or $84.0 million from $752.1 million to $668.2 million, the average balance of the investment securities portfolio decreased by 5% or $9.4 million from $199.5 million to $190.2 million and the average balance of federal funds sold and other interest-earning assets increased by $40.2 million from $9.3 million from $49.5 million. The average of gross loans outstanding has declined due to a combination of the Company trying to reduce its exposure to construction, land acquisition and development lending and the overall weakness for new loan demand due to economic conditions over the past thirty months.
Average interest-bearing liabilities decreased by $40.0 million or 5% from $862.4 million for the quarter ended March 31, 2010 to $822.4 million for the current quarter. Total interest-bearing deposits increased by $14.0 million or 2% from $649.8 million to $663.8 million. Interest-bearing NOW account deposits increased by $53.6 million from $96.8 million to $150.4 million largely due to the premium-yield checking product introduced in December 2008. Total average time deposits declined by over $42.8 million primarily due to the Company reducing its exposure to brokered deposits by $42.0 million over the last twelve months. Average total borrowings decreased by $54.0 million or 25% from $212.6 million to $158.6 million. The significant reduction in borrowings was attributable to the $50.0 million payoff of borrowings with the Federal Reserve Bank discount window in April 2010. The Company is making a concerted effort to reduce its exposure to wholesale funding.
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Net interest margin is interest income earned on loans, securities and other earning assets, less interest expense paid on deposits and borrowings, expressed as a percentage of total average earning assets. The tax equivalent net interest margin for the three-month period ended March 31, 2011 was 2.82% compared to 3.27% for the prior year period. Management estimates the foregone interest income from nonaccrual loans, which includes both the reversal of previously accrued interest income and the loss of current income from daily accruals, to be $945,000 for the first quarter. Adjusting for the level of foregone interest income due to credit quality deterioration, the tax equivalent net interest margin would have been approximately 3.24% for the three-month period ended March 31, 2011. The average yield on earning assets for the current three-month period decreased 85 basis points to 4.93% compared with 5.78% for the prior year period, while the average cost of interest-bearing funds decreased by 47 basis points to 2.33% from 2.80%. The interest rate spread, which is the difference between the average yield on earning assets and the cost of interest-bearing funds, declined by 38 basis points from 2.98% to 2.60%. The percentage of interest earning assets to average interest-bearing liabilities decreased from 111.43% for the prior year period to 110.38% for the three months ended March 31, 2011. A decrease in the ratio of average earning assets to average interest-bearing liabilities indicates an increased dependency on interest-bearing forms of funding and otherwise has a negative impact on the margin. Approximately 43% of the Company’s loan portfolio at both March 31, 2011 and December 31, 2010 has variable rate pricing based on the Prime lending rate or LIBOR (London Inter Bank Offering Rate).
Management anticipates that continued contraction of the net interest margin is possible in the near term as the negative impact from interest reversals and foregone interest on nonaccrual loans may overshadow the positive effects of the decline in the cost of interest-bearing funds. Once credit quality issues subside, we would anticipate the margin to stabilize and then expand. We continue to position the balance sheet to take advantage of a rising interest rate environment.
Provision for Loan Losses. The Company’s provision for loan losses for the three-month period ended March 31, 2011 was $7.0 million compared to $1.8 million for the same period in 2010. The increase in the loan loss provision was due to deterioration of loan quality due to continuing economic weakness primarily in the real estate and housing sectors. As further explained in the section entitled “Analysis of Allowance for Loan Losses,” there are two components used to determine the appropriate loan loss provision. The first component is historical loan charge-off experience supplemented by certain qualitative factors and the second component is the evaluation of impaired loans to determine if impairment exists and to recognize that deficiency as a specific reserve. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management.
Non-Interest Income. Non-interest income was $1.0 million of both three-month periods ended March 31, 2011 and 2010. Revenue from service charges and other customer service and activity fees on deposit accounts increased by $15,000 in the current three-month period compared to the prior three-month period. Total service charges and other deposit related revenue was $447,000 for the three-month period ended March 31, 2011 compared to $432,000 for the prior year three-month period. The $15,000 net improvement reflects increases primarily in service charges, ATM and debit card related revenue and safe deposit fees, offset by a decrease in NSF processing fees. The Company experienced a decrease in mortgage loan related revenue of $71,000. For the three-months ended March 31, 2011, we recognized $75,000 in origination revenue and $91,000 in gains on the sale of mortgages for a total of $166,000 of mortgage related income compared to $193,000 in origination revenue and $44,000 in gains on the sale of mortgages for a total of $237,000 for the prior period. Due to lower housing valuations and the expiration of the first-time homebuyer program, mortgage activity for both purchase money and refinance opportunities is slow. Other noninterest income declined by $36,000 for the current three-month period due in part to a $14,000 decline in brokerage referral revenue, an $8,000 decrease in revenue from nonmarketable equity investments and a $5,000 decrease in earnings on cash value of bank owned life insurance. In February 2011, the Company realized $101,000 in gains on the sale of available for sale securities. No such gains were recognized during 2010. The Company recorded $1,000 in losses on the disposition of fixed assets for the current three-month period compared to $7,000 in gains for the period ended March 31, 2010.
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Non-Interest Expenses. For the current three-month period, non-interest expenses increased by $914,000 or 15% from $6.2 million to $7.1 million. Personnel expenses are $3.3 million for the current three-month period compared to $3.1 million for the prior year period. The increase relates to the addition of nine full-time equivalent employees and a significant increase in medical insurance premiums for 2011. FDIC insurance premiums have increased by $140,000 due to a larger deposit base and changes to the assessment calculation. Occupancy expenses are $55,000 higher primarily due to the late first quarter 2010 expansion at our Operations Center in Cary, North Carolina. Data processing expense have increased by $34,000 due primarily to increased account volumes.
Other noninterest expenses increased by $468,000 of which approximately $381,000 in consulting and legal expenses are associated with our pending investment agreement with Piedmont Community Bank Holdings, Inc. (“Piedmont”). We anticipate continued legal and investment banking expenses related to the Piedmont investment.
Loan and collection related expenses include costs to originate new loans and expenses related to the acquisition, ongoing servicing and disposition of repossessed and foreclosed collateral. Total loan and collection related expenses increased by $138,000 or 39% to $492,000 for the three-month period ended March 31, 2011 compared to $354,000 prior three-month period. Expenses incurred in the acquisition and servicing of foreclosed and repossessed assets, which include collection, legal, and maintenance costs, totaled $436,000 in the current period compared to $322,000 in the prior year. Included in the numbers above for the current three-month period is $166,000 in net losses on the sale of, and valuation write-downs on, other real estate owned. These losses were partially offset by an $8,000 gain on the disposition of repossessed property. For the three-month period ended March 31, 2010, the Company had recognized a $33,000 net loss on the sale of other real estate owned.
Provision for Income Taxes. The Company did not record any income tax impact for the three-month period ended March 31, 2011 compared to a benefit of $23,000 for the prior year period. Based on our evaluation of the Company’s deferred tax asset, as described in detail below, the Company determined that no income tax benefit associated with the pre-tax loss for the current period should be recorded, and the valuation allowance should be increased. The benefit for the first quarter of 2010 was realized on pre-tax income due to the volume of tax-exempt interest income booked for the quarter.
Deferred tax assets are recognized for temporary deductible differences, operating loss and tax credit carry forwards. A valuation allowance is established when it is more likely than not that all or some portion of the deferred tax asset will not be realized. Evaluating the need for and amount of a valuation allowance requires judgment and analysis of the positive and negative evidence. Included in our analysis, which receives significant weight, is the 3-year cumulative loss test. The cumulative loss test calculates the cumulative pre-tax income (loss) over the preceding twelve quarter period. If the Company is in a cumulative loss position, management performs an evaluation of the positive and negative evidence to determine whether a valuation allowance is necessary. As of March 31, 2011, the Company did not pass the cumulative loss test by $21.0 million. Management has evaluated, among other factors, historical pre-tax earnings, projected future earnings, credit quality trends, taxable temporary differences and the cause and probability of recurrence of those circumstances leading to current taxable losses in evaluating the need for a valuation allowance.
As of March 31, 2011, prior to consideration of any valuation allowance, our recorded net deferred tax asset was $12.8 million compared to $9.8 million at December 31, 2010. At December 31, 2010, management concluded that a portion of the net deferred tax asset may not be fully realizable and established a valuation analysis in the amount of $2.1 million. During the first quarter of 2011, the valuation allowance was increased by $2.8 million bring the total valuation allowance at March 31, 2011 to $4.9 million. The Company will continue to monitor deferred tax assets closely to evaluate the level and/or need for a valuation allowance. Significant negative trends in credit quality, losses from operations, or significant deviations from forecasted future financial results could impact our ability to fully realize the deferred tax asset in the future, and results of operations may be adversely affected by further increases in the related valuation allowance.
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NET INTEREST INCOME
Net interest income represents the difference between income derived from interest-earning assets and interest expense incurred on interest-bearing liabilities. Net interest income is affected by both (1) the difference between the rates of interest earned on interest-earning assets and the rates paid on interest-bearing liabilities (“interest rate spread”) and (2) the relative amounts of interest-earning assets and interest-bearing liabilities (“net interest-earning balance”). The following tables set forth information relating to average balances of the Company's assets and liabilities for the three-month periods ended March 31, 2011 and 2010. The tables reflect the average yield on interest-earning assets and the average cost of interest-bearing liabilities (derived by dividing income or expense by the daily average balance of interest-earning assets or interest-bearing liabilities, respectively) as well as the net interest margin. In preparing the tables, non-accrual loans are included, when applicable, in the average loan balance. For purposes of the analysis, Federal Home Loan Bank stock is included in Investment Securities totals.
Average Balances, Interest and Average Yields/Cost
(Dollars in Thousands)
For the Three Months Ended March 31,
|
||||||||||||||||||||||||
2011
|
2010
|
|||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
Balance
|
Interest
|
Yield/Cost
|
Balance
|
Interest
|
Yield/Cost
|
|||||||||||||||||||
Interest-earnings assets
|
||||||||||||||||||||||||
Loan portfolio
|
$ | 668,152 | $ | 9,078 | 5.51 | % | $ | 752,131 | $ | 11,484 | 6.19 | % | ||||||||||||
Investment securities
|
190,187 | 1,663 | 4.08 | % * | 199,542 | 1,936 | 4.44 | % | ||||||||||||||||
Fed funds and other interest-earning assets
|
49,454 | 29 | 0.23 | % | 9,270 | 5 | 0.22 | % | ||||||||||||||||
Total interest-earning assets
|
907,793 | 10,770 | 4.93 | % | 960,943 | 13,425 | 5.78 | % | ||||||||||||||||
Noninterest-earning assets
|
56,312 | 51,131 | ||||||||||||||||||||||
Total Assets
|
$ | 964,105 | $ | 1,012,074 | ||||||||||||||||||||
Interest-bearing liabilities
|
||||||||||||||||||||||||
Interest-bearing NOW
|
$ | 150,431 | 760 | 2.05 | % | $ | 96,841 | 625 | 2.62 | % | ||||||||||||||
Money market and savings
|
133,501 | 315 | 0.96 | % | 130,300 | 405 | 1.26 | % | ||||||||||||||||
Time deposits
|
379,877 | 2,274 | 2.43 | % | 422,701 | 3,316 | 3.18 | % | ||||||||||||||||
Short-term borrowings
|
3,633 | 15 | 1.67 | % | 65,300 | 206 | 1.26 | % | ||||||||||||||||
Long-term debt
|
154,970 | 1,371 | 3.59 | % | 147,259 | 1,412 | 3.84 | % | ||||||||||||||||
Total interest-bearing liabilities
|
822,412 | 4,735 | 2.33 | % | 862,401 | 5,964 | 2.80 | % | ||||||||||||||||
Non-interest bearing deposits
|
59,085 | 55,206 | ||||||||||||||||||||||
Other liabilities
|
4,346 | 3,687 | ||||||||||||||||||||||
Total Liabilities
|
885,843 | 921,294 | ||||||||||||||||||||||
Stockholders' Equity
|
78,262 | 90,780 | ||||||||||||||||||||||
Total Liabilities & Stockholders' Equity
|
$ | 964,105 | $ | 1,012,074 | ||||||||||||||||||||
Net interest income
|
$ | 6,035 | $ | 7,461 | ||||||||||||||||||||
Interest rate spread
|
2.60 | % | 2.98 | % | ||||||||||||||||||||
Net interest-margin
|
2.82 | % * | 3.27 | % | ||||||||||||||||||||
Percentage of average interest-earning assets to average interest-bearing liabilities
|
110.38 | % | 111.43 | % |
*
|
Shown as a tax-adjusted yield
|
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VOLUME/RATE VARIANCE ANALYSIS
The following table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities for the three-month periods ended March 31, 2011 and 2010. The table distinguishes between (i) changes attributable to volume (changes in volume multiplied by the prior period’s rate), (ii) changes attributable to rate (changes in rate multiplied by the prior period’s volume), and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) has been allocated equally to both the changes attributable to volume and the changes attributable to rate.
Three Months Ended March 31,
|
||||||||||||
2011 vs. 2010
|
||||||||||||
(in Thousands) | ||||||||||||
Increase (Decrease) Due to
|
||||||||||||
Volume
|
Rate
|
Total
|
||||||||||
Interest Income
|
||||||||||||
Loan portfolio
|
(1,212 | ) | (1,194 | ) | (2,406 | ) | ||||||
Investment Securities
|
(98 | ) | (175 | ) | (273 | ) | ||||||
Fed funds and other interest-earning assets
|
23 | 1 | 24 | |||||||||
Total interest-earning assets
|
(1,287 | ) | (1,368 | ) | (2,655 | ) | ||||||
Interest Expense
|
||||||||||||
Interest-bearing NOW
|
314 | (179 | ) | 135 | ||||||||
Money market and savings
|
10 | (100 | ) | (90 | ) | |||||||
Time deposits
|
(291 | ) | (751 | ) | (1,042 | ) | ||||||
Short-term borrowings
|
(228 | ) | 37 | (191 | ) | |||||||
Long-term debt
|
72 | (113 | ) | (41 | ) | |||||||
Total interest-bearing liabilities
|
(123 | ) | (1,106 | ) | (1,229 | ) | ||||||
Net interest income
|
(1,164 | ) | (262 | ) | (1,426 | ) |
NONPERFORMING ASSETS
Our financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on loans, unless we place a loan on nonaccrual basis. We account for loans on a nonaccrual basis when we have serious doubts about the collectability of principal or interest. Generally, our policy is to place a loan on nonaccrual status when the loan becomes past due 90 days. We also place loans on nonaccrual status in cases where we are uncertain whether the borrower can satisfy the contractual terms of the loan agreement. Amounts received on nonaccrual loans generally are applied first to principal and then to interest only after all principal has been collected.
- 40 -
The table below sets forth, for the periods indicated, information about our nonaccrual loans, restructured loans, total nonperforming loans, and total nonperforming assets.
- 41 -
The table below summarizes our nonperforming loan portfolio by region. The Company considers our total footprint to be comprised of three primary regions: the Triangle region which encompasses our Wake and Johnston county offices, the Sandhills region which encompasses our Lee and Moore county offices and the Wilmington region.
Nonperforming Loans by Region
As of March 31, 2011
|
||||||||||||||||
Nonperforming
|
||||||||||||||||
% of Total
|
Loans to
|
|||||||||||||||
Loans
|
Loans
|
Nonperforming
|
Loans
|
|||||||||||||
Outstanding
|
Outstanding
|
Loans
|
Outstanding
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Triangle Region
|
$ | 376,293 | 57.59 | % | $ | 23,062 | 6.13 | % | ||||||||
Sandhills Region
|
104,833 | 16.04 | % | 7,644 | 7.29 | % | ||||||||||
Wilmington Region
|
172,324 | 26.37 | % | 15,964 | 9.26 | % | ||||||||||
Total allowance
|
$ | 653,450 | 100.00 | % | $ | 46,670 | 7.15 | % |
Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal have been granted due to the borrower’s weakened financial condition. We accrue interest on restructured loans at the restructured rates when we anticipate that no loss of original principal will occur. The Company will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. All TDRs are considered to be impaired and are evaluated as such in the quarterly allowance calculation. As of March 31, 2011, the allowance for loan losses allocated to TDRs totaled $2.9 million.
The table below summarizes performing restructured loans, which are classified as impaired for purposes of the loan loss allowance calculation.
At March 31,
|
At December 31,
|
|||||||||||||||
2011
|
2010
|
2010
|
2009
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Performing restructured loans:
|
||||||||||||||||
Construction and A&D
|
$ | 1,593 | $ | - | $ | 4,896 | $ | 1,097 | ||||||||
Commercial real estate
|
2,727 | 5,879 | 2,257 | 6,286 | ||||||||||||
Residential mortgage
|
1,372 | 4,654 | 1,383 | 5,935 | ||||||||||||
Home equity lines and loans
|
- | - | - | - | ||||||||||||
Commercial and industrial
|
63 | 152 | 64 | 372 | ||||||||||||
Consumer
|
- | - | - | - | ||||||||||||
Total performing restructured loans
|
$ | 5,755 | $ | 10,685 | $ | 8,600 | $ | 13,691 |
- 42 -
Potential problem loans are loans which are currently performing and are not included as nonaccrual or restructured loans above, but about which we have serious doubts as to the borrower’s ability to comply with present repayment terms. These loans are likely to be included later in nonaccrual, past due or restructured loans, so they are considered by our management in assessing the adequacy of our allowance for loan losses. At March 31, 2011, we identified twenty-seven loans totaling $9.9 million as potential problems loans. Of the $9.9 million in potential problem loans, six loans totaling $6.4 million are concentrated in the residential construction, land acquisition and development sectors, three loans totaling $1.0 million are residential first trust mortgages and three loans totaling $911,000 are commercial real estate mortgages. There were thirty foreclosed properties valued at a total of $12.2 million, thirty-seven boat slips valued at $2.0 million and ninety-five nonaccrual loans totaling $46.7 million. Foreclosed property is valued at fair value at the date of foreclosure or acquisition. Interest foregone on nonaccrual and charged-off loans for the three-month period ended March 31, 2011 was $945,000.
At March 31, 2010, we identified twenty-four loans totaling $7.5 million as potential problems loans. Of the $7.5 million in potential problem loans, eleven loans totaling $3.9 million are concentrated in the residential construction, land acquisition and development sectors and two loans totaling $2.0 million are commercial real estate. There were thirty-four foreclosed properties valued at a total of $8.1 million and eighty-seven nonaccrual loans totaling $29.4 million. Foreclosed property is valued at fair value at the date of foreclosure or acquisition. Interest foregone on nonaccrual and charged-off loans for the three-month period ended March 31, 2010 was $686,000
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through periodic charges to earnings in the form of a provision for loan losses. Increases to the allowance for loan losses occur as a result of provisions charged to operations and recoveries of amounts previously charged-off, and decreases to the allowance occur when loans are charged-off. Management evaluates the adequacy of our allowance for loan losses on a monthly basis. The evaluation of the adequacy of the allowance for loan losses involves the consideration of loan growth, loan portfolio composition and industry diversification, historical loan loss experience, current delinquency levels, adverse conditions that might affect a borrower’s ability to repay the loan, estimated value of underlying collateral, prevailing economic conditions and all other relevant factors derived from our history of operations. Additionally, as an important component of their periodic examination process, regulatory agencies review our allowance for loan losses and may require additional provisions for estimated losses based on judgments that differ from those of management.
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. The internal grading system is reviewed and tested periodically by an independent third party credit review firm. The testing process involves the evaluation of a sample of new loans, loans having been identified as possessing potential weakness in credit quality, past due loans and nonaccrual loans to determine the ongoing effectiveness of the internal grading system. The loan grading system is used to assess the adequacy of the allowance for loan losses.
Management has developed a model for evaluating the adequacy of the allowance for loan losses. The model uses the Company’s internal loan grading system to segment each category of loans by risk class. The Company’s internal grading system is comprised of nine different risk classifications. Loans possessing a risk class of 1 through 6 demonstrate various degrees of risk, but each is considered to have the capacity to perform in accordance with the terms of the loan. Loans possessing a risk class of 7 to 9 are generally considered impaired and are individually evaluated for impairment.
- 43 -
The predetermined allowance percentages to be applied to loans possessing risk grade 1 through 6 are determined by using the historical charge-off percentages and adding management’s qualitative factors. For each individual loan type, we calculate the average historical charge-off percentage over a five year period. The current year charge-offs are annualized and included as one of the five years under consideration. The resulting averages represent a charge-off in a more normalized environment. To those averages, management adds qualitative factors which are more a reflection of current economic conditions and trends. Together, these two components comprise the reserve. Those loans moving into risk grade 7 for reasons other than a TDR, which will continue to accrue interest, are not evaluated individually. These loans are reserved for using an allowance percentage that represents the amount of historical charge-offs on loans moving into risk grade 7 or higher. For risk grade 6 loans that are either unsecured or secured by a General Security Agreement on business assets, we reserve 25% of the outstanding balance. If that loan migrates to a risk grade 7, we reserve 50% of the outstanding loan balance.
Those loans that are identified through the Company’s internal loan grading system as impaired are evaluated individually. When management believes a real estate collateral-supported loan will move from a risk grade 6 to a risk grade 7, a new appraisal is ordered. Each loan is analyzed to determine the net value of collateral and an estimate of potential loss. The net value of collateral per our analysis is determined using various subjective discounts, selling expenses and a review of the assumptions used to generate the current appraisal. If the analysis of a real estate collateral-supported loan results in an estimated loss, a specific reserve is recorded. TDRs and nonaccrual loans with risk grade 7 and 8 are re-evaluated periodically to determine the adequacy of specific reserves. Appraised values on real estate collateral are subject to constant change and management makes certain assumptions about how the age of an appraisal impacts current value.
When an impaired loan is determined to be collateral dependent and the borrower or guarantors no longer demonstrate the ability or willingness to service the debt, the loan is written down to its appraised value. As the net value determined through the analysis process is typically lower than the appraised value, a loan determined to be collateral-dependent would continue to have a specific reserve even after the partial charge-off.
Using the data gathered during the monthly evaluation process, the model calculates an acceptable range for the allowance for loan losses. Management and the Board of Directors are responsible for determining the appropriate level of the allowance for loan losses within that range.
The provision for the first quarter of 2011 was primarily the result of credit quality deterioration due to current economic conditions in our markets. The sectors of the loan portfolio being impacted most by the economic climate are residential construction, and land acquisition and development. Other factors influencing the provision include net loan charge-offs. For the three-month period ended March 31, 2011, net loan charge-offs were $4.2 million compared with $2.6 million for the prior year three-month period and non-accrual loans were $46.7 million and $29.4 million at March 31, 2011 and 2010, respectively. The allowance for loan losses at March 31, 2011 was $23.5 million, which represents 3.60% of total loans held for investment compared to $16.8 million or 2.26% as of March 31, 2010.
- 44 -
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. While management believes the methodology used to establish the allowance for loan losses incorporates the best information available at the time, future adjustments to the level of the allowance may be necessary and the results of operations could be adversely affected should circumstances differ substantially from the assumptions initially used. We believe that the allowance for loan losses was established in conformity with generally accepted accounting principles; however, there can be no assurances that the regulatory agencies, after reviewing the loan portfolio, will not require management to increase the level of the allowance. Likewise, there can be no assurance that the existing allowance for loan losses is adequate should there be deterioration in the quality of any loans or changes in any of the factors discussed above. Any increases in the provision for loan losses resulting from such deterioration or change in condition could adversely affect our financial condition and results of operations.
The following table describes the allocation of the allowance for loan losses among various categories of loans for the dates indicated:
Allocation of Allowance for Loan Losses
At March 31,
|
At December 31,
|
|||||||||||||||
2011
|
2010
|
|||||||||||||||
% of Total
|
% of Total
|
|||||||||||||||
Amount
|
Loans (1)
|
Amount
|
Loans (1)
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Residential real estate loans
|
$ | 1,614 | 12.56 | % | $ | 1,360 | 12.05 | % | ||||||||
Home equity loans and lines
|
2,751 | 8.41 | % | 1,453 | 8.43 | % | ||||||||||
Commercial real estate loans
|
7,263 | 51.42 | % | 5,345 | 51.06 | % | ||||||||||
Construction loans
|
9,077 | 20.36 | % | 9,775 | 20.79 | % | ||||||||||
Commercial and industrial loans
|
2,709 | 6.69 | % | 2,689 | 7.10 | % | ||||||||||
Loans to individuals
|
71 | 0.56 | % | 80 | 0.57 | % | ||||||||||
Total allowance
|
$ | 23,485 | 100.00 | % | $ | 20,702 | 100.00 | % |
(1) Represents total of all outstanding loans in each category as a percent of total loans outstanding.
- 45 -
The following table presents information regarding changes in the allowance for loan losses for the periods indicated:
Changes in Allowance for Loan Losses
For the Three-Month Period Ended March 31,
|
||||||||
2011
|
2010
|
|||||||
(Dollars in thousands)
|
||||||||
Balance at the beginning of the year
|
$ | 20,702 | $ | 17,567 | ||||
Charge-offs:
|
||||||||
Commercial and industrial loans
|
269 | 67 | ||||||
Commercial real estate loans
|
216 | 1,026 | ||||||
Construction, acquisition and development
|
3,761 | 1,425 | ||||||
Residential mortgage loans
|
227 | 29 | ||||||
Home equity lines and loans
|
112 | 112 | ||||||
Consumer loans
|
14 | 8 | ||||||
Total charge-offs
|
4,599 | 2,667 | ||||||
Recoveries
|
||||||||
Commercial and industrial loans
|
36 | 105 | ||||||
Commercial real estate
|
- | - | ||||||
Construction, acquisition and development
|
312 | - | ||||||
Residential mortgage loans
|
2 | - | ||||||
Home equity lines and loans
|
8 | 1 | ||||||
Consumer loans
|
- | - | ||||||
Total recoveries
|
358 | 106 | ||||||
Net charge-offs
|
4,241 | 2,561 | ||||||
Provision for loan losses
|
7,024 | 1,801 | ||||||
Balance at the end of the period
|
$ | 23,485 | $ | 16,807 | ||||
Total loans held for investment outstanding at period-end
|
$ | 652,783 | $ | 744,484 | ||||
Average loans held for investment outstanding for the period
|
$ | 666,448 | $ | 752,131 | ||||
Allowance for loan losses to total loans outstanding
|
3.60 | % | 2.26 | % | ||||
Annualized ratio of net charge-offs to average loans held for investment outstanding
|
2.57 | % | 1.38 | % |
- 46 -
LIQUIDITY AND CAPITAL RESOURCES
Maintaining adequate liquidity while managing interest rate risk is the primary goal of the Company’s asset and liability management strategy. Liquidity is the ability to fund the needs of the Company’s borrowers and depositors, pay operating expenses, and meet regulatory liquidity requirements. Maturing investments, loan and mortgage-backed security principal repayments, deposit growth, brokered time deposits and borrowings from the Federal Home Loan Bank, Federal Reserve Bank and other correspondent banks are presently the main sources of the Company’s liquidity. The Company’s primary uses of liquidity are to fund loans and to make investments.
As of March 31, 2011, liquid assets (cash and due from banks, interest-earning deposits with banks, fed funds sold and investment securities available for sale) were approximately $264.9 million, which represents 28% of total assets and 37% of total deposits. Supplementing this liquidity, the Company has available lines of credit from various correspondent banks of approximately $343.3 million of which $142.0 million is outstanding. At March 31, 2011, the Company had outstanding commitments for undisbursed lines of credit and letters of credit amounted to approximately $127.9 million, a $2.2 million commitment to purchase securities in early April and a $363,000 commitment for further investment in a Small Business Investment Corporation. Management intends to fund anticipated loan closings and operational needs through cash and cash equivalents on hand, brokered deposits, scheduled principal repayments from the loan and securities portfolios, and anticipated increases in deposits and borrowings. Certificates of deposit represented 52% of the Company’s total deposits at both March 31, 2011 and December 31, 2010. The Company’s growth strategy will include marketing efforts focused at increasing the relative volume of transaction deposit accounts; however, time deposits will continue to play an important role in the Company’s funding strategy. Certificates of deposit of $100,000 or more represented 40% and 42% of the Company’s total deposits at March 31, 2011 and December 31, 2010, respectively. While these deposits are generally considered rate sensitive and the Company will need to pay competitive rates to retain these deposits at maturity, there are other subjective factors that will determine the Company’s continued retention of those deposits.
Under federal capital regulations, Crescent Financial Corporation must satisfy certain minimum leverage ratio requirements and risk-based capital requirements. At March 31, 2011, the Company’s equity to asset ratio is 7.47%. The Company’s ratios of Tier 1 capital to risk-weighted assets and total capital to risk-based assets are 9.74% and 12.01%, respectively. The bank subsidiary is required to maintain capital adequacy ratios. Crescent State Bank has Tier I capital to risk-weighted assets and total capital to risk-based assets ratios of 9.44% and 11.72%, respectively.
On February 23, 2011, the Company and Piedmont Community Bank Holdings, Inc. (“Piedmont”), entered into a definitive agreement pursuant to which Piedmont will invest $75 million in the Company in exchange for Company common stock priced at $4 per share. As a result of the investment, Piedmont will own approximately 66 percent of Company shares on a fully diluted basis.
In addition, the agreement provides for Piedmont to make a tender offer to the Company's existing shareholders to purchase up to 67 percent (6,442,105 shares) of currently outstanding Company common stock at a price of $4.75 per share. If the maximum number of shares is tendered, Piedmont will pay approximately $30.6 million for all such shares, and Piedmont would then own a total of approximately 89 percent of all outstanding common Company shares.
Adam Abram, chairman of Piedmont, will be named chairman of Crescent Financial Corporation, and Scott Custer, president and chief executive officer of Piedmont, will become chief executive officer of Crescent Financial Corporation, upon closing of the transaction. Michael G. Carlton will continue to serve in his role as president of Crescent Financial Corporation and president and chief executive officer of Crescent State Bank.
- 47 -
The board of directors of Crescent Financial Corporation will be restructured to include eight designees of Piedmont, including Mr. Abram and Mr. Custer, as well as four continuing Company directors, including Messrs. Carlton, James A. Lucas Jr., Charles A. Paul III and Brent D. Barringer. These four existing Company directors will also be appointed to the board of directors of Piedmont.
Completion of the transaction is conditioned upon, among other things, the approval of the shareholders of Crescent Financial Corporation, as well as the North Carolina Commissioner of Banks and the Federal Reserve. As of the date of this filing, an application for approval has been filed with the appropriate regulatory authorities and the special meeting of shareholders proxy statement has been mailed to the shareholders. The parties anticipate that the transaction will be consummated in the third quarter of this year.
IMPACT OF INFLATION AND CHANGING PRICES
A commercial bank has an asset and liability composition that is distinctly different from that of a company with substantial investments in plant and inventory because the major portions of its assets are monetary in nature. As a result, a bank’s performance may be significantly influenced by changes in interest rates. Although the banking industry is more affected by changes in interest rates than by inflation in the prices of goods and services, inflation is a factor that may influence interest rates. However, the frequency and magnitude of interest rate fluctuations do not necessarily coincide with changes in the general inflation rate. Inflation does affect operating expenses in that personnel expenses and the cost of supplies and outside services tend to increase more during periods of high inflation.
FORWARD-LOOKING INFORMATION
This quarterly report to stockholders may contain, in addition to historical information, certain “forward-looking statements” that represent management’s judgment concerning the future and are subject to risks and uncertainties that could cause the Company’s actual operating results and financial position to differ materially from those projected in the forward-looking statements. Such forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate” or “continue” or the negative thereof or other variations thereof or comparable terminology. Factors that could influence the estimates include changes in national, regional and local market conditions, legislative and regulatory conditions, and the interest rate environment.
- 48 -
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company’s primary market risk is interest rate risk. Interest rate risk is the result of differing maturities or repricing intervals of interest earning assets and interest bearing liabilities and the fact that rates on these financial instruments do not change uniformly. These conditions may impact the earnings generated by the Company’s interest earning assets or the cost of its interest bearing liabilities, thus directly impacting the Company’s overall earnings. The Company’s management actively monitors and manages interest rate risk. One way this is accomplished is through the development of and adherence to the Company’s asset/liability policy. This policy sets forth management’s strategy for matching the risk characteristics of the Company’s interest earning assets and liabilities so as to mitigate the effect of changes in the rate environment. The Company’s market risk profile has not changed significantly since December 31, 2010.
Item 4. Controls and Procedures
Crescent Financial Corporation’s management, with the participation of the Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2011. Based on that evaluation, the Company’s Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective, as of March 31, 2011, to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
The Company assesses the adequacy of its internal control over financial reporting quarterly and enhances its controls in response to internal control assessments and internal and external audit and regulatory recommendations. During the first quarter of 2011, the Company enhanced and strengthened certain internal controls and processes concerning the accumulation of information used to document the adequacy of the allowance for loan losses. These new processes will provide for better communication, timing and supporting documentation of management’s estimates. As part of the changes in these processes, there were improvements in the related system of internal controls that enhanced the effectiveness of the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes to ensure that the Company’s systems evolve with its business.
- 49 -
Part II.
|
OTHER INFORMATION
|
Item 1.
|
Legal Proceedings.
|
None that are material.
Item 1a.
|
Risk Factors.
|
Not Applicable.
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds.
|
None.
Item 3.
|
Defaults Upon Senior Debt.
|
None.
Item 4.
|
(Removed and Reserved)
|
Item 5.
|
Other Information.
|
None.
Item 6.
|
Exhibits
|
(a) Exhibits.
31.1
|
Certification of Principal Executive Officer pursuant to Rule 13a – 14(a)
|
|
31.2
|
Certification of Principal Financial Officer pursuant to Rule 13a – 14(a)
|
|
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32.2
|
|
Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
- 50 -
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CRESCENT FINANCIAL CORPORATION
|
||
Date: May 12, 2011
|
By:
|
/s/ Michael G. Carlton
|
Michael G. Carlton
|
||
President and Chief Executive Officer
|
||
Date: May 12, 2011
|
By:
|
/s/ Bruce W. Elder
|
Bruce W. Elder
|
||
Principal Financial Officer
|
- 51 -