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EXCEL - IDEA: XBRL DOCUMENT - VANTAGESOUTH BANCSHARES, INC. | Financial_Report.xls |
EX-31.1 - EXHIBIT 31.1 - VANTAGESOUTH BANCSHARES, INC. | v311164_ex31-1.htm |
EX-32.2 - EXHIBIT 32.2 - VANTAGESOUTH BANCSHARES, INC. | v311164_ex32-2.htm |
EX-31.2 - EXHIBIT 31.2 - VANTAGESOUTH BANCSHARES, INC. | v311164_ex31-2.htm |
EX-32.1 - EXHIBIT 32.1 - VANTAGESOUTH BANCSHARES, INC. | v311164_ex32-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2012
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO |
Commission File Number 000-32951
CRESCENT FINANCIAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 45-2915089 | |
(State or other jurisdiction of Incorporation | (IRS Employer Identification Number) | |
or organization) |
3600 Glenwood Avenue, Suite 300, Raleigh, North Carolina 27612
(Address of principal executive offices)
(Zip Code)
(919) 659-9000
(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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer ¨ | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
Common Stock, $0.001 par value 28,385,308 shares outstanding as of May 14, 2012.
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
TABLE OF CONTENTS |
Page No. | ||
Part I. | FINANCIAL INFORMATION | |
Item 1 - | Financial Statements (Unaudited) | |
Consolidated Balance Sheets | ||
March 31, 2012 and December 31, 2011 | 3 | |
Consolidated Statements of Operations | ||
Three Months Ended March 31, 2012 (Successor) and | ||
March 31, 2011 (Predecessor) | 4 | |
Consolidated Statements of Comprehensive Income (Loss) | ||
Three Months Ended March 31, 2012 (Successor) and | ||
March 31, 2011 (Predecessor) | 5 | |
Consolidated Statement of Changes in Stockholders’ Equity | ||
Three Months Ended March 31, 2012 (Successor) | 6 | |
Consolidated Statements of Cash Flows | ||
Three Months Ended March 31, 2012 (Successor) and | ||
March 31, 2011 (Predecessor) | 7 | |
Notes to Consolidated Financial Statements | 8 - 30 | |
Item 2 - | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 31 - 44 |
Item 3 - | Quantitative and Qualitative Disclosures about Market Risk | 44 |
Item 4 - | Controls and Procedures | 44 |
Part II. | Other Information | |
Item 1 - | Legal Proceedings | 45 |
Item 1a - | Risk Factors | 45 |
Item 2 - | Unregistered Sales of Equity Securities and Use of Proceeds | 45 |
Item 3 - | Defaults Upon Senior Debt | 45 |
Item 4 - | Mine Safety Disclosures | 45 |
Item 5 - | Other Information | 45 |
Item 6 - | Exhibits | 45 |
- 2 - |
Part I. Financial Information
Item 1 - Financial Statements
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
CONSOLIDATED BALANCE SHEETS (Unaudited) |
March 31, | December 31, | |||||||
2012 | 2011* | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 12,026,525 | $ | 8,843,873 | ||||
Interest-earning deposits with banks | 2,120,251 | 1,773,064 | ||||||
Federal funds sold | 42,925,000 | 14,745,000 | ||||||
Investment securities available for sale, at fair value | 144,943,234 | 143,503,848 | ||||||
Mortgage loans held for sale | 3,317,166 | 3,841,412 | ||||||
Loans held for investment | 515,761,462 | 552,877,060 | ||||||
Allowance for loan losses | (737,000 | ) | (227,000 | ) | ||||
NET LOANS HELD FOR INVESTMENT | 515,024,462 | 552,650,060 | ||||||
Federal Home Loan Bank stock, at cost | 8,669,300 | 8,669,300 | ||||||
Premises and equipment, net | 10,619,240 | 10,285,794 | ||||||
Investment in life insurance | 19,441,727 | 19,261,443 | ||||||
Foreclosed assets | 5,496,743 | 9,422,056 | ||||||
Deferred tax asset, net | 29,691,329 | 30,190,593 | ||||||
Goodwill | 21,816,342 | 20,015,194 | ||||||
Other intangibles, net | 2,165,118 | 2,229,747 | ||||||
Other assets | 7,371,445 | 9,071,796 | ||||||
TOTAL ASSETS | $ | 825,627,882 | $ | 834,503,180 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Deposits: | ||||||||
Demand | $ | 75,320,025 | $ | 91,215,170 | ||||
Savings | 42,613,110 | 46,840,021 | ||||||
Money market and NOW | 251,433,203 | 226,583,947 | ||||||
Time | 289,462,363 | 309,779,448 | ||||||
TOTAL DEPOSITS | 658,828,701 | 674,418,586 | ||||||
Short-term borrowings | 5,000,000 | - | ||||||
Long-term debt | 12,251,659 | 12,215,901 | ||||||
Accrued expenses and other liabilities | 4,930,503 | 4,809,240 | ||||||
TOTAL LIABILITIES | 681,010,863 | 691,443,727 | ||||||
Commitments (Note C) | ||||||||
Stockholders’ Equity | ||||||||
Preferred stock, no par value, 5,000,000 shares authorized, 24,900 shares issued and outstanding at both March 31, 2012 and December 31, 2011 | 24,489,170 | 24,442,303 | ||||||
Common stock, $0.001 par value, 75,000,000 shares authorized; 28,385,308 and 28,412,059 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively | 28,385 | 28,412 | ||||||
Common stock warrant | 1,325,372 | 1,325,372 | ||||||
Additional paid-in capital | 117,444,567 | 117,434,029 | ||||||
Retained earnings (accumulated deficit) | 479,153 | (181,555 | ) | |||||
Accumulated other comprehensive income | 850,372 | 10,892 | ||||||
TOTAL STOCKHOLDERS’ EQUITY | 144,617,019 | 143,059,453 | ||||||
TOTAL LIABILITIES AND | ||||||||
STOCKHOLDERS’ EQUITY | $ | 825,627,882 | $ | 834,503,180 |
* | Derived from audited consolidated financial statements. |
See accompanying notes.
- 3 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) |
Three Month Periods Ended March 31, 2012 (Successor) and March 31, 2011 (Predecessor) |
Successor | Predecessor | |||||||
Company | Company | |||||||
2012 | 2011 | |||||||
INTEREST INCOME | ||||||||
Loans | $ | 8,334,790 | $ | 9,077,943 | ||||
Investment securities available for sale | 963,492 | 1,662,690 | ||||||
Federal funds sold and interest-earning deposits | 12,047 | 29,092 | ||||||
TOTAL INTEREST INCOME | 9,310,329 | 10,769,725 | ||||||
INTEREST EXPENSE | ||||||||
Deposits | 1,124,470 | 3,348,840 | ||||||
Short-term borrowings | 1,604 | 15,359 | ||||||
Long-term debt | 276,160 | 1,370,647 | ||||||
TOTAL INTEREST EXPENSE | 1,402,234 | 4,734,846 | ||||||
NET INTEREST INCOME | 7,908,095 | 6,034,879 | ||||||
PROVISION FOR LOAN LOSSES | 804,000 | 7,023,511 | ||||||
NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES | 7,104,095 | (988,632 | ) | |||||
NON-INTEREST INCOME | ||||||||
Mortgage origination revenue | 68,500 | 74,970 | ||||||
Gain on sale of mortgage loans | 587,439 | 91,455 | ||||||
Service charges and fees on deposit accounts | 447,182 | 447,049 | ||||||
Earnings on life insurance | 203,758 | 212,717 | ||||||
Gain on sale of available for sale securities | 192,192 | 100,631 | ||||||
Other | 149,796 | 115,421 | ||||||
TOTAL NON-INTEREST INCOME | 1,648,867 | 1,042,243 | ||||||
NON-INTEREST EXPENSE | ||||||||
Salaries and employee benefits | 3,822,127 | 3,347,288 | ||||||
Occupancy and equipment | 971,163 | 1,012,039 | ||||||
Data processing | 518,671 | 420,297 | ||||||
FDIC insurance premiums | 344,541 | 448,985 | ||||||
Net (gain) loss on foreclosed assets | (58,414 | ) | 158,876 | |||||
Other loan related expense | 496,033 | 492,239 | ||||||
Professional services | 763,290 | 543,980 | ||||||
Other | 834,176 | 676,551 | ||||||
TOTAL NON-INTEREST EXPENSE | 7,691,587 | 7,100,255 | ||||||
INCOME (LOSS) BEFORE INCOME TAXES | 1,061,375 | (7,046,644 | ) | |||||
INCOME TAX EXPENSE | 353,800 | - | ||||||
NET INCOME (LOSS) | 707,575 | (7,046,644 | ) | |||||
Effective dividend on preferred stock (Note I) | 383,596 | 427,434 | ||||||
Net income available (loss attributed) to common stockholders | $ | 323,979 | $ | (7,474,078 | ) | |||
NET INCOME (LOSS) PER COMMON SHARE | ||||||||
Basic | $ | 0.01 | $ | (0.78 | ) | |||
Diluted | $ | 0.01 | $ | (0.78 | ) | |||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note D) | ||||||||
Basic | 28,360,196 | 9,581,390 | ||||||
Diluted | 28,385,439 | 9,581,390 |
See accompanying notes.
- 4 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) |
Three Month Periods Ended March 31, 2012 (Successor) and March 31, 2011 (Predecessor) |
Successor | Predecessor | |||||||
Company | Company | |||||||
2012 | 2011 | |||||||
NET INCOME (LOSS) | $ | 707,575 | $ | (7,046,644 | ) | |||
Other comprehensive income (loss): | ||||||||
Securities available for sale: | ||||||||
Unrealized holding gain (loss) on available for sale securities | 1,173,927 | (724,878 | ) | |||||
Tax effect | (452,549 | ) | 279,441 | |||||
Reclassification of gains recognized in net income | 192,192 | 100,631 | ||||||
Tax effect | (74,090 | ) | (38,793 | ) | ||||
Net of tax amount | 839,480 | (383,599 | ) | |||||
Cash flow hedging activities: | ||||||||
Unrealized holding gain (loss) on cash flow hedging activities | - | 80,049 | ||||||
Tax effect | - | (30,859 | ) | |||||
Net of tax amount | - | 49,190 | ||||||
Total other comprehensive income (loss) | 839,480 | (334,409 | ) | |||||
Comprehensive INCOME (LOSS) | $ | 1,547,055 | $ | (7,381,053 | ) |
See accompanying notes.
- 5 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited) |
Retained | Accumulated | |||||||||||||||||||||||||||||||||||
Common | Additional | earnings/ | other | Total | ||||||||||||||||||||||||||||||||
Preferred stock | Common stock | stock | paid-in | accumulated | comprehensive | stockholders’ | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | warrants | capital | deficit | income | equity | ||||||||||||||||||||||||||||
Balance at December 31, 2011 | 24,900 | $ | 24,442,303 | 28,412,060 | $ | 28,412 | $ | 1,325,372 | $ | 117,434,029 | $ | (181,555 | ) | $ | 10,892 | $ | 143,059,453 | |||||||||||||||||||
Net income | - | - | - | - | - | - | 707,575 | - | 707,575 | |||||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | - | 839,480 | 839,480 | |||||||||||||||||||||||||||
Expense recognized in connection with stock options and restricted stock | - | - | - | - | - | 10,511 | - | - | 10,511 | |||||||||||||||||||||||||||
Restricted stock, forfeited | - | - | (26,752 | ) | (27 | ) | - | 27 | - | - | - | |||||||||||||||||||||||||
Accretion of discount on preferred stock | - | 46,867 | - | - | - | - | (46,867 | ) | - | - | ||||||||||||||||||||||||||
Preferred stock dividend | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Balance at March 31, 2012 | 24,900 | $ | 24,489,170 | 28,385,308 | $ | 28,385 | $ | 1,325,372 | $ | 117,444,567 | $ | 479,153 | $ | 850,372 | $ | 144,617,019 |
See accompanying notes.
- 6 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
Three Months Ended March 31, 2012 (Successor) and March 31, 2011 (Predecessor) |
Successor | Predecessor | |||||||
Company | Company | |||||||
2012 | 2011 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income (loss) | $ | 707,575 | $ | (7,046,644 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation | 234,956 | 251,800 | ||||||
Stock based compensation | 10,511 | 34,506 | ||||||
Provision for loan losses | 804,000 | 7,023,511 | ||||||
Accretion of purchased loans | (3,493,095 | ) | - | |||||
Amortization of core deposit premium | 64,629 | 33,337 | ||||||
Amortization of premium on time deposits | (894,811 | ) | - | |||||
Accretion of trust preferred securities | 14,345 | - | ||||||
Accretion of discount on long-term debt | 21,413 | - | ||||||
Gain on mortgage loan commitments | (234,140 | ) | (6,334 | ) | ||||
Net gain on sales of mortgage loans | (353,298 | ) | (85,120 | ) | ||||
Originations of mortgage loans held-for-sale | (24,756,649 | ) | (11,843,128 | ) | ||||
Proceeds from sales of mortgage loans | 25,634,193 | 16,812,766 | ||||||
Net increase in cash surrender value of life insurance | (180,284 | ) | (194,142 | ) | ||||
Deferred income taxes | 128,600 | (31,529 | ) | |||||
Gain on sale of available for sale securities | (192,192 | ) | (100,631 | ) | ||||
Net amortization of premiums/discounts on securities | 95,756 | 494,751 | ||||||
Net (gain)/ loss on disposal of and valuation adjustments to foreclosed assets | (85,289 | ) | 158,876 | |||||
Increase in interest rate swaps | 56,189 | - | ||||||
Change in assets and liabilities: | ||||||||
(Increase)/ decrease in accrued interest receivable | (662,859 | ) | 609,814 | |||||
(Increase)/ decrease in other assets | 1,528,936 | 3,294,345 | ||||||
Increase/ (decrease) in accrued interest payable | 40,740 | (24,567 | ) | |||||
Increase in accrued expenses and other liabilities | (1,090,035 | ) | 138,215 | |||||
TOTAL ADJUSTMENTS | (3,308,384 | ) | 16,629,528 | |||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | (2,600,809 | ) | 9,582,884 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of investment securities available for sale | (10,388,344 | ) | (35,078,914 | ) | ||||
Proceeds from maturities and principal repayments of securities available for sale | 3,413,388 | 7,534,704 | ||||||
Proceeds from sale of securities available for sale | 6,998,125 | 20,445,655 | ||||||
Proceeds from disposal of foreclosed assets | 4,508,473 | 1,618,919 | ||||||
Loan originations and principal collections, net | 25,671,032 | 17,461,008 | ||||||
Proceeds from sale of loans | 14,809,075 | 1,950,000 | ||||||
Purchases of premises and equipment | (568,402 | ) | (59,641 | ) | ||||
NET CASH PROVIDED BY INVESTING ACTIVITIES | 44,443,347 | 13,871,731 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Net increase (decrease) in deposits: | ||||||||
Demand | (15,895,145 | ) | (2,783,237 | ) | ||||
Savings | (4,226,911 | ) | (7,495,661 | ) | ||||
Money market and NOW | 24,849,256 | 9,683,021 | ||||||
Time deposits | (19,859,899 | ) | 1,417,749 | |||||
Net increase/ (decrease) in short-term borrowings | 5,000,000 | (2,000,000 | ) | |||||
Net increase/ (decrease) in long-term debt | - | (5,000,000 | ) | |||||
Dividends paid on preferred stock | - | - | ||||||
NET CASH USED BY FINANCING ACTIVITIES | (10,132,699 | ) | (6,178,128 | ) | ||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 31,709,839 | 17,276,487 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 25,361,937 | 49,106,179 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 57,071,776 | $ | 66,382,666 |
See accompanying notes.
- 7 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the accounts of Crescent Financial Bancshares, Inc. (the “Company”) and its wholly-owned subsidiary, Crescent State Bank (the “Bank”). The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). They do not include all of the information and footnotes required by such accounting principles for complete financial statements, and therefore should be read in conjunction with the audited consolidated financial statements and accompanying footnotes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “Company’s 2011 Form 10-K”).
In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included, and all significant intercompany transactions have been eliminated in consolidation. Results of operations for the three month period ended March 31, 2012 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2012. The consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A description of the accounting policies followed by the Company are as set forth in Note B of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
Balances and activity in the Company’s consolidated financial statements prior to the Piedmont Investment have been labeled with “Predecessor Company” while balances and activity subsequent to the Piedmont Investment have been labeled with “Successor Company.”
NOTE B – PIEDMONT INVESTMENT
On November 18, 2011, the Company completed the issuance and sale to Piedmont Community Bank Holdings, Inc. (“Piedmont”) of 18,750,000 shares of common stock for $75.0 million in cash (the “Piedmont Investment”) pursuant to an Investment Agreement (the “Piedmont Investment Agreement”). As part of its investment, Piedmont also made a tender offer to the Company’s stockholders commencing on November 8, 2011 to purchase up to 67% (6,442,105 shares) of our outstanding common stock at a price of $4.75 per share (“Tender Offer”). Pursuant to the Tender Offer, Piedmont purchased 6,128,423 shares of the Company’s common stock for $29.1 million. As a result of the Piedmont Investment and the Tender Offer, Piedmont owns approximately 88% of the Company’s outstanding common stock.
In connection with the closing of the Piedmont Investment, the Company amended its Supplemental Executive Retirement Plan (“SERP”). The SERP was frozen as of April 30, 2011 with no additional liability accrued beyond that date. The full balance of the SERP liability was paid out in December 2011 in accordance with the provisions of the Piedmont Investment Agreement.
Staff Accounting Bulletin (“SAB”) Topic No. 5.J, Push Down Basis of Accounting Required in Certain Limited Circumstances, indicates that push-down accounting is required in purchase transactions that result in an entity becoming substantially wholly owned. In determining whether a company has become substantially wholly owned, SEC Staff guidance indicates that push-down accounting would be required if 95% or more of the company has been acquired, permitted if 80% to 95% has been acquired, and prohibited if less than 80% of the company is acquired. The Company determined push-down accounting to be appropriate due to Piedmont’s acquisition of 88% of the Company’s outstanding common stock in the Piedmont Investment and the Tender Offer.
- 8 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE B – PIEDMONT INVESTMENT (Continued)
The following table summarizes the Piedmont Investment and the Successor Company’s opening balance sheet:
Originally | Measurement | Adjusted | ||||||||||
Reported at | Period | Balances at | ||||||||||
November 18, 2011 | Adjustments | November 18, 2011 | ||||||||||
Fair value of assets acquired: | ||||||||||||
Cash and cash equivalents | $ | 226,126,051 | $ | - | $ | 226,126,051 | ||||||
Investment securities available for sale | 89,342,932 | - | 89,342,932 | |||||||||
Mortgage loans held for sale | 4,587,862 | - | 4,587,862 | |||||||||
Loans | 561,911,272 | - | 561,911,272 | |||||||||
Federal Home Loan Bank stock | 8,669,300 | - | 8,669,300 | |||||||||
Premises and equipment | 10,325,392 | - | 10,325,392 | |||||||||
Deferred tax asset, net | 30,267,925 | 155,976 | 30,423,901 | |||||||||
Investment in life insurance | 19,169,460 | - | 19,169,460 | |||||||||
Foreclosed assets | 10,584,003 | (405,131 | ) | 10,178,872 | ||||||||
Goodwill | 20,015,193 | 1,801,148 | 21,816,341 | |||||||||
Other intangibles | 2,260,262 | - | 2,260,262 | |||||||||
Other assets | 10,092,656 | - | 10,092,656 | |||||||||
Total assets acquired | 993,352,308 | 1,551,993 | 994,904,302 | |||||||||
Fair value of liabilities assumed: | ||||||||||||
Deposits | 678,289,539 | - | 678,289,539 | |||||||||
Borrowings | 164,801,131 | - | 164,801,131 | |||||||||
Other liabilities | 7,110,829 | 1,551,993 | 8,662,822 | |||||||||
Total liabilities assumed | 850,201,498 | 1,551,993 | 851,753,492 | |||||||||
Net assets | $ | 143,150,810 | $ | - | $ | 143,150,810 | ||||||
Non-controlling interests at fair value: | ||||||||||||
Preferred stock | 24,408,999 | - | 24,408,999 | |||||||||
Common stock warrant | 1,325,372 | - | 1,325,372 | |||||||||
Common stock | 42,416,439 | - | 42,416,439 | |||||||||
Total non-controlling interests | 68,150,810 | - | 68,150,810 | |||||||||
Purchase price | $ | 75,000,000 | $ | - | $ | 75,000,000 |
The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available to make estimates of fair value during the measurement period through March 31, 2012. The Company is currently within the one-year measurement period with respect to the acquisition date, and thus, material adjustments to these purchase accounting fair value adjustments are possible. In the first quarter of 2012, goodwill increased by $1.8 million as a result of adjustments to refine the Company’s acquisition date estimate of market rent on two branch leases as well as adjustments to refine the valuation of certain other real estate owned based on subsequent selling prices.
A summary and description of the assets, liabilities and non-controlling interests fair valued in conjunction with applying the acquisition method of accounting is as follows:
Cash and Cash Equivalents. Cash and cash equivalents, which include proceeds from the Piedmont Investment, held at acquisition date approximated fair value on that date and did not require a fair value adjustment.
- 9 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE B – PIEDMONT INVESTMENT (Continued)
Securities Available for Sale. Available for sale securities are reported at fair value at acquisition date. To account for the Piedmont Investment, the difference between the fair value and par value became the new premium or discount for each security in the investment portfolio. The fair value of investment securities is primarily based on values obtained from third party pricing models, which are based on recent trading activity for the same or similar securities. Two equity securities were valued at their respective stock market prices. Immediately prior to the acquisition, the investment securities portfolio had an amortized cost of $89.8 million and was in a net unrealized gain position of approximately $862,000.
Loans Held for Investment. All loans in the loan portfolio were adjusted to estimated fair value at the Piedmont Investment date. Upon analyzing estimated credit losses, expected cash flows were forecasted over the remaining life of each loan and discounted those expected cash flows to present value at current market interest rates for similar loans considering loan collateral type and credit quality. Based on this valuation, the Company recorded a loan fair value discount of approximately $43.4 million. In addition, the Company eliminated net deferred loan fees immediately prior to the acquisition of approximately $663,000.
Federal Home Loan Bank Stock. The Company’s investment in FHLB stock is carried at cost. Given the option to redeem this stock at par through the FHLB, the Company determined that cost approximated fair value at acquisition date and made no related adjustment.
Premises and Equipment. Premises and equipment were adjusted to estimated fair value at acquisition date based on recent appraisals for bank-owned land and buildings. The total fair value adjustment reduced the book value of these assets by approximately $540,000. At acquisition, accumulated depreciation was eliminated and estimated fair value became the cost basis of these assets.
Deferred Tax Asset. The net deferred tax asset is primarily related to the recognition of differences between certain tax and book bases of assets and liabilities related to purchase accounting at the Piedmont Investment, including fair value adjustments discussed elsewhere in this section, along with federal and state net operating losses that the Company determined to be realizable as of the acquisition date. A valuation allowance is recorded for deferred tax assets, including net operating losses, if the Company determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on its analysis, the Company determined that no valuation allowance was necessary at acquisition date. See Note K of Item 8 in the Company’s 2011 Form 10-K for further discussion of the Company’s valuation allowance analysis.
Investment in Life Insurance. Bank-owned life insurance investments are recorded at their cash surrender value, or the amount that can be realized upon surrender. Therefore, no fair value adjustments were made to this amount at acquisition date.
Foreclosed Assets. Foreclosed assets were adjusted to estimated fair value, which includes consideration of recent appraisals and the Company’s disposition strategy, at acquisition date.
Goodwill. Goodwill represents the excess of purchase price over the fair value of acquired net assets. This acquisition was nontaxable and, as a result, there is no tax basis in the goodwill. Accordingly, none of the goodwill associated with the acquisition is deductible for tax purposes.
Other Intangibles. The only separately identifiable intangible asset we recorded at acquisition date was related to the value of the Bank’s core customer deposit relationships, or core deposit intangible. This amount represents the present value of the difference between a market participant’s cost of obtaining alternative funds and the current cost to maintain the acquired core deposit base. The present value is calculated over the estimated life of the acquired core deposit base and will be amortized on an accelerated method over a ten-year period. Deposit accounts evaluated for the core deposit intangible were demand deposit accounts, money market accounts and savings accounts. Time deposits were not included in our evaluation of the core deposit intangible.
- 10 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE B – PIEDMONT INVESTMENT (Continued)
Deposits. Time deposits were not included in the core deposit intangible evaluation. Instead, a separate valuation of time deposits was conducted due to the contractual time frame associated with these liabilities. Time deposits evaluated for purchase accounting consisted of certificates of deposit (“CD’s”), brokered deposits and CD’s through the Certificate of Deposit Account Registry Services (“CDARS”). The fair value of these deposits was determined by first stratifying the deposit pool by maturity and calculating the contractual interest rates for each maturity period. Then contractual cash flows were projected by period and discounted to present value using current market interest rates for similar duration CD’s.
Outstanding balances of CDs totaled $196.5 million at acquisition date, and the estimated fair value premium totaled $4.4 million. The outstanding balance of brokered deposits was $115.0 million, and the estimated fair value premium totaled $1.6 million. The outstanding balance of CDARS was $15.5 million, and the estimated fair value premium totaled approximately $47,000. We will amortize these premiums into income as a reduction of interest expense on a level-yield basis over the weighted average time deposit terms.
Borrowings. Included in borrowings are FHLB advances as well as a subordinated term loan issued by the Bank and junior subordinated debentures issued in the form of trust preferred securities. Fair values for FHLB advances were determined by developing cash flow estimates for each advance based on scheduled principal and interest payments, contractual interest rates and prepayment penalties. Once the cash flows were determined, the current FHLB advance rate for similar maturity terms was used to discount the cash flows to the present value. The outstanding balance of FHLB advances at the acquisition date was $142.0 million, and the estimated fair value premium totaled $10.6 million. Acquired FHLB advances were repaid after the acquisition date prior to December 31, 2011.
Fair values for the trust preferred securities and subordinated term loan were estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments. Once the cash flows were determined, a market rate for comparable debt instruments was used to discount the cash flows to their present values. Outstanding trust preferred securities and subordinated debt at the acquisition date was $8.0 million and $7.5 million, respectively, and the estimated fair value discount on each totaled $2.8 million, and $731,000, respectively. The Company will accrete these discounts as an increase to interest expense on a level-yield basis over the contractual term of each debt instrument.
Non-controlling Interests. Non-controlling interests include preferred stock and common stock warrants issued pursuant to the U.S. Treasury’s Troubled Asset Relief Program capital purchase program (“TARP CPP”) as well as common stock owned at the acquisition date by legacy stockholders. Preferred stock issued under the TARP CPP was valued based on forecasting expected cash flows with an assumed repayment date and discounting these cash flows based on current market yields for similar preferred stock. The discount between the estimated fair value at acquisition date and the $24.9 million liquidation value will be accreted to retained earnings over the remaining period to anticipated repayment of these securities. The common stock warrant, also issued to the U.S. Treasury, was valued using a Black-Scholes option pricing model. See Note I – Cumulative Perpetual Preferred Stock for more details.
The fair value of non-controlling common stock was estimated using the closing stock market price on the acquisition date, which was $4.39 per share, and applying this stock price to the number of outstanding non-controlling common shares at that date.
There were no indemnification assets in this transaction, nor was there any contingent consideration to be recognized. Professional and other costs related to the Piedmont Investment were expensed as incurred.
- 11 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE C – COMMITMENTS
The following is a summary of the contract amount of the Company’s exposure to off-balance sheet commitments at March 31, 2012:
Undisbursed lines of credit | $ | 29,250,531 | ||
Commitments to extend credit | 71,391,474 | |||
Financial standby letters of credit | 3,839,976 | |||
Capital commitment to private investment fund | 175,000 |
NOTE D - 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 U.S. Treasury and are determined using the treasury stock method.
Three Months Ended | ||||||||
March 31 | ||||||||
Successor | Predecessor | |||||||
Company | Company | |||||||
2012 | 2011 | |||||||
Weighted average number of shares used in computing basic net income per share | 28,360,196 | 9,581,390 | ||||||
Effect of dilutive stock options | 25,243 | - | ||||||
Weighted average number of shares used in computing diluted net income per share | 28,385,439 | 9,581,390 |
For the three month period ended March 31, 2012, there were 241,484 options and the warrant for 833,705 shares that were anti-dilutive as the average stock price was below the exercise price. For the three month period ended March 31, 2011, there were 299,611 options and the warrant for 833,705 shares that were anti-dilutive primarily due to the net loss.
NOTE E - INVESTMENT SECURITIES
The following is a summary of the securities portfolio by major classification:
March 31, 2012 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | Fair | |||||||||||||
cost | gains | losses | value | |||||||||||||
Securities available for sale: | ||||||||||||||||
Mortgage-backed securities | $ | 26,695,109 | $ | 105,063 | $ | 8,206 | $ | 26,791,966 | ||||||||
Collateralized mortgage obligations | 79,000,586 | 290,442 | 277,437 | 79,013,591 | ||||||||||||
Municipals, non-taxable | 13,259,418 | 348,328 | - | 13,607,746 | ||||||||||||
Corporate bonds | 24,071,729 | 836,802 | - | 24,908,531 | ||||||||||||
Marketable equity | 532,548 | 88,852 | - | 621,400 | ||||||||||||
$ | 143,559,390 | $ | 1,669,487 | $ | 285,643 | $ | 144,943,234 |
- 12 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE E - INVESTMENT SECURITIES (Continued)
December 31, 2011 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | Fair | |||||||||||||
cost | gains | losses | value | |||||||||||||
Securities available for sale: | ||||||||||||||||
Mortgage-backed securities | $ | 19,451,556 | $ | 19,641 | $ | 106,853 | $ | 19,364,344 | ||||||||
Collateralized mortgage obligations | 82,192,471 | 153,812 | 251,414 | 82,094,869 | ||||||||||||
Municipals, non-taxable | 13,280,926 | 263,159 | 30,194 | 13,513,891 | ||||||||||||
Corporate bonds | 28,041,712 | 38,943 | 114,553 | 27,966,102 | ||||||||||||
Marketable equity | 519,458 | 49,575 | 4,391 | 564,642 | ||||||||||||
$ | 143,486,123 | $ | 525,130 | $ | 507,405 | $ | 143,503,848 |
All mortgage-backed securities and collateralized mortgage obligations in the Company’s portfolio at March 31, 2012 and December 31, 2011 were backed by government sponsored enterprises (“GSEs”).
The following tables summarize 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, 2012 and December 31, 2011:
March 31, 2012 | ||||||||||||||||||||||||
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 | $ | 7,509,277 | $ | 8,206 | $ | - | $ | - | $ | 7,509,277 | $ | 8,206 | ||||||||||||
Collateralized mortgage obligations | 50,460,144 | 277,437 | - | - | 50,460,144 | 277,437 | ||||||||||||||||||
Total temporarily impaired securities | $ | 57,969,421 | $ | 285,643 | $ | - | $ | - | $ | 57,969,421 | $ | 285,643 |
December 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: | ||||||||||||||||||||||||
Mortgage-backed | $ | 9,153,058 | $ | 106,854 | $ | - | $ | - | $ | 9,153,058 | $ | 106,854 | ||||||||||||
Collateralized mortgage obligations | 67,359,625 | 251,413 | - | - | 67,359,625 | 251,413 | ||||||||||||||||||
Municipals | 2,637,330 | 30,194 | - | - | 2,637,330 | 30,194 | ||||||||||||||||||
Corporate bonds | 15,818,502 | 114,553 | - | - | 15,818,502 | 114,553 | ||||||||||||||||||
Marketable equity | 32,131 | 4,391 | - | - | 32,131 | 4,391 | ||||||||||||||||||
Total temporarily impaired securities | $ | 95,000,646 | $ | 507,405 | $ | - | $ | - | $ | 95,000,646 | $ | 507,405 |
- 13 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE E - INVESTMENT SECURITIES (Continued)
Unrealized losses on investment securities at March 31, 2012 related to five GSE collateralized mortgage obligations and two GSE mortgage-backed securities. Unrealized losses on investment securities at December 31, 2011 related to eleven GSE collateralized mortgage obligations, four GSE mortgage-backed securities, three municipal securities, seven investment grade corporate bonds and one marketable equity security. At March 31, 2012 and December 31, 2011, none of the securities had been in an unrealized loss position for more than a twelve month period.
The securities in an unrealized loss position at March 31, 2012 have continued to perform and are expected to perform through maturity, and the issuers have not experienced significant adverse events that would call into question their ability to repay these debt obligations according to contractual terms. Further, because the Company does not intend to sell these investments and does not believe that it will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, unrealized losses on such securities are not considered to represent other-than-temporary impairment at March 31, 2012.
At March 31, 2012 and December 31, 2011, investment securities with a carrying value of $32.5 million and $43.9 million 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, 2012, by contractual maturity, are shown below. 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.
Due after one | Due after five | Other | ||||||||||||||||||
Due within | year through | years through | Due after | equity | ||||||||||||||||
one year | five years | ten years | ten years | securities | ||||||||||||||||
Mortgage backed: | ||||||||||||||||||||
Amortized cost | $ | 3,918,107 | $ | 10,043,343 | $ | 6,735,485 | $ | 5,998,174 | $ | - | ||||||||||
Fair value | 3,926,840 | 10,074,122 | 6,763,659 | 6,027,346 | - | |||||||||||||||
Collateralized mortgage obligations | ||||||||||||||||||||
Amortized cost | 11,606,365 | 47,518,158 | 17,764,238 | 2,111,825 | - | |||||||||||||||
Fair value | 11,650,169 | 47,535,677 | 17,727,123 | 2,100,621 | - | |||||||||||||||
Municipals | ||||||||||||||||||||
Amortized cost | 455,000 | 3,627,918 | 7,039,439 | 2,137,059 | - | |||||||||||||||
Fair value | 455,000 | 3,698,219 | 7,208,737 | 2,245,790 | - | |||||||||||||||
Corporate bonds | ||||||||||||||||||||
Amortized cost | - | 24,071,729 | - | - | - | |||||||||||||||
Fair value | - | 24,908,531 | - | - | - | |||||||||||||||
Marketable equity | ||||||||||||||||||||
Amortized cost | - | - | - | - | 532,548 | |||||||||||||||
Fair value | - | - | - | - | 621,400 | |||||||||||||||
Total | ||||||||||||||||||||
Amortized cost | $ | 15,979,472 | $ | 85,261,148 | $ | 31,539,162 | $ | 10,247,058 | $ | 532,548 | ||||||||||
Fair value | $ | 16,032,009 | $ | 86,216,549 | $ | 31,699,519 | $ | 10,373,757 | $ | 621,400 |
- 14 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE F - LOANS HELD FOR INVESTMENT
Following is a summary of loans at March 31, 2012 and December 31, 2011:
March 31, 2012 | December 31, 2011 | |||||||
Real estate - commercial | $ | 289,512,795 | $ | 310,314,968 | ||||
Real estate - residential | 63,298,391 | 67,004,033 | ||||||
Construction loans | 70,662,909 | 83,929,770 | ||||||
Commercial and industrial loans | 43,185,152 | 39,433,800 | ||||||
Home equity loans and lines of credit | 45,370,932 | 48,940,064 | ||||||
Loans to individuals | 3,772,859 | 3,299,958 | ||||||
Total loans | 515,803,038 | 552,922,593 | ||||||
Less: | ||||||||
Deferred loan fees | (41,576 | ) | (45,532 | ) | ||||
Allowance for loan losses | (737,000 | ) | (227,000 | ) | ||||
Net loans held for investment | $ | 515,024,462 | $ | 552,650,060 |
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.
Purchased Credit-Impaired Loans
Accretable yield, or income expected to be collected, related to purchased credit-impaired (“PCI”) loans in the successor period is as follows:
Balance, January 1, 2012 | $ | 29,645,444 | ||
New loans purchased | - | |||
Accretion of income for the period | (3,112,996 | ) | ||
Reclassifications from nonaccretable difference | - | |||
Disposals | (442,114 | ) | ||
Balance, March 31, 2012 | $ | 26,090,334 |
The accretable yield represents the excess of estimated cash flows expected to be collected over the initial fair value of the PCI loans, which is their fair value at the time of the Piedmont Investment. The accretable yield is accreted into interest income over the estimated life of the PCI loans using the level yield method. The accretable yield will change due to changes in:
· | the estimate of the remaining life of PCI loans which may change the amount of future interest income, and possibly principal, expected to be collected; |
· | the estimate of the amount of contractually required principal and interest payments over the estimated life that will not be collected (the nonaccretable difference); and |
· | indices for PCI loans with variable rates of interest. |
For PCI loans, the impact of loan modifications is included in the evaluation of expected cash flows for subsequent decreases or increases of cash flows. For variable rate PCI loans, expected future cash flows will be recalculated as the rates adjust over the lives of the loans. At acquisition, the expected future cash flows were based on the variable rates that were in effect at that time.
- 15 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE F - LOANS HELD FOR INVESTMENT (Continued)
Allowance for Loan Losses
The following is a summary of changes in the allowance for loan losses and the ending recorded investment in loans by portfolio segment and based on impairment method as of and for the periods ended March 31, 2012 and 2011 (in thousands):
March 31, 2012 | ||||||||||||||||||||||||
Commercial | Real Estate | Real Estate | ||||||||||||||||||||||
& Industrial | Commercial | Residential | Construction | Consumer | Total | |||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning balance | $ | 30 | $ | 126 | $ | 47 | $ | 21 | $ | 3 | $ | 227 | ||||||||||||
Charge-offs | (15 | ) | - | (271 | ) | - | (8 | ) | (294 | ) | ||||||||||||||
Recoveries | - | - | - | - | - | - | ||||||||||||||||||
Provision for loan losses | 163 | (47 | ) | 588 | 79 | 21 | 804 | |||||||||||||||||
Ending balance | $ | 178 | $ | 79 | $ | 364 | $ | 100 | $ | 16 | $ | 737 | ||||||||||||
Ending balance: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Collectively evaluated for impairment | $ | 178 | $ | 79 | $ | 364 | $ | 100 | $ | 16 | $ | 737 | ||||||||||||
Purchased credit-impaired | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Loans: | ||||||||||||||||||||||||
Ending balance | $ | 43,185 | $ | 289,513 | $ | 108,669 | $ | 70,663 | $ | 3,773 | $ | 515,803 | ||||||||||||
Ending balance: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Collectively evaluated for impairment | $ | 20,725 | $ | 140,487 | $ | 77,921 | $ | 21,374 | $ | 3,768 | $ | 264,275 | ||||||||||||
Purchased credit-impaired | $ | 22,460 | $ | 149,026 | $ | 30,748 | $ | 49,289 | $ | 5 | $ | 251,528 |
March 31, 2011 | ||||||||||||||||||||||||
Commercial | Real Estate | Real Estate | ||||||||||||||||||||||
& Industrial | Commercial | Residential | Construction | 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 for loan losses | 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 |
- 16 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE F - LOANS HELD FOR INVESTMENT (Continued)
The following is a summary of the ending allowance for loans losses and the recorded investment in loans by portfolio segment and based on impairment method at December 31, 2011 (in thousands):
December 31, 2011 | ||||||||||||||||||||||||
Commercial | Real Estate | Real Estate | ||||||||||||||||||||||
& Industrial | Commercial | Residential | Construction | Consumer | Total | |||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Ending balance | $ | 30 | $ | 126 | $ | 47 | $ | 21 | $ | 3 | $ | 227 | ||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Collectively evaluated for impairment | $ | 30 | $ | 126 | $ | 47 | $ | 21 | $ | 3 | $ | 227 | ||||||||||||
Purchased credit-impaired | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Loans: | ||||||||||||||||||||||||
Ending balance | $ | 39,434 | $ | 310,315 | $ | 115,944 | $ | 83,930 | $ | 3,300 | $ | 552,923 | ||||||||||||
Ending balance: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Collectively evaluated for impairment | $ | 12,426 | $ | 149,654 | $ | 79,588 | $ | 19,315 | $ | 2,850 | $ | 263,833 | ||||||||||||
Purchased credit-impaired | $ | 27,008 | $ | 149,026 | $ | 36,356 | $ | 64,615 | $ | 450 | $ | 289,090 |
At the Piedmont Investment, the acquired loan portfolio was adjusted to fair value and the allowance for loan losses was eliminated. For PCI loans, impairment and the associated allowance for loan losses is evaluated based on decreases in expected cash flows. Since no decreases in expected cash flows were detected on PCI loans since acquisition, no impairment, or corresponding allowance for loan losses, was recorded at March 31, 2012 and December 31, 2011.
Analysis of Credit Quality
The Company uses 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. |
- 17 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE F - 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. |
- 18 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE F - 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. |
The following tables summarize the carrying value of the non-acquired loan portfolio (or loans originated subsequent to the Piedmont Investment) by internal risk ratings at March 31, 2012 and December 31, 2011:
Commercial Credit Exposure | ||||||||||||||||||||
March 31, 2012 | ||||||||||||||||||||
Commercial | Real Estate | Commercial | Commercial | |||||||||||||||||
& Industrial | Commercial | Construction | LOC | Total | ||||||||||||||||
Non-Acquired Loans | (Dollars in Thousands) | |||||||||||||||||||
1-Minimal Credit Risk | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
2-Modest Credit Risk | - | - | - | - | - | |||||||||||||||
3-Average Credit Risk | 104 | - | - | - | 104 | |||||||||||||||
4-Acceptable Credit Risk | 5,827 | 10,046 | - | 24 | 15,897 | |||||||||||||||
5-Acceptable Credit Risk | 128 | 680 | 1,397 | - | 2,205 | |||||||||||||||
6-Special Mention | - | - | - | - | - | |||||||||||||||
7-Substandard | - | - | - | - | - | |||||||||||||||
8-Doubtful | - | - | - | - | - | |||||||||||||||
9-Loss | - | - | - | - | - | |||||||||||||||
Other | 9 | - | 259 | - | 268 | |||||||||||||||
Total | $ | 6,068 | $ | 10,726 | $ | 1,656 | $ | 24 | $ | 18,474 |
Consumer Credit Exposure | ||||||||||||||||||||
March 31, 2012 | ||||||||||||||||||||
Real Estate | Consumer | Home | ||||||||||||||||||
Residential | Construction | Equity | Consumer | Total | ||||||||||||||||
Non-Acquired Loans | (Dollars in Thousands) | |||||||||||||||||||
1-Minimal Credit Risk | $ | - | $ | - | $ | - | $ | 293 | $ | 293 | ||||||||||
2-Modest Credit Risk | - | - | - | - | - | |||||||||||||||
3-Average Credit Risk | 626 | 242 | 545 | 50 | 1,463 | |||||||||||||||
4-Acceptable Credit Risk | 87 | 642 | 250 | 401 | 1,380 | |||||||||||||||
5-Acceptable Credit Risk | 49 | - | - | 72 | 121 | |||||||||||||||
6-Special Mention | - | - | - | - | - | |||||||||||||||
7-Substandard | - | - | - | - | - | |||||||||||||||
8-Doubtful | - | - | - | - | - | |||||||||||||||
9-Loss | - | - | - | - | - | |||||||||||||||
Other | 975 | - | 1 | 12 | 988 | |||||||||||||||
Total | $ | 1,737 | $ | 884 | $ | 796 | $ | 828 | $ | 4,245 |
- 19 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE F - LOANS HELD FOR INVESTMENT (Continued)
Commercial Credit Exposure | ||||||||||||||||||||
December 31, 2011 | ||||||||||||||||||||
Commercial | Commercial | Commercial | Commercial | |||||||||||||||||
& Industrial | Real Estate | Construction | LOC | Total | ||||||||||||||||
Non-Acquired Loans | (Dollars in thousands) | |||||||||||||||||||
1-Minimal Credit Risk | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
2-Modest Credit Risk | - | - | - | - | - | |||||||||||||||
3-Average Credit Risk | 108 | - | - | - | 108 | |||||||||||||||
4-Acceptable Credit Risk | 316 | 7,416 | - | - | 7,732 | |||||||||||||||
5-Acceptable Credit Risk | 470 | 231 | 138 | - | 839 | |||||||||||||||
6-Special Mention | - | - | - | - | - | |||||||||||||||
7-Substandard | 99 | - | - | - | 99 | |||||||||||||||
8-Doubtful | - | - | - | - | - | |||||||||||||||
9-Loss | - | - | - | - | - | |||||||||||||||
Other | - | - | - | - | - | |||||||||||||||
Total | $ | 993 | $ | 7,647 | $ | 138 | $ | - | $ | 8,778 |
Consumer Credit Exposure | ||||||||||||||||||||
December 31, 2011 | ||||||||||||||||||||
Real Estate | Consumer | Home | ||||||||||||||||||
Residential | Construction | Equity | Consumer | Total | ||||||||||||||||
Non-Acquired Loans | (Dollars in thousands) | |||||||||||||||||||
1-Minimal Credit Risk | $ | - | $ | - | $ | - | $ | 25 | $ | 25 | ||||||||||
2-Modest Credit Risk | - | - | - | - | - | |||||||||||||||
3-Average Credit Risk | 721 | 110 | 426 | 13 | 1,270 | |||||||||||||||
4-Acceptable Credit Risk | 358 | 86 | - | 17 | 461 | |||||||||||||||
5-Acceptable Credit Risk | 660 | - | - | 71 | 731 | |||||||||||||||
6-Special Mention | - | - | - | - | - | |||||||||||||||
7-Substandard | - | - | - | - | - | |||||||||||||||
8-Doubtful | - | - | - | - | - | |||||||||||||||
9-Loss | - | - | - | - | - | |||||||||||||||
Other | - | - | - | - | - | |||||||||||||||
Total | $ | 1,739 | $ | 196 | $ | 426 | $ | 126 | $ | 2,487 |
- 20 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE F - LOANS HELD FOR INVESTMENT (Continued)
The following tables summarize the carrying value of the acquired loan portfolio (or loans originated prior to the Piedmont Investment) by internal risk ratings at March 31, 2012 and December 31, 2011:
Commercial Credit Exposure | ||||||||||||||||||||
March 31, 2012 | ||||||||||||||||||||
Commercial | Real Estate | Commercial | Commercial | |||||||||||||||||
& Industrial | Commercial | Construction | LOC | Total | ||||||||||||||||
Acquired Loans | (Dollars in thousands) | |||||||||||||||||||
1-Minimal Credit Risk | $ | 702 | $ | - | $ | - | $ | 11 | $ | 713 | ||||||||||
2-Modest Credit Risk | 592 | - | - | - | 592 | |||||||||||||||
3-Average Credit Risk | 917 | 14,057 | 3,464 | - | 18,438 | |||||||||||||||
4-Acceptable Credit Risk | 8,546 | 93,510 | 6,301 | 62 | 108,419 | |||||||||||||||
5-Acceptable Credit Risk | 19,042 | 110,860 | 26,279 | 86 | 156,267 | |||||||||||||||
6-Special Mention | 4,243 | 45,438 | 17,330 | 13 | 67,024 | |||||||||||||||
7-Substandard | 2,301 | 14,922 | 7,964 | - | 25,187 | |||||||||||||||
8-Doubtful | - | - | 388 | - | 388 | |||||||||||||||
9-Loss | - | - | - | - | - | |||||||||||||||
Other | 366 | - | 35 | 212 | 613 | |||||||||||||||
Total | $ | 36,709 | $ | 278,787 | $ | 61,761 | $ | 384 | $ | 377,641 |
Consumer Credit Exposure | ||||||||||||||||||||
March 31, 2012 | ||||||||||||||||||||
Real Estate | Consumer | |||||||||||||||||||
Residential | Construction | Home Equity | Consumer | Total | ||||||||||||||||
Acquired Loans | (Dollars in thousands) | |||||||||||||||||||
1-Minimal Credit Risk | $ | - | $ | - | $ | - | $ | 276 | $ | 276 | ||||||||||
2-Modest Credit Risk | - | - | - | - | - | |||||||||||||||
3-Average Credit Risk | 9,586 | 1,550 | 3,457 | 414 | 15,007 | |||||||||||||||
4-Acceptable Credit Risk | 23,494 | 3,456 | 27,437 | 706 | 55,093 | |||||||||||||||
5-Acceptable Credit Risk | 16,192 | 342 | 9,341 | 591 | 26,466 | |||||||||||||||
6-Special Mention | 5,389 | 176 | 1,915 | 331 | 7,811 | |||||||||||||||
7-Substandard | 6,151 | 804 | 2,425 | 19 | 9,399 | |||||||||||||||
8-Doubtful | 140 | - | - | - | 140 | |||||||||||||||
9-Loss | - | - | - | - | - | |||||||||||||||
Other | 609 | 34 | - | 608 | 1,251 | |||||||||||||||
Total | $ | 61,561 | $ | 6,362 | $ | 44,575 | $ | 2,945 | $ | 115,443 |
Commercial Credit Exposure | ||||||||||||||||||||
December 31, 2011 | ||||||||||||||||||||
Commercial | Real Estate | Commercial | Commercial | |||||||||||||||||
& Industrial | Commercial | Construction | LOC | Total | ||||||||||||||||
Acquired Loans | (Dollars in thousands) | |||||||||||||||||||
1-Minimal Credit Risk | $ | 938 | $ | - | $ | - | $ | 11 | $ | 949 | ||||||||||
2-Modest Credit Risk | 598 | - | - | - | 598 | |||||||||||||||
3-Average Credit Risk | 1,171 | 10,108 | 3,594 | - | 14,873 | |||||||||||||||
4-Acceptable Credit Risk | 8,201 | 130,614 | 9,134 | 70 | 148,019 | |||||||||||||||
5-Acceptable Credit Risk | 22,405 | 111,571 | 27,199 | 99 | 161,274 | |||||||||||||||
6-Special Mention | 2,212 | 34,877 | 22,482 | 1 | 59,572 | |||||||||||||||
7-Substandard | 2,258 | 13,907 | 12,402 | 1 | 28,568 | |||||||||||||||
8-Doubtful | - | 379 | 519 | - | 898 | |||||||||||||||
9-Loss | - | - | - | - | - | |||||||||||||||
Other | 253 | 1,212 | - | 223 | 1,688 | |||||||||||||||
Total | $ | 38,036 | $ | 302,668 | $ | 75,330 | $ | 405 | $ | 416,439 |
- 21 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE F - LOANS HELD FOR INVESTMENT (Continued)
Consumer Credit Exposure | ||||||||||||||||||||
December 31, 2011 | ||||||||||||||||||||
Real Estate | Consumer | |||||||||||||||||||
Residential | Construction | Home Equity | Consumer | Total | ||||||||||||||||
Acquired Loans | (Dollars in thousands) | |||||||||||||||||||
1-Minimal Credit Risk | $ | - | $ | - | $ | - | $ | 290 | $ | 290 | ||||||||||
2-Modest Credit Risk | - | - | - | - | - | |||||||||||||||
3-Average Credit Risk | 9,330 | 1,886 | 8,523 | 412 | 20,151 | |||||||||||||||
4-Acceptable Credit Risk | 23,802 | 4,870 | 27,060 | 815 | 56,547 | |||||||||||||||
5-Acceptable Credit Risk | 18,487 | 507 | 7,183 | 628 | 26,805 | |||||||||||||||
6-Special Mention | 5,155 | 176 | 2,064 | 336 | 7,731 | |||||||||||||||
7-Substandard | 8,300 | 758 | 3,684 | 43 | 12,785 | |||||||||||||||
8-Doubtful | 145 | - | - | - | 145 | |||||||||||||||
9-Loss | - | - | - | - | - | |||||||||||||||
Other | 46 | 69 | - | 650 | 765 | |||||||||||||||
Total | $ | 65,265 | $ | 8,266 | $ | 48,514 | $ | 3,174 | $ | 125,219 |
Past Due Analysis
The following tables summarize the aging of the loan portfolio by past due status, based on contractual terms, at March 31, 2012 and December 31, 2011:
March 31, 2012 | ||||||||||||||||||||
Greater than | ||||||||||||||||||||
30-89 Days | 90 Days | Total | Total | |||||||||||||||||
Past Due | Past Due | Past Due | Current | Loans | ||||||||||||||||
Acquired Loans: | (Dollars in thousands) | |||||||||||||||||||
Commercial and industrial | $ | 312 | $ | 811 | $ | 1,123 | $ | 35,219 | $ | 36,342 | ||||||||||
Commercial construction | 5,838 | 5,243 | 11,081 | 50,680 | 61,761 | |||||||||||||||
Commercial real estate | 1,549 | 5,469 | 7,018 | 271,959 | 278,977 | |||||||||||||||
Commercial lines of credit | - | - | - | 384 | 384 | |||||||||||||||
Consumer | 1 | - | 1 | 2,944 | 2,945 | |||||||||||||||
Consumer construction | - | 588 | 588 | 5,774 | 6,362 | |||||||||||||||
Home equity | 132 | - | 132 | 44,443 | 44,575 | |||||||||||||||
Residential real estate | 403 | 2,922 | 3,325 | 57,627 | 60,952 | |||||||||||||||
Total | $ | 8,235 | $ | 15,033 | $ | 23,268 | $ | 469,030 | $ | 492,298 |
December 31, 2011 | ||||||||||||||||||||
Greater than | ||||||||||||||||||||
30-89 Days | 90 Days | Total | Total | |||||||||||||||||
Past Due | Past Due | Past Due | Current | Loans | ||||||||||||||||
Acquired Loans: | (Dollars in thousands) | |||||||||||||||||||
Commercial and industrial | $ | 925 | $ | 797 | $ | 1,722 | $ | 36,314 | $ | 38,036 | ||||||||||
Commercial construction | 4,809 | 10,328 | 15,137 | 60,193 | 75,330 | |||||||||||||||
Commercial real estate | 3,878 | 6,101 | 9,979 | 292,689 | 302,668 | |||||||||||||||
Commercial lines of credit | - | 1 | 1 | 404 | 405 | |||||||||||||||
Consumer | 3 | 3 | 6 | 3,168 | 3,174 | |||||||||||||||
Consumer construction | 652 | 382 | 1,034 | 7,232 | 8,266 | |||||||||||||||
Home equity | 740 | 1,128 | 1,868 | 46,646 | 48,514 | |||||||||||||||
Residential real estate | 2,289 | 4,148 | 6,437 | 58,828 | 65,265 | |||||||||||||||
Total | $ | 13,296 | $ | 22,888 | $ | 36,184 | $ | 505,474 | $ | 541,658 |
- 22 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE F - LOANS HELD FOR INVESTMENT (Continued)
None of the non-acquired loans were past due at March 31, 2012 or December 31, 2011. None of the non-acquired or purchased non-impaired loans were restructured in a troubled debt restructuring at March 31, 2012.
NOTE G – DERIVATIVE FINANCIAL INSTRUMENTS
The Company may, at times, use derivative financial instruments 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 consolidated 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. The Predecessor Company entered into certain interest rate swap agreements as described below.
In August 2003, $8.0 million in trust preferred securities (“TRUPs”) were issued through Crescent Financial Capital Trust I (the “Trust”). The Trust invested the total proceeds from the sale of its TRUPs in junior subordinated deferrable interest debentures issued by the Company, which fully and unconditionally guarantees the TRUPs. The junior subordinated debentures were adjusted to estimated fair value in purchase accounting with the Piedmont Investment, and at March 31, 2012, their carrying value was $5.5 million. The TRUPs pay cumulative cash distributions quarterly at an annual contract rate, reset quarterly, equal to three-month LIBOR plus 3.10%.
In June 2009, the Company entered into derivative financial instruments which swapped the variable rate payments for fixed payments. These instruments consisted of a three-year and four-year swap, each for one-half of the notional amount of the TRUPs for fixed rates of 5.49% and 5.97%, respectively. Due to the deferral of interest payments on the TRUPs, the associated interest rate swaps no longer qualify for cash flow hedge accounting and are therefore marked to fair value through earnings.
On September 26, 2008, the Bank entered into an unsecured subordinated term loan agreement in the amount of $7.5 million. The agreement requires the Bank to make quarterly payments of interest at an annual contract rate, reset quarterly, equal to three-month LIBOR plus 4.00%. The subordinated term loan was adjusted to estimated fair value in purchase accounting with the Piedmont Investment, and at March 31, 2012, its carrying value was $6.8 million.
In June 2009, the Bank entered into derivative financial instruments which swapped the variable rate payments for fixed payments. These instruments consisted of a three-year and four-year swap, each for one-half of the notional amount of the subordinated debt for fixed rates of 6.39% and 6.87%, respectively. At the Piedmont Investment, these swaps were no longer designated as qualifying for hedge accounting and therefore mark them to fair value through earnings.
The following tables disclose the location and fair value amounts of derivative instruments designated as hedging instruments in the consolidated balance sheets.
March 31, | December 31, | |||||||||||||
2012 | 2011 | |||||||||||||
Balance Sheet | Notional | Estimated Fair | Estimated Fair | |||||||||||
Location | Amount | Value | Value | |||||||||||
Trust preferred securities: | ||||||||||||||
Interest rate swap | Other liabilities | $ | 4,000,000 | $ | (21,453 | ) | $ | (38,275 | ) | |||||
Interest rate swap | Other liabilities | 4,000,000 | (121,638 | ) | (134,029 | ) | ||||||||
Subordinated term loan agreements: | ||||||||||||||
Interest rate swap | Other liabilities | 3,750,000 | (18,575 | ) | (34,160 | ) | ||||||||
Interest rate swap | Other liabilities | 3,750,000 | (112,259 | ) | (123,650 | ) | ||||||||
$ | 15,500,000 | $ | (273,925 | ) | $ | (330,114 | ) |
- 23 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE G – DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
The following table discloses activity in accumulated other comprehensive income (“OCI”) related to the interest rate swaps for the periods presented.
Successor Company | Predecessor Company | |||||||
January 1 | January 1 | |||||||
to | to | |||||||
March 31, | March 31, | |||||||
2012 | 2011 | |||||||
Accumulated OCI resulting from interest rate swaps as of the beginning of the period, net of tax | $ | - | $ | (355,818 | ) | |||
Other comprehensive (gain) loss recognized, net of tax | - | 49,190 | ||||||
Accumulated OCI resulting from interest rate swaps as of the end of the period, net of tax | $ | - | $ | (306,628 | ) |
The Company monitors the credit risk of the interest rate swap counterparty. The Company has pledged $780,000 in cash to the counterparty to the swaps.
NOTE H - FAIR VALUE MEASUREMENT
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. For example, investment securities available for sale are recorded at fair value on a recurring basis. Additionally, we may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, impaired loans and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. The following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Investment Securities. Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market exchange 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 marketable equity securities traded on an active exchange, such as the New York Stock Exchange. Level 2 securities include mortgage-backed securities and collateralized mortgage obligations, both issued by government sponsored entities, municipal bonds and corporate debt securities.
Derivatives. Derivative instruments include interest rate swaps and are valued on a recurring basis using models developed by third-party providers. This type of derivative is classified as Level 2 within the hierarchy.
Loans. Loans are not recorded at fair value on a recurring basis. However, certain loans are determined to be impaired, and those loans are charged down to estimated fair value. The fair value of impaired loans that are collateral dependent is based on collateral value. For impaired loans that are not collateral dependent, estimated value is based on either an observable market price, if available, or the present value of expected future cash flows. Those impaired loans not requiring a charge-off represent loans for which the estimated fair value exceeds the recorded investments in such loans. When the fair value of an impaired loan is based on an observable market price or a current appraised value with no adjustments, we record the impaired loan as nonrecurring Level 2. When an appraised value is not available, or we determine the fair value of the collateral is further impaired below the appraised value, and there is no observable market price, we classify the impaired loan as nonrecurring Level 3.
- 24 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE H - FAIR VALUE MEASUREMENT (Continued)
Interest Rate Lock Commitments. The fair value of interest rate lock commitments is based on servicing rate premium, origination income net of origination costs, fall out rates and changes in loan pricing between the commitment date and period end, typically month end. The Company classifies interest rate lock commitments as Level 3. There have been no changes in valuation techniques for the quarter ended March 31, 2012.
Interest Rate Lock Commitments | ||||||||
Level 3 | ||||||||
Successor | Predecessor | |||||||
Fair Value | Fair Value | |||||||
Balance, December 31, 2011 and 2010 | $ | 211,622 | $ | 53,185 | ||||
Gains/ (losses) included in other income | 234,140 | (85,120 | ) | |||||
Transfers in | 28,605,145 | 111,029 | ||||||
Transfers out | (28,744,093 | ) | (16,680 | ) | ||||
Balance, March 31, 2012 and 2011 | $ | 306,814 | $ | 62,414 |
Gain on interest rate lock commitments for the period is included in the Mortgage loan origination revenue line of non-interest income on the consolidated Statements of Operations.
Foreclosed Assets. Foreclosed assets are adjusted to fair value upon transfer of 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. Given the lack of observable market prices for identical properties, the Company classifies foreclosed assets as nonrecurring Level 3.
The following tables summarize information about assets and liabilities measured at fair value at March 31, 2012 and December 31, 2011:
Fair Value Measurements at | ||||||||||||||||
March 31, 2012, Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Assets/(Liabilities) | Markets for | Observable | Unobservable | |||||||||||||
Measured at | Identical Assets | Inputs | Inputs | |||||||||||||
Description | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Securities available for sale: | ||||||||||||||||
Mortgage-backed | $ | 26,791,966 | $ | - | $ | 26,791,966 | $ | - | ||||||||
Collateralized mortgage obligations | 79,013,591 | - | 79,013,591 | - | ||||||||||||
Municipals | 13,607,746 | - | 13,607,746 | - | ||||||||||||
Corporate bonds | 24,908,531 | - | 24,908,531 | |||||||||||||
Marketable equity | 621,400 | 621,400 | - | - | ||||||||||||
Foreclosed assets | 5,496,743 | - | - | 5,496,743 | ||||||||||||
Interest rate lock commitments | 306,814 | - | - | 306,814 | ||||||||||||
Derivative liabilities | (273,925 | ) | - | (273,925 | ) | - |
- 25 - |
CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE H - FAIR VALUE MEASUREMENT (Continued)
Fair Value Measurements at | ||||||||||||||||
December 31, 2011, Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Assets/(Liabilities) | Markets for | Observable | Unobservable | |||||||||||||
Measured at | Identical Assets | Inputs | Inputs | |||||||||||||
Description | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Securities available for sale: | ||||||||||||||||
Mortgage-backed | $ | 19,364,344 | $ | - | $ | 19,364,344 | $ | - | ||||||||
Collateralized mortgage obligations | 82,094,869 | - | 82,094,869 | - | ||||||||||||
Municipals | 13,513,891 | - | 13,513,891 | - | ||||||||||||
Corporate bonds | 27,966,102 | - | 27,966,102 | |||||||||||||
Marketable equity | 564,642 | 564,642 | - | - | ||||||||||||
Foreclosed assets | 9,422,056 | - | - | 9,422,056 | ||||||||||||
Interest rate lock commitments | 211,622 | - | - | 211,622 | ||||||||||||
Derivative liabilities | (330,114 | ) | - | (330,114 | ) | - |
Quantitative Information about Level 3 Fair Value Measurements
Fair Value at | ||||||||||||
March 31, 2012 | Valuation Technique | Unobservable Input | Range | |||||||||
Recurring measurements: | ||||||||||||
Interest Rate Lock Commitments | $ | 306,814 | Pricing model | Pull through rates | 80-85 | % | ||||||
Nonrecurring measurements: | ||||||||||||
Foreclosed assets | 5,496,743 | Discounted appraisals | Collateral discounts | 15-50 | % |
The significant unobservable input used in the fair value measurement of the Company’s interest rate lock commitments is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. Generally, the fair value of an interest rate lock commitment is positive (negative) if the prevailing interest rate is lower (higher) than the interest rate lock commitment rate. Therefore, an increase in the pull through rates (i.e., higher percentage of loans estimated to close) will result in the fair value of the interest rate lock commitments increasing in a gain position, or decreasing in a loss position. The pull through ratio is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. The pull through rate is computed based on historical internal data and the ratio is periodically reviewed by the Company’s mortgage banking division.
Due to the nature of the Company’s business, a significant portion of its assets and liabilities consist of financial instruments. Accordingly, the estimated fair values of these financial instruments are disclosed. Quoted market prices, if available, are utilized as an estimate of the fair value of financial instruments. The fair value of such instruments has been derived based on assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net amounts ultimately collected could be materially different from the estimates presented below. In addition, these estimates are only indicative of the values of individual financial instruments and should not be considered an indication of the fair value of the Company taken as a whole.
Cash and Cash Equivalents. The carrying amounts for cash and cash equivalents are equal to fair value.
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CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE H - FAIR VALUE MEASUREMENT (Continued)
Investment Securities Available for Sale. See discussion related to fair value estimates for securities available for sale in the fair value hierarchy section above. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior periods.
Mortgage Loans Held For Sale. The fair value of mortgage loans held for sale is based on commitments on hand from investors within the secondary market for loans with similar characteristics. The changes in fair value of the assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage loan for sale. As such, the Company classifies loans measured at fair value on a nonrecurring basis as a Level 2 asset. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior periods.
Loans Held For Investment. The Company does not record loans held-for-investment at fair value on a recurring basis. However, when a loan is considered impaired an allowance for loan losses is established. The fair value of impaired loans is estimated using one of several methods based on portfolio type, acquired and non-acquired. Upon analyzing estimated credit losses in the acquired portfolio, we forecasted expected cash flows over the remaining life of each loan and discounted those expected cash flows to present value at current market interest rates for similar loans considering loan collateral type and credit quality. The fair value of any impaired non-acquired loans would be valued using either collateral value, market value of similar debt, enterprise value, liquidation value or discounted cash flows. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior periods.
Federal Home Loan Bank Stock. Given the option to redeem this stock at par through the FHLB, the carrying value of FHLB stock approximates fair value. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior periods.
Deposits. The fair value of demand deposits, savings, money market and NOW accounts represents the amount payable on demand. The fair value of fixed-maturity certificates of deposit and individual retirement accounts is estimated using the present value of the projected cash flows using interest rates currently offered for instruments of similar remaining maturities. The carrying values of short-term borrowings, including overnight, federal funds purchased and FHLB advances, approximates the fair values due to the short maturities of those instruments. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior periods.
Short-term Borrowings and Long-term Debt. The fair value of short-term borrowings and long-term debt are based upon discounted expected cash flows at the interest rate for debt with the same or similar remaining maturities and collateral requirements could be obtained. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior periods.
Accrued Interest Receivable and Accrued Interest Payable. The carrying amounts of accrued interest receivable and payable approximate fair value due to the short maturities of these instruments. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior periods.
Derivative Instruments. See discussion related to fair value estimates for derivative instruments in the fair value hierarchy section above. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent with techniques used in prior periods.
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CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE H - FAIR VALUE MEASUREMENT (Continued)
The following tables summarize the carrying amounts and estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, at March 31, 2012 and December 31, 2011:
March 31, 2012 | ||||||||||||||||||||
Carrying | Estimated | |||||||||||||||||||
amount | fair value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 57,071,776 | $ | 57,071,776 | $ | 57,071,776 | $ | - | $ | - | ||||||||||
Investment securities | 144,943,234 | 144,943,234 | 621,400 | 144,321,834 | - | |||||||||||||||
Federal Home Loan Bank stock | 8,669,300 | 8,669,300 | 8,669,300 | - | - | |||||||||||||||
Mortgage loans held for sale | 3,317,166 | 3,317,166 | - | 3,317,166 | - | |||||||||||||||
Loans held for investment, net | 515,024,462 | 515,024,462 | - | - | 515,024,462 | |||||||||||||||
Accrued interest receivable | 3,464,493 | 3,464,493 | - | 3,464,493 | - | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | 658,828,701 | 658,828,701 | - | 658,828,701 | - | |||||||||||||||
Short-term borrowings | 5,000,000 | 5,000,000 | - | - | 5,000,000 | |||||||||||||||
Long-term debt | 12,251,659 | 12,251,659 | - | - | 12,251,659 | |||||||||||||||
Interest rate swaps | (273,925 | ) | (273,925 | ) | - | (273,925 | ) | - | ||||||||||||
Accrued interest payable | 820,525 | 820,525 | - | 820,525 | - |
December 31, 2011 | ||||||||
Carrying | Estimated | |||||||
amount | fair value | |||||||
Financial assets: | ||||||||
Cash and cash equivalents | $ | 25,361,937 | $ | 25,361,937 | ||||
Investment securities | 143,503,848 | 143,503,848 | ||||||
Federal Home Loan Bank stock | 8,669,300 | 8,669,300 | ||||||
Mortgage loans held for sale | 3,841,412 | 3,841,412 | ||||||
Loans held for investment, net | 552,650,060 | 552,650,060 | ||||||
Accrued interest receivable | 2,801,634 | 2,801,634 | ||||||
Financial liabilities: | ||||||||
Deposits | 674,418,586 | 674,418,586 | ||||||
Short-term borrowings | - | - | ||||||
Long-term debt | 12,215,901 | 12,215,901 | ||||||
Interest rate swaps | 330,114 | 330,114 | ||||||
Accrued interest payable | 779,784 | 779,784 |
NOTE I - CUMULATIVE PERPETUAL PREFERRED STOCK
Pursuant to the United States Treasury’s TARP Capital Purchase Program (“CPP”), the Company issued $24.9 million in Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“preferred stock” or “Series A Preferred Stock”), 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 were 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.
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CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE I - CUMULATIVE PERPETUAL PREFERRED STOCK (Continued)
Predecessor Company
The Predecessor Company used a Black-Scholes option pricing model to calculate the fair value of the common stock warrants issued pursuant to the TARP CPP and in connection with the Series A Preferred Stock. The common stock warrants were assigned a relative fair value of $2.28 per share, or $2.4 million in the aggregate, at issuance on January 9, 2009. This amount was recorded as the discount on the preferred stock and was accreted as a reduction in net income (loss) available for common stockholders over a five-year period. The relative fair value of the preferred stock at issuance was $22.5 million. Through the discount accretion over the five-year period, the preferred stock was scheduled to accrete up to the redemption amount of $24.9 million. For purposes of these calculations, the fair value of the common stock warrant at issuance was estimated using the Black-Scholes option pricing model based on 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 Predecessor Company’s computation of expected volatility was based on daily historical volatility of the Company’s common stock since January of 1999. The risk-free interest rate was based on the market yield for ten-year U.S. Treasury securities as of the issuance date.
Successor Company
The Successor Company assigned an estimated fair value to both the Series A Preferred Stock and common stock warrants in purchase accounting in connection with the Piedmont Investment. These securities represent non-controlling interests that were recorded at estimated fair value. As discussed in Note B – Piedmont Investment, the preferred stock was valued based on forecasting expected cash flows with an assumed repayment date and discounting these cash flows based on current market yields for similar preferred stock. For purposes of the discount rate, the Successor Company used the market yield on an index of publicly traded preferred stocks adjusted for a liquidity factor. The preferred stock was assigned a non-controlling interest fair value of $24.4 million at the acquisition date, and the discount between this value and the $24.9 million redemption value will be accreted as a reduction in net income (loss) available for common stockholders over a two-year period.
The common stock warrants were valued at $1.59 per share, or $1.3 million in the aggregate, at the acquisition date using a Black-Scholes option pricing model. Assumptions used in the Black-Scholes option pricing model were as follows:
Risk-free interest rate | 0.31 | % | ||
Expected life of warrants | 2 years | |||
Expected dividend yield | 0.00 | % | ||
Expected volatility | 65.10 | % |
The risk-free interest rate was based on the market yield for two-year U.S. Treasury securities as of the acquisition date.
As a condition of the TARP CPP, the Company must obtain consent from the U.S. 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 is subjected to heightened corporate governance requirements.
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CRESCENT FINANCIAL BANCSHARES, INC. AND SUBSIDIARY |
Notes to Consolidated Financial Statements |
NOTE I - CUMULATIVE PERPETUAL PREFERRED STOCK (Continued)
On April 12, 2012, the Company received approval from the Federal Reserve Bank of Richmond (the “Federal Reserve Bank”) to resume payment of preferred dividends on TARP Preferred Stock and interest payments due on its subordinated debentures issued in connection with trust preferred securities. The Company deferred dividend payments on its TARP Preferred Stock beginning with the payment due February 15, 2011. The Company will pay all deferred cumulative preferred dividends of $1.6 million plus current dividends on the next scheduled quarterly payment date of May 15, 2012. The Company deferred interest payments on its trust preferred securities beginning with the payment due April 7, 2011 but continued to accrue interest expense in its consolidated financial statements. The Company will pay all accrued deferred interest of $371,000 plus current interest on the next scheduled quarterly payment date of July 7, 2012.
NOTE J - RECENT ACCOUNTING PRONOUNCEMENTS
In September 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles — Goodwill and Other, to amend FASB Accounting Standards Codification (“ASC”) Topic 350, Testing Goodwill for Impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, to amend FASB ASC Topic 220, Comprehensive Income. The amendments in this update eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and will require them to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement format would include the traditional income statement and the components and total other comprehensive income as well as total comprehensive income. In the two statement approach, the first statement would be the traditional income statement which would immediately be followed by a separate statement which includes the components of other comprehensive income, total other comprehensive income and total comprehensive income. The amendments in this update are to be applied retrospectively and are effective for the first interim or annual period beginning after December 15, 2011. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, to amend ASC Topic 820, Fair Value Measurement. The amendments in this update result in common fair value measurement and disclosure requirements in GAAP and IFRS. Some of the amendments clarify the application of existing fair value measurement requirements and others change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. Many of the previous fair value requirements are not changed by this standard. The amendments in this update are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.
In April 2011, the FASB issued ASU 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, to amend ASC Topic 320, Receivables. The amendments in this update clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a borrower is experiencing financial difficulties. The amendments in this update were 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. This update also indicates that companies should disclose the information regarding troubled debt restructurings required by paragraphs 310-10-50-33 through 50-34, which was deferred by ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, for interim and annual periods beginning on or after June 15, 2011. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.
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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 understanding and evaluating the financial condition and consolidated results of operations of Crescent Financial Bancshares, Inc. (the “Company”). This discussion and analysis includes descriptions of significant transactions, trends and other factors affecting the Company’s operating results for the successor three months ended March 31, 2012 and the predecessor three months ended March 31, 2011 as well as the financial condition of the Company as of March 31, 2012. This discussion should be read in conjunction with the unaudited consolidated financial statements and accompanying notes included in this report.
Crescent State Bank (“CSB” or the “Bank”), which is the wholly-owned banking subsidiary of the Company, is a North Carolina-chartered commercial bank which operates fifteen full-service branch offices in the communities of Cary (2), Apex, Clayton, Holly Springs, Pinehurst, Raleigh (3), Southern Pines, Sanford, Garner, Wilmington (2) and Knightdale, North Carolina. CSB is a community bank with the objective of serving businesses, business owners and professionals within its markets. The following discussion and analysis includes financial results of the Bank, which are consolidated with financial results of the Company. The Company and its consolidated banking subsidiary are collectively referred to herein as the Company unless otherwise noted. The Company also has an interest in Crescent Financial Capital Trust I (the “Trust”). The Trust was formed for the sole purpose of issuing trust preferred securities and is not consolidated with the financial results of the Company.
On November 18, 2011, the Company completed the issuance and sale to Piedmont Community Bank Holdings, Inc. (“Piedmont”) of 18,750,000 shares of common stock for $75.0 million in cash (the “Piedmont Investment”). As part of its investment, Piedmont also made a tender offer to the Company’s stockholders commencing on November 8, 2011 to purchase up to 67% (6,442,105 shares) of our outstanding common stock at a price of $4.75 per share (“Tender Offer”). Pursuant to the Tender Offer, Piedmont purchased 6,128,423 shares of the Company’s common stock for $29.1 million. As a result of the Piedmont Investment and the Tender Offer, Piedmont owns approximately 88% of the Company’s outstanding common stock.
The Company’s results of operations in the first quarter of 2012 were significantly impacted by the controlling investment in the Company by Piedmont. Because of the level of Piedmont’s ownership and control following the controlling investment and the Tender Offer, the Company applied push-down accounting. Accordingly, the Company’s assets and liabilities were adjusted to estimated fair value at the acquisition date, and the allowance for loan losses was eliminated. The Company is currently within the one-year measurement period with respect to the acquisition date, and thus, material adjustments to these purchase accounting fair value adjustments are possible. In the first quarter of 2012, goodwill increased by $1.8 million as a result of adjustments to refine the Company’s acquisition date estimate of market rent on two branch leases as well as adjustments to refine the valuation of certain other real estate owned based on subsequent selling prices. Balances and activity in the Company’s consolidated financial statements prior to the Piedmont Investment have been labeled with “Predecessor Company” while balances and activity subsequent to the Piedmont Investment have been labeled with “Successor Company.”
On April 12, 2012, the Company received approval from the Federal Reserve Bank of Richmond (the “Federal Reserve Bank”) to resume payment of preferred dividends on securities issued to the U.S. Treasury in connection with the TARP Capital Purchase Program (“TARP Preferred Stock”) and interest payments due on its subordinated debentures issued in connection with trust preferred securities. The Company deferred dividend payments on its TARP Preferred Stock beginning with the payment due February 15, 2011. The Company will pay all deferred cumulative preferred dividends of $1.6 million plus current dividends on the next scheduled quarterly payment date of May 15, 2012. The Company deferred interest payments on its trust preferred securities beginning with the payment due April 7, 2011 but continued to accrue interest expense in its consolidated financial statements. The Company will pay all accrued deferred interest of $371,000 plus current interest on the next scheduled quarterly payment date of July 7, 2012.
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EXECUTIVE SUMMARY
The following is a summary of the Company’s results of operations and changes in financial condition in the first quarter of 2012:
· | Net income totaled $708,000 in the first quarter of 2012, which was an increase from a net loss of $7.0 million in the predecessor first quarter of 2011 and a net loss of $148,000 in the successor period of November 19 to December 31, 2011; |
· | After the effective dividend on preferred stock, net income available to common stockholders totaled $324,000, or $0.01 per share, in the first quarter of 2012, which was an increase from a net loss to common stockholders of $7.5 million, or ($0.78) per share, in the predecessor first quarter of 2011 and a net loss to common stockholders of $330,000, or ($0.01) per share, in the successor period of November 19 to December 31, 2011. |
· | Asset quality continued to improve as total nonperforming assets decreased from $32.3 million, or 3.87% of total assets, as of December 31, 2011 to $20.9 million, or 2.53% of total assets, as of March 31, 2012; |
· | Net interest margin improved to 4.46% in the first quarter of 2012 from 2.82% in the predecessor first quarter of 2011 and from 3.24% in the successor period of November 19 to December 31, 2011; and |
· | Capital ratios continued to increase as the Company’s tier 1 leverage and total risk-based capital ratios increased from 10.68% and 15.27%, respectively, as of December 31, 2011 to 12.72% and 16.87%, respectively, as of March 31, 2012. |
COMPARISON OF FINANCIAL CONDITION AS OF
MARCH 31, 2012 AND DECEMBER 31, 2011
Total assets at March 31, 2012 were $825.6 million, which was a decrease of $8.9 million, or 1%, from total assets of $834.5 million at December 31, 2011. Earning assets totaled $717.7 million, or 87% of total assets, at March 31, 2012 compared to $725.4 million, or 87% of total assets, at December 31, 2011. Earning assets at March 31, 2012 consisted of $515.8 million in gross loans held for investment, $153.6 million in investment securities and Federal Home Loan Bank (“FHLB”) stock, $45.0 in federal funds sold and interest-earning deposits with correspondent banks and $3.3 million in mortgage loans held for sale. Earning assets at December 31, 2011 consisted of $552.9 million in gross loans held for investment, $152.2 million in investment securities and FHLB stock, $16.5 million in federal funds sold and interest-earning deposits and $3.8 million in mortgage loans held for sale. Total deposits and stockholders’ equity at March 31, 2012 were $658.8 million and $144.6 million, respectively, compared to $674.4 million and $143.1 million, respectively, at December 31, 2011.
Loans and Allowance for Loan Losses
Gross loans held for investment, net of deferred loan fees, totaled $515.8 million at March 31, 2012 reflecting a $37.1 million, or 7%, decrease compared to $552.9 million at December 31, 2011. This decline resulted from a combination of principal payments in the normal course of business, problem asset resolutions and loan sales. Most of the loan categories experienced a balance reduction in the first quarter of 2012. The changes in the portfolio, by category, were as follows: construction and land development loans, $13.3 million decline, or 16%; commercial real estate mortgages, $20.8 million decline, or 7%; residential one-to-four family mortgage loans, $3.7 million decline, or 6%; commercial and industrial loans, $3.8 million increase, or 10%; home equity lines and loans, $3.6 million decline, or 7%; and consumer loans, $0.5 million increase, or 14%.
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The composition of the Company’s loan portfolio at March 31, 2012 was as follows: 56% commercial real estate mortgage loans, 14% construction and land development loans, 12% residential one-to-four family first deed of trust mortgage loans, 9% home equity lines and loans, 8% commercial and industrial loans and consumer loans at less than 1%. The composition of the loan portfolio at December 31, 2011 was as follows: 56% commercial real estate mortgage loans, 15% construction and land development loans, 12% residential one-to-four family first deed of trust mortgage loans, 9% home equity lines and loans, 7% commercial and industrial loans and consumer loans at less than 1%.
The following table summarizes the gross unpaid borrower principal balances (“UPB”) and carrying amounts in the loan portfolio by type at March 31, 2012 and December 31, 2011:
March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||
UPB | Carrying Amount | Carrying Amount as % of UPB | UPB | Carrying Amount | Carrying Amount as % of UPB | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Real estate – commercial | $ | 299,270 | $ | 289,513 | 96.7 | % | $ | 323,426 | $ | 310,315 | 95.9 | % | ||||||||||||
Real estate – residential | 64,621 | 63,298 | 98.0 | % | 69,312 | 67,004 | 96.7 | % | ||||||||||||||||
Construction | 85,147 | 70,663 | 83.0 | % | 109,965 | 83,930 | 76.3 | % | ||||||||||||||||
Commercial and industrial | 44,179 | 43,185 | 97.8 | % | 41,466 | 39,434 | 95.1 | % | ||||||||||||||||
Home equity | 47,379 | 45,371 | 95.8 | % | 51,700 | 48,940 | 94.7 | % | ||||||||||||||||
Consumer | 3,874 | 3,773 | 97.4 | % | 3,439 | 3,300 | 96.0 | % | ||||||||||||||||
Total loans | $ | 544,470 | $ | 515,803 | 94.7 | % | $ | 599,308 | $ | 552,923 | 92.3 | % |
The allowance for loan losses at March 31, 2012 totaled $737,000, which was an increase from $227,000 at December 31, 2011. The net increase is due to an $804,000 provision for loan losses, which was partially offset by $294,000 in net chargeoffs. The allowance for loan losses at March 31, 2012 consisted of $366,000 related to estimated losses inherent in loans originated subsequent to the Piedmont Investment and $371,000 of estimated losses on purchased non-impaired loans. The allowance on loans originated subsequent to the Piedmont Investment was 1.74% of related outstanding loans at March 31, 2012. Based on the Company’s evaluation, there was no impairment recorded on purchased credit-impaired loans at March 31, 2012. For more information regarding the Company’s allowance for loan losses methodology and details regarding the calculation, see section entitled “Analysis of Allowance for Loan Losses.”
The allowance for loan losses at December 31, 2011 totaled $227,000, which reflected estimated losses inherent in loans originated subsequent to the Piedmont Investment. At December 31, 2011, this allowance equaled 2.03% of related loans outstanding. No loan losses were recorded on purchased credit-impaired or purchased non-impaired loans at December 31, 2011.
Nonperforming loans as a percentage of total loans held for investment totaled 2.99% at March 31, 2012, which was a decline from 4.14% at December 31, 2011. Total nonperforming assets (which include nonaccrual loans, loans past due 90 days or more and still accruing, other real estate owned and repossessed loan collateral) as a percentage of total assets at March 31, 2012 totaled 2.53%, which was a decline from 3.87% at December 31, 2011. The decline in nonperforming loans and assets was related to a combination of asset resolutions through borrower payments, note sales, foreclosed asset sales and chargeoffs.
As part of an ongoing, focused effort to reduce its problem asset levels, the Company completed various loan sales to investors in the first quarter of 2012. The loan sales included notes with carrying values totaling $17.1 million at December 31, 2011, of which $7.5 million were classified as nonperforming. Included in these loan sales was a sale of notes with a total carrying value of $5.0 million to VantageSouth Holdings, Inc., which is a wholly-owned subsidiary of Piedmont. These loans were sold at estimated fair value, and no gain or loss was recorded on the transaction. For more information regarding nonperforming assets, see section below entitled “Nonperforming Assets.”
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Investment Securities
The amortized cost and fair value of the securities portfolio were $143.6 million and $144.9 million, respectively, at March 31, 2012 compared to $143.5 million for both at December 31, 2011. All investment securities are accounted for as available for sale and are recorded at fair value with unrealized gains and losses charged to accumulated other comprehensive income. The investment securities portfolio at March 31, 2012 consisted of mortgage-backed securities (“MBSs”), collateralized mortgage obligations (“CMOs”), municipal bonds, investment grade corporate bonds and the common stock of two publicly traded companies. All MBSs and CMOs were issued by either a Government Sponsored Enterprise (“GSE”), such as Federal Home Loan Mortgage Corporation (“Freddie Mac”) or the Federal National Mortgage Association (“Fannie Mae”) or the government-owned Government National Mortgage Association (“Ginnie Mae”). The Company did not own any corporate issued, or private label, CMOs at March 31, 2012 or December 31, 2011.
At March 31, 2012 and December 31, 2011, the securities portfolio had $1.7 million and $525,000, respectively, of unrealized gains and $286,000 and $507,000, respectively, of unrealized losses. None of these securities had been in an unrealized loss position for more than twelve months at either date.
The following table summarizes the amortized costs and fair value of available for sale securities at March 31, 2012 and December 31, 2011:
March 31, 2012 | December 31, 2011 | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Securities available for sale: | ||||||||||||||||
Mortgage-backed | $ | 26,695 | $ | 26,792 | $ | 19,452 | $ | 19,364 | ||||||||
Collateralized mortgage obligations | 79,001 | 79,014 | 82,192 | 82,095 | ||||||||||||
Municipal | 13,259 | 13,608 | 13,281 | 13,514 | ||||||||||||
Corporate bonds | 24,072 | 24,908 | 28,042 | 27,966 | ||||||||||||
Marketable equity securities | 532 | 621 | 519 | 565 | ||||||||||||
Total securities available for sale | $ | 143,559 | $ | 144,943 | $ | 143,486 | $ | 143,504 |
The Company also owned $8.7 million of FHLB stock at both March 31, 2012 and December 31, 2011. This stock is recorded at cost and is classified separately from investment securities available for sale.
Non-Interest Earning Assets
Total non-interest earning assets decreased from $109.3 million at December 31, 2011 to $108.6 million at March 31, 2012. Accrued interest receivable, cash and due from banks, and premises and equipment increased by $0.7 million, $3.2 million and $0.3 million, respectively. Foreclosed assets declined by $3.9 million primarily as a result of the Company receiving $4.5 million in proceeds from dispositions. The decline in foreclosed assets was partially offset by transfers into other real estate owned.
Net deferred tax assets decreased by $499,000 during the first quarter of 2012 to a balance of $29.7 million at March 31, 2012. Deferred tax assets represent, among other items, the tax impact of purchase accounting fair value adjustments as well as predecessor company net operating losses that are available to be carried forward and used to offset future taxable income.
The Company has evaluated its deferred tax assets to determine whether a valuation allowance is necessary. In conducting this evaluation, all available evidence, both positive and negative, was considered based on the more-likely-than-not criteria that such assets will be realized. This evaluation included, but was not limited to: (1) available carry back potential to offset federal tax; (2) potential future reversals of existing deferred tax liabilities, which historically have a reversal pattern generally consistent with deferred tax assets; (3) potential tax planning strategies; and (4) future projected taxable income. Our assessment of future projected taxable income considered significant changes which occurred throughout the Company because of the recapitalization with the Piedmont Investment. These changes include improved capital levels, improved asset quality, significant management and organizational improvements, improved liquidity and improved risk management processes. These factors have significantly improved the Company’s earnings potential since the Piedmont Investment. Based on this evaluation, and considering the weight of the positive evidence compared to the negative evidence, the Company concluded that at March 31, 2012, a valuation allowance was not necessary.
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Goodwill and other intangibles totaled $21.8 million and $2.2 million, respectively, and $20.0 million and $2.2 million, respectively, at March 31, 2012 and December 31, 2011. Goodwill represents the excess of purchase price in the Piedmont Investment over the fair value of acquired net assets, including non-controlling interests. As part of the valuation of net assets, the Company also identified and recorded the value of customer deposit relationships, or core deposit intangible, as an other intangible asset. The core deposit intangible is being amortized over its estimated useful life using an accelerated method. The Company is currently within the one-year measurement period with respect to the acquisition date, and thus, material adjustments to purchase accounting fair value adjustments are possible. In the first quarter of 2012, goodwill increased by $1.8 million as a result of adjustments to refine the acquisition date estimate of market rent on two branch leases as well as adjustments to refine the valuation of certain other real estate owned based on subsequent selling prices.
Deposits
Total deposits at March 31, 2012 were $658.8 million compared to $674.4 million at December 31, 2011, reflecting a $15.6 million decline. Despite the 2% decrease in total deposits during the first quarter of 2012, there were changes to the mix of deposits within the portfolio which served to reduce the Company’s reliance on non-core funding and improve its cost of funds. Non-core, wholesale time deposits decreased by $12.3 million from $112.0 million at December 31, 2011 to $99.7 million at March 31, 2012. Retail time deposits decreased by $8.0 million, or 4%. In contrast, money market deposits increased by $41.9 million, or 56%, growing from $74.4 million at December 31, 2011 to $116.3 million at March 31, 2012. Other interest-bearing, non-maturity deposits declined by a total of $21.3 million, and non-interest bearing demand deposits decreased by $15.9 million during the quarter.
The composition of the deposit portfolio, by category, at March 31, 2012 was as follows: 44% in time deposits, 21% in interest-bearing deposits, 11% in non-interest bearing demand deposits, 18% in money market and 6% in statement savings. The composition of the deposit portfolio, by category, at December 31, 2011 was as follows: 46% in time deposits, 22% in interest-bearing deposits, 14% in non-interest bearing demand deposits, 11% in money market and 7% in statement savings.
The following table summarizes balances outstanding and average interest rates for each major category of deposits at March 31, 2012 and December 31, 2011:
March 31, 2012 | December 31, 2011 | |||||||||||||||
Outstanding Balance | Average Rate(1) | Outstanding Balance | Average Rate(2) | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Non-interest bearing | $ | 75,320 | – | $ | 91,215 | – | ||||||||||
Interest bearing demand | 135,145 | 0.67 | % | 152,180 | 1.03 | % | ||||||||||
Money market | 116,288 | 0.84 | % | 74,404 | 0.96 | % | ||||||||||
Savings | 42,613 | 0.20 | % | 46,840 | 0.30 | % | ||||||||||
Retail time deposits | 189,728 | 0.79 | % | 197,769 | 0.76 | % | ||||||||||
Wholesale time deposits | 99,735 | 1.15 | % | 112,011 | 1.12 | % | ||||||||||
Total interest bearing deposits | 583,509 | 0.79 | % | 583,204 | 0.88 | % | ||||||||||
Total deposits | $ | 658,829 | 0.69 | % | $ | 674,419 | 0.77 | % |
(1) Average rate for the three months ended March 31, 2012.
(2) Average rate for the period from November 19 to December 31, 2011.
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Borrowings
Total borrowings were $17.3 million at March 31, 2012 compared to $12.3 million at December 31, 2011, an increase of $5.0 million. Long-term debt at March 31, 2012 and December 31, 2011 consisted of $6.8 million in subordinated term loans issued to a non-affiliated financial institution as well as $5.5 million and $5.4 million, respectively, in junior subordinated debt issued in the form of trust preferred securities. In the first quarter of 2012, the Company borrowed $5.0 million in short-term advances from the Federal Home Loan Bank of Atlanta (“FHLB advances”), which remained outstanding at March 31, 2012.
Stockholders’ Equity
Total stockholders’ equity increased by $1.6 million, from $143.1 million at December 31, 2011 to $144.6 million at March 31, 2012. This increase was partially due to a $660,000 increase in retained earnings resulting from net income less accretion on preferred stock in the first quarter of 2012 and was partially due to an $840,000 increase in accumulated comprehensive income from an increase in net unrealized gains on the available for sale securities portfolio.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2012 (SUCCESSOR) AND MARCH 31, 2011 (PREDECESSOR)
Net income for the three months ended March 31, 2012, before adjusting for the effective dividend on preferred stock, was $708,000 compared to net loss of $7.0 million for the three months ended March 31, 2011. After adjusting for $384,000 and $427,000 in dividends and discount accretion on preferred stock for the two respective periods, net income attributable to common stockholders for the current period was $324,000, or $0.01 per diluted share, compared with net loss attributable to common stockholders of $7.5 million, or $(0.78) per diluted share, for the first quarter of the prior year. Annualized return on average assets increased to 0.35% from (2.96%) for the prior period. Return on average equity for the current period was 1.97% compared to (36.52%) for the prior period.
Net Interest Income
Net interest income in the first quarter of 2012 totaled $7.9 million while net interest income in predecessor first quarter of 2011 totaled $6.0 million. Net interest margin increased from 2.82% in the first quarter of 2011 to 4.46% in the first quarter of 2012. This significant margin improvement was primarily due to a decline in funding costs as the average rate on total interest-bearing liabilities fell from 2.33% in the first quarter of 2011 to 0.95% in the first quarter of 2012. Yield on earning assets increased from 4.93% in the first quarter of 2011 to 5.25% in the first quarter of 2012. Average earning assets totaled $718.6 million in the first quarter of 2012, which was a decline from $907.8 million in the first quarter of 2011. The decline in average earning assets was due to balance sheet restructuring late in 2011 following the Piedmont Investment, purchase accounting fair value adjustments, and continued resolution of legacy problem assets.
Average earning assets totaled $718.6 million in the first quarter of 2012, which was a decline of $189.2 million, or 21%, from $907.8 million in the first quarter of 2011. The decline in average earning assets was due to balance sheet restructuring late in 2011, a change in the Company’s business model which has shifted the loan portfolio mix, purchase accounting fair value adjustments, and continued resolution of legacy problem assets. This decline in average earning assets was comprised of a $126.8 million decrease in the average balance of loans outstanding, a $37.4 million decrease in the average balance of the securities portfolio and a $25.0 million decrease in the average balances of federal funds sold and other interest-earning cash.
Average interest-bearing liabilities totaled $590.9 million in the first quarter of 2012, which was a decline of $231.5 million, or 28%, from $822.4 million in the first quarter of 2011. Average total interest-bearing deposits decreased by $88.8 million, or 13%, from $663.8 million in the first quarter of 2011 to $575.0 million in the first quarter of 2012. Total average time deposits declined by $80.0 million as the Company has reduced its exposure to brokered deposits by $42.0 million over the past year. Average total borrowings decreased by $142.7 million, or 90%, from $158.6 million in the first quarter of 2011 to $15.9 million in the first quarter of 2012. The significant reduction in average borrowings was primarily due to the early redemption of all outstanding FHLB advances following the Piedmont Investment.
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Accretion of the discount on purchased non-impaired loans added $380,000 to net interest income in the first quarter of 2012 and increased earning asset yields by 0.21%. Additionally, the Company recorded $563,000 of income in the quarter related to recovery payments in excess of carrying value on certain purchased credit-impaired loans, which benefited earning asset yields by 0.31%. Net amortization of purchase accounting fair value adjustments on interest-bearing liabilities increased net interest income by $859,000 in the first quarter of 2012 and lowered funding costs by 0.60%. The remaining 0.78% decline in funding costs from the first quarter of 2011 was due to the repricing and change in mix of deposits to favor low-cost, core deposits.
Provision for Loan Losses
Provision for loan losses in the first quarter of 2012 totaled $804,000 while provision for loan losses in the predecessor first quarter of 2011 totaled $7.0 million. The loan loss provision in the first quarter of 2012 reflected an increase of $139,000 in estimated losses in loans originated subsequent to the Piedmont Investment as well as $665,000 of credit losses on the purchased non-impaired loan portfolio. Although the purchased non-impaired loan portfolio was adjusted to fair value at acquisition, the Company records charge-offs for losses in excess of the fair value adjustments and provides reserves for deterioration in credit quality on this portfolio since acquisition. The purchased credit-impaired loan portfolio was adjusted to fair value at acquisition and no additional impairment on these loans was evident during the first quarter of 2012.
Non-Interest Income
Noninterest income in the first quarter of 2012 totaled $1.6 million compared with $1.0 million in the predecessor first quarter of 2011. The primary reason for this increase is the growth in the mortgage lending business. Total mortgage lending income increased from $166,000 in the first quarter of 2012. The Company restructured its mortgage lending business following the Piedmont Investment, hired additional experienced mortgage lenders and continues to benefit from the currently low interest rate environment. Further, the Company realized a net gain of $192,000 on the sale of available for sale securities in the first quarter of 2012 compared to a net gain of $101,000 in the first quarter of 2011.
Non-Interest Expenses
Noninterest expense in the first quarter of 2012 totaled $7.7 million compared with $7.1 million in the predecessor first quarter of 2011. Salaries and employee benefits increased by $475,000 thousand, or 14%, due to a contract termination payment to a former executive as well as the recent addition of certain management positions as part of the Company’s management team and business line restructuring. Also contributing to higher noninterest expense was an increase of $98,000 in data processing costs and an increase of $113,000 in professional services expense. Partially offsetting these increased expenses were decreases in the Company’s FDIC insurance premiums, occupancy and equipment expense, and advertising and marketing costs of $105,000, $41,000 and $33,000, respectively.
Income Taxes
Income tax expense in the first quarter of 2012 totaled $354,000, which represented a 33% effective tax rate on pre-tax income. This effective tax rate was determined by the Company’s statutory income tax rate adjusted for non-taxable municipal investment income and earnings on life insurance. The Company did not record any tax benefit associated with the pre-tax loss in the predecessor first quarter of 2011. The valuation allowance on deferred tax assets was increased by $2.8 million during the first quarter of 2011, which represented a full reserve on the tax benefit generated by losses in that quarter.
Because of the improvement in the Company’s earnings prospects following the Piedmont Investment and following an analysis of positive and negative evidence related to its deferred tax assets, the Company determined that there was sufficient positive evidence to indicate that it would likely realize the full value of its deferred tax assets over time and therefore held no valuation allowance on its deferred tax assets as of March 31, 2012.
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NET INTEREST INCOME AND MARGIN ANALYSIS
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, 2012 and 2011. 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, FHLB stock is included in average investment securities. Non-accrual loans are included in the average loan balance.
AVERAGE BALANCES, INTEREST AND YIELDS/COSTS
(Dollars in thousands)
Successor Company | Predecessor Company | |||||||||||||||||||||||
For the Three Months Ended March 31, 2012 | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance | Interest | Yield/Cost | Balance | Interest | Yield/Cost | |||||||||||||||||||
Interest-earnings assets | ||||||||||||||||||||||||
Loan portfolio | $ | 541,361 | $ | 8,335 | 6.18 | % | $ | 668,152 | $ | 9,078 | 5.51 | % | ||||||||||||
Investment securities | 152,811 | 963 | 2.71 | %* | 190,187 | 1,663 | 4.08 | %* | ||||||||||||||||
Fed funds and other interest-earning | 24,457 | 12 | 0.20 | % | 49,454 | 29 | 0.24 | % | ||||||||||||||||
Total interest-earning assets | 718,629 | 9,310 | 5.25 | % | 907,793 | 10,770 | 4.93 | % | ||||||||||||||||
Noninterest-earning assets | 101,449 | 56,312 | ||||||||||||||||||||||
Total assets | $ | 820,078 | $ | 964,105 | ||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Interest-bearing NOW | $ | 142,452 | 237 | 0.67 | % | $ | 150,431 | 760 | 2.05 | % | ||||||||||||||
Money market and savings | 132,648 | 206 | 0.62 | % | 133,501 | 315 | 0.96 | % | ||||||||||||||||
Time deposits | 299,895 | 681 | 0.91 | % | 379,877 | 2,274 | 2.43 | % | ||||||||||||||||
Short-term borrowings | 3,648 | 2 | 0.22 | % | 3,633 | 15 | 1.67 | % | ||||||||||||||||
Long-term debt | 12,238 | 276 | 9.05 | % | 154,970 | 1,371 | 3.54 | % | ||||||||||||||||
Total interest-bearing liabilities | 590,881 | 1,402 | 0.95 | % | 822,412 | 4,735 | 2.33 | % | ||||||||||||||||
Non-interest bearing deposits | 79,933 | 59,085 | ||||||||||||||||||||||
Other liabilities | 4,663 | 4,346 | ||||||||||||||||||||||
Total liabilities | 675,477 | 885,843 | ||||||||||||||||||||||
Stockholders' equity | 144,601 | 78,262 | ||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 820,078 | $ | 964,105 | ||||||||||||||||||||
Net interest income | $ | 7,908 | $ | 6,035 | ||||||||||||||||||||
Interest rate spread | 4.30 | % | 2.60 | % | ||||||||||||||||||||
Tax equivalent net interest-margin | 4.46 | % | 2.82 | % | ||||||||||||||||||||
Percentage of average interest-earning assets to average interest-bearing liabilities | 121.62 | % | 110.38 | % |
* Shown as a tax equivalent yield
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NONPERFORMING ASSETS
Loans are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date. Loans are generally classified as nonaccrual if they are past due for a period of more than 90 days, unless such loans are well secured and in the process of collection. If a loan or a portion of a loan is classified as doubtful or as partially charged off, the loan is generally classified as nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance of interest and principal by the borrower in accordance with the contractual terms.
While a loan is classified as nonaccrual and the future collectability of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to the principal outstanding, except in the case of loans with scheduled amortizations where the payment is generally applied to the oldest payment due. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.
Assets acquired as a result of foreclosure are recorded at estimated fair value in other real estate. Any excess of cost over estimated fair value at the time of foreclosure is charged to the allowance for loan losses. Valuations are periodically performed on these properties, and any subsequent write-downs are charged to earnings. Routine maintenance and other holding costs are included in non-interest expense.
A loan is classified as a troubled debt restructuring (“TDR”) 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. The Company grants concessions by (1) reduction of the stated interest rate for the remaining original life of the debt or (2) extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. The Company does not generally grant concessions through forgiveness of principal or accrued interest.
The Company’s policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is likely. If a borrower was materially delinquent on payments prior to the restructuring but shows the capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward until demonstrated performance under new terms. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status. The Company closely monitors these loans and ceases accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms.
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The table below summarizes information about the Company’s nonperforming loans and nonperforming assets as well as certain key credit quality ratios at March 31, 2012 and December 31, 2011:
March 31, 2012 | December 31, 2011 | |||||||
(Dollars in thousands) | ||||||||
Nonaccrual loans(1) | $ | 387 | $ | – | ||||
Accruing loans past due 90 days or more(1) | 15,036 | 22,888 | ||||||
Foreclosed assets | 5,497 | 9,422 | ||||||
Total nonperforming assets | $ | 20,920 | $ | 32,310 | ||||
Restructured loans not included above | $ | – | $ | – | ||||
Allowance for loan losses | $ | 737 | $ | 227 | ||||
Allowance for loan losses to total loans | 0.14 | % | 0.04 | % | ||||
Allowance for loan losses to loans originated by Successor Company | 1.73 | % | 2.03 | % | ||||
Nonperforming loans to total loans | 2.99 | % | 4.14 | % | ||||
Nonperforming assets to total assets | 2.53 | % | 3.87 | % |
(1) | Nonaccrual loans generally include loans for which full collection of principal and interest is not expected or loans past due greater than 90 days. All loans classified as purchased-credit impaired at March 31, 2012 and December 31, 2011 exhibiting these characteristics were included in an acquired loan pool and were therefore accreting interest based on the applicable pool yield. Therefore, these loans are classified as accruing loans past due 90 days or more and are considered nonperforming at both dates. |
The following table below summarizes information about the Company’s nonperforming loans by type at March 31, 2012 and December 31, 2011:
March 31, 2012 | December 31, 2011 | |||||||||||||||
Carrying Value | Percentage of Total Loans in Category | Carrying Value | Percentage of Total Loans in Category | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Nonperforming loans: | ||||||||||||||||
Construction | $ | 5,859 | 8.29 | % | $ | 10,710 | 12.76 | % | ||||||||
Real estate – commercial | 5,469 | 1.89 | % | 6,101 | 1.97 | % | ||||||||||
Real estate – residential | 2,922 | 4.62 | % | 4,148 | 6.19 | % | ||||||||||
Commercial and industrial | 811 | 1.88 | % | 798 | 2.02 | % | ||||||||||
Home equity | 359 | 0.79 | % | 1,128 | 2.30 | % | ||||||||||
Consumer | 3 | 0.08 | % | 3 | 0.09 | % | ||||||||||
Total nonperforming loans | $ | 15,423 | 2.99 | % | $ | 22,888 | 4.14 | % |
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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 at least a quarterly basis. The evaluation of the adequacy of the allowance for loan losses includes loans evaluated collectively for impairment and loans evaluated individually for impairment and involves considerations of adverse conditions affecting a borrower’s ability to repay, collateral values, historical loan loss experience, current delinquency levels and trends, loan growth, loan portfolio composition, industry diversification, prevailing economic conditions and all other relevant factors.
Because of the Piedmont Investment on November 18, 2011, the Company’s assets and liabilities were adjusted to fair value at acquisition, and the allowance for loan losses was eliminated. The Company’s methodology for evaluating the allowance for loan losses applies to all loans originated subsequent to the Piedmont Investment and acquired loans not identified as purchased credit-impaired. The allowance for loan losses of $737,000 at March 31, 2012 reflected $366,000 of losses incurred on new loans originated subsequent to the Piedmont Investment and $371,000 of losses on purchased non-impaired loans. For purchased credit-impaired loans, estimates of cash flows expected to be collected are updated each reporting period, and probable decreases in cash flows are charged to the provision for loan losses. No impairment on purchased credit-impaired loans was identified at March 31, 2012.
The Company uses an internal grading system to assign the degree of inherent risk on each loan in the portfolio. The risk grade is initially assigned by the lending officer and reviewed by the loan administration function. The internal risk grading system is reviewed and tested periodically by an independent third party credit review firm. The allowance for loan losses model uses the Company’s internal loan grading system to segment each category of loans by risk grade. The Company’s internal grading system is comprised of nine different risk classifications. Generally, loans with a risk grade 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. These loans are evaluated collectively for impairment. Loans with a risk grade of 7 through 9 are generally considered impaired and are individually evaluated for impairment. Certain risk grade 7 loans which continue to accrue interest and have not been restructured are not considered impaired.
The loss rates applied to loans with a risk grade of 1 through 6 are determined based on historical charge-off rates and certain qualitative factors. For each loan type, the average historical charge-off rate is calculated over a two year period. Additionally, qualitative factors are added which reflect current economic conditions and trends. Together, these two components comprise the loss rates for loans evaluated collectively for impairment.
Loans that are identified through the Company’s internal loan grading system as impaired are evaluated individually for impairment. When management believes a real estate collateral-supported loan will be downgraded 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 loss. The net value of collateral based on the Company’s 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. When an impaired loan is determined to be collateral dependent and the borrower or guarantors no longer demonstrate the ability of willingness to service the debt, the loan is charged down to its estimated fair value.
The Company’s regulators, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about all relevant information available to them at the time of their examination. Any adjustments to original estimates are made in the period in which the factors and other considerations indicate that adjustments to the allowance for loan losses are necessary.
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The following table summarizes the allocation of the allowance for loan losses among various categories of loans at March 31, 2012 and December 31, 2011:
March 31, 2012 | December 31, 2011 | |||||||||||||||
Amount | % of Total Allowance | Amount | % of Total Allowance | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Allowance for loan losses: | ||||||||||||||||
Real estate – commercial | $ | 79 | 10.72 | % | $ | 126 | 55.95 | % | ||||||||
Real estate – residential | 23 | 3.12 | 39 | 12.27 | ||||||||||||
Construction | 100 | 13.57 | 21 | 15.35 | ||||||||||||
Commercial and industrial | 178 | 24.15 | 30 | 7.18 | ||||||||||||
Home equity | 341 | 46.27 | 8 | 9.13 | ||||||||||||
Consumer | 16 | 2.17 | 3 | 0.12 | ||||||||||||
Total allowance | $ | 737 | 100.00 | % | $ | 227 | 100.00 | % |
The following table summarizes information regarding changes in the allowance for loan losses for the three months ended March 31, 2012 and 2011:
Successor Company | Predecessor Company | |||||||
(dollars in thousands) | Three Months Ended March 31, 2012 | Three Months Ended March 31, 2011 | ||||||
Allowance for loan losses, beginning of period | $ | 227 | $ | 20,702 | ||||
Charge-offs: | ||||||||
Real estate – commercial | – | 216 | ||||||
Real estate – residential | – | 227 | ||||||
Construction | – | 3,761 | ||||||
Commercial and industrial | – | 269 | ||||||
Home equity | 294 | 112 | ||||||
Consumer | – | 14 | ||||||
Total charge-offs | 294 | 4,599 | ||||||
Recoveries: | ||||||||
Real estate – commercial | – | – | ||||||
Real estate – residential | – | 2 | ||||||
Construction | – | 312 | ||||||
Commercial and industrial | – | 36 | ||||||
Home equity | – | 8 | ||||||
Consumer | – | – | ||||||
Total recoveries | – | 358 | ||||||
Net charge-offs | 294 | 4,241 | ||||||
Provision for loan losses | 804 | 7,024 | ||||||
Allowance for loan losses, end of period | $ | 737 | $ | 23,485 | ||||
Average loans held for investment for the period | 541,361 | 666,448 | ||||||
Net charge-offs to average loans held for investment | 0.22 | % | 2.58 | % |
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity management involves the ability to fund the needs and requirements of depositors and borrowers, paying operating expenses and ensuring compliance with regulatory liquidity requirements. To ensure the Company is positioned to meet immediate and future cash demands, it relies on internal analysis of liquidity, knowledge of current economic and market trends and forecasts of future conditions. Investment portfolio principal payments and maturities, loan principal payments, deposit growth, brokered deposit sources, and available borrowings from the FHLB, the Federal Reserve Bank and a federal funds line are the primary sources of liquidity for the Company. The primary uses of liquidity are repayments of borrowings, disbursements of loan proceeds and investment purchases.
At March 31, 2012, liquid assets (which include cash and due from banks, interest-earning deposits with banks, federal funds sold and investment securities available for sale) totaled $202.0 million, which represented 24% of total assets and 31% of total deposits. Supplementing this on-balance sheet liquidity, the Company has available off-balance sheet liquidity in the form of lines of credit from various correspondent banks which totaled $280.9 million at March 31, 2012. At March 31, 2012, outstanding commitments for undisbursed lines of credit and letters of credit totaled $104.5 million and outstanding capital commitments to a private investment fund were $175,000. Management believes that the aggregate liquidity position of the Company is sufficient to meet deposit maturities and withdrawals, borrowing commitments and loan funding requirements. Core deposits (total deposits less brokered deposits), one of our most stable sources of liquidity, together with common equity capital funded $679.2 million, or 82%, of total assets at March 31, 2012 compared with $681.0 million, or 82%, of total assets at December 31, 2011.
Total stockholders’ equity increased by $1.6 million, from $143.1 million at December 31, 2011 to $144.6 million at March 31, 2012. This increase was partially due to a $660,000 increase in retained earnings resulting from net income less accretion on preferred stock in the first quarter of 2012 and was partially due to an $840,000 increase in accumulated comprehensive income from an increase in net unrealized gains on the available for sale securities portfolio.
At March 31, 2012, the Company had a leverage ratio of 12.72%, a Tier 1 capital ratio of 15.66%, and a total risk-based capital ratio of 16.87%. These ratios exceed all federal regulatory capital requirements. The Company’s tangible equity to tangible assets ratio increased from 14.87% at December 31, 2011 to 15.05% at March 31, 2012, and its tangible common equity to tangible assets ratio increased from 11.87% at December 31, 2011 to 11.99% at March 31, 2012. The Bank is currently operating under additional capital requirements which call for the maintenance of a Tier 1 leverage ratio and total risk-based capital ratio of 8.00% and 11.00%, respectively. At March 31, 2012, the Bank had a leverage ratio of 12.18% and a total risk-based capital ratio of 16.17%, both of which exceeded the additional capital requirements.
On April 12, 2012, the Company received approval from the Federal Reserve Bank to resume payment of preferred dividends on its TARP Preferred Stock and interest payments due on its subordinated debentures issued in connection with trust preferred securities. The Company deferred dividend payments on its TARP Preferred Stock beginning with the payment due February 15, 2011. The Company will pay all deferred cumulative preferred dividends of $1.6 million plus current dividends on the next scheduled quarterly payment date of May 15, 2012. The Company deferred interest payments on its trust preferred securities beginning with the payment due April 7, 2011 but continued to accrue interest expense in its consolidated financial statements. The Company will pay all accrued deferred interest of $371,000 plus current interest on the next scheduled quarterly payment date of July 7, 2012.
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FORWARD-LOOKING INFORMATION
This quarterly report on Form 10-Q contains certain “forward-looking statements” that represent management’s judgments 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. Risks and other factors that could influence the estimates include risks associated with the ownership by Piedmont of a majority of the Company’s voting power, including interests of Piedmont differing from other stockholders or any change in management, strategic direction, business plan, or operations, the Company’s new management’s ability to successfully integrate into the Company’s business and execute its business plan, local economic conditions affecting retail and commercial real estate, disruptions in the credit markets, changes in interest rates, adverse developments in the real estate market affecting the value and marketability of collateral securing loans made by the Bank, the failure of assumptions underlying loan loss and other reserves, competition and the risk of new and changing regulation. Additional factors that could cause actual results to differ materially are discussed in the Company’s filings with the Securities and Exchange Commission, including without limitation its Annual Report on Form 10-K. The forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date hereof, and the Company does not assume any obligation to update such forward-looking statements, except as may otherwise be required by law.
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, 2011.
Item 4. Controls and Procedures
The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2012. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective 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.
There were no changes in the Company’s internal controls over financial reporting during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, these internal controls.
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Part II. | OTHER INFORMATION |
Item 1. Legal Proceedings
The Company is involved in legal proceedings which arise in the ordinary course of business, none of which are considered material.
Item 1a. Risk Factors
There are no significant changes to the Company’s risk factors as disclosed in its Form 10-K as of December 31, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Debt
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibits
10.1 | Tax Sharing Agreement, effective as of December 22, 2011, between Piedmont Community Bank Holdings, Inc. and Crescent Financial Bancshares, Inc. (incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on January 24, 2012). |
10.2 | Separation and Release Agreement, dated as of January 30, 2012, by and among Crescent Financial Bancshares, Inc., Crescent State Bank and Michael G. Carlton (incorporated by reference from the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2012). |
10.3 | Separation and Release Agreement, dated as of January 27, 2012, by and between Crescent State Bank and Thomas E. Holder, Jr. (incorporated by reference from the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2012). |
10.4 | Separation and Release Agreement, dated as of February 13, 2012, by and between Crescent State Bank and Ray D. Vaughn (incorporated by reference from the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2012). |
10.5 | Separation and Release Agreement, dated as of March 15, 2012, by and among Crescent Financial Bancshares, Inc., Crescent State Bank and Bruce W. Elder (incorporated by reference from the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2012). |
10.6 | Affiliate Services Agreement, entered into March 28, 2012, by and among Crescent Financial Bancshares, Inc., Crescent State Bank, Piedmont Community Bank Holdings, Inc. and VantageSouth Bank (incorporated by reference from the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2012). |
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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 Principal 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. |
101.INS* | XBRL Instance Document. |
101.SCH* | XBRL Taxonomy Extension Schema Document. |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document. |
* XBRL information is deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CRESCENT FINANCIAL BANCSHARES, INC. | |||
Date: | May 15, 2012 | By: | /s/ Scott M. Custer |
Scott M. Custer | |||
President and Chief Executive Officer | |||
Date: | May 15, 2012 | By: | /s/ Terry S. Earley |
Terry S. Earley | |||
Executive Vice President and Chief Financial Officer |
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