U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20429
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2002
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO ___________
Commission File Number 000-32951
CRESCENT FINANCIAL CORPORATION
------------------------------
(Exact name of small business issuer as specified in its charter)
NORTH CAROLINA 56-2259050
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(State of Incorporation) (IRS Employer
Identification Number)
1005 HIGH HOUSE ROAD, CARY, NORTH CAROLINA 27513
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(Address of principal executive offices)
(919) 460-7770
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(Issuer's Telephone Number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 _____
---
The number of shares of the registrant's common stock outstanding as of April
24, 2002 was 1,450,718.
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Page No.
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets
March 31, 2002 and December 31, 2001 ............................................. 3
Consolidated Statements of Operations
Three Month Periods Ended March 31, 2002 and 2001 ................................ 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2002 and 2001 ....................................... 5
Notes to Consolidated Financial Statements ....................................... 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations ........................................................................ 7 - 20
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders ...................... 21
Item 6. Exhibits and Reports on Form 8-K ......................................... 21
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
-----------------------------
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------------------------------------------
March 31, 2002 December 31,
(Unaudited) 2001*
---------------- ------------
(dollars in thousands)
ASSETS
Cash and due from banks $ 4,469 $ 10,095
Interest-earning deposits with banks 768 4,589
Federal funds sold 6,074 10,319
Investment securities available for sale at fair value 21,932 22,833
Loans 93,559 80,574
Allowance for loan losses (1,329) (1,116)
-------------- -----------
NET LOANS 92,230 79,458
Accrued interest receivable 548 513
Federal Home Loan Bank stock 250 250
Bank premises and equipment 780 851
Other assets 839 266
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TOTAL ASSETS $ 127,890 $ 129,174
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $ 20,505 $ 27,122
Savings 1,142 683
Money market and NOW 39,785 39,251
Time 50,481 46,099
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TOTAL DEPOSITS 111,913 113,155
Federal Home Loan Bank advances 5,000 5,000
Accrued expenses and other liabilities 428 569
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TOTAL LIABILITIES 117,341 118,724
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STOCKHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares authorized,
none outstanding; - -
Common stock, $1 par value, 20,000,000 shares authorized; 1,450,718 shares
issued and outstanding 1,290 1,290
Additional paid-in capital 9,625 9,625
Accumulated deficit (438) (653)
Accumulated other comprehensive income 72 188
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TOTAL STOCKHOLDERS' EQUITY 10,549 10,450
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COMMITMENTS (Note B)
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 127,890 $ 129,174
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* Derived from audited financial statements.
See accompanying notes.
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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended March 31, 2002 and 2001
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2002 2001
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(dollars in thousands
except per share data)
INTEREST INCOME
Loans $ 1,476 $ 1,233
Investment securities available for sale 340 230
Federal funds sold and interest-bearing deposits 32 173
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TOTAL INTEREST INCOME 1,848 1,636
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INTEREST EXPENSE
Deposits 617 830
Borrowings 57 -
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TOTAL INTEREST EXPENSE 674 830
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NET INTEREST INCOME 1,174 806
PROVISION FOR LOAN LOSSES 213 131
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 961 675
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NON-INTEREST INCOME 160 81
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NON-INTEREST EXPENSE
Salaries and employee benefits 466 388
Occupancy and equipment 195 183
Data processing 60 48
Other 214 176
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TOTAL NON-INTEREST EXPENSE 935 795
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INCOME (LOSS) BEFORE INCOME TAXES 186 (39)
INCOME TAX EXPENSE (BENEFIT) (29) -
------------ -----------
NET INCOME (LOSS) $ 215 $ (39)
============ ===========
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE $ .15 $ (.03)
============ ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC 1,450,718 1,450,718
============ ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING DILUTED 1,479,638 1,450,718
============ ===========
See accompanying notes.
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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, 2002 and 2001
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2002 2001
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(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 215 $ (39)
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Adjustments to reconcile net loss to net cash used by operating activities
Depreciation 77 75
Provision for loan losses 213 131
Deferred income taxes (99) -
(Gain)/loss on sale of securities - (2)
Net amortization of premiums on securities (2) (7)
Change in assets and liabilities
(Increase) in accrued interest receivable (35) (59)
(Increase) in other assets (53) (1)
Increase in accrued interest payable 5 41
(Decrease) in other liabilities (146) (85)
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TOTAL ADJUSTMENTS (40) 93
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NET CASH PROVIDED BY OPERATING ACTIVITIES 175 54
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (529) (3,818)
Proceeds from sales of securities available for sale - 1,004
Maturities of securities available for sale 600 1,000
Principal repayments of securities available for sale 643 168
Net increase in loans (13,333) (10,091)
Purchases of bank premises and equipment (6) (51)
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NET CASH USED BY INVESTING ACTIVITIES (12,625) (11,788)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits:
Noninterest-bearing demand (6,617) 2,184
Savings 459 96
Money market and NOW 534 21,224
Time deposits 4,382 12,056
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NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (1,242) 35,560
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13,692) 23,826
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,003 8,882
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,311 $ 32,708
========== ===========
See accompanying notes.
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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
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NOTE A - BASIS OF PRESENTATION
In management's opinion, the financial information, which is unaudited, reflects
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the financial information as of and for the three
month periods March 31, 2002 and 2001, in conformity with generally accepted
accounting principles. Operating results for the three-month period ended March
31, 2002 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 2002.
The organization and business of Crescent Financial Corporation and subsidiary
(the "Company"), accounting policies followed by the Company and other
information are contained in the notes to the financial statements filed as part
of the Bank's 2001 annual report on Form 10-KSB. This quarterly report should be
read in conjunction with such annual report.
NOTE B - COMMITMENTS
At March 31, 2002, loan commitments are as follows
Undisbursed lines of credit $25,106,000
Stand-by letters of credit 30,000
NOTE C - PER SHARE RESULTS
Net income (loss) per share has been computed by dividing net income (loss) for
each period by the weighted average number of shares outstanding during such
period. The net loss per share for the period ended March 31, 2001 has been
adjusted to reflect the effects of a 12 1/2 % stock split effected in the form
of a dividend to be paid on April 15, 2002 to shareholders of record March 15,
2002.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
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Management's discussion and analysis is intended to assist readers in the
understanding and evaluation of the financial condition and consolidated results
of operations of Crescent Financial Corporation (the "Company"). The analysis
includes detailed discussions for each of the factors affecting Crescent
Financial Corporation's operating results and financial condition for the
periods ended March 31, 2002 and 2001. It should be read in conjunction with the
audited financial statements and accompanying notes included in this report and
the supplemental financial data appearing throughout this discussion and
analysis. Because the Company has no operations and conducts no business on its
own other than owning Crescent State Bank, the discussion contained in this
Management's Discussion and Analysis concerns primarily the business of the
Bank. However, for ease of reading and because the financial statements are
presented on a consolidated basis, the Company and the Bank are collectively
referred to herein as the Company unless otherwise noted. All significant
intercompany transactions and balances are eliminated in consolidation.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2002 AND DECEMBER 31, 2001
Over the three-month period ended March 31, 2002, total assets declined by $1.3
million from $129.2 million at December 31, 2001 to $127.9 million at March 31,
2002. The decrease in total assets resulted from the maturity of a significant
volume of high-cost certificates of deposit and a sharp decline in deposits to
real estate escrow settlement accounts. Earning assets totaled $122.5 million or
96% of total assets at March 31, 2002 compared with $118.8 million or 92% of
total assets as of December 31, 2001. Components of earning assets at March 31,
2002 are $93.6 million in gross loans, $22.1 million in investment securities
and FHLB stock, $6.1 million in overnight investments and $768,000 in
interest-bearing deposits with correspondent banks. Total deposits and
stockholders' equity at March 31, 2002 were $111.9 million and $10.5 million
compared to $113.2 million and $10.4 million, respectively, at December 31,
2001.
Gross loans outstanding at March 31, 2002 increased by $13.0 million or 24% to
$93.5 million compared to $80.6 million reported at December 31, 2001. The
composition of the loan portfolio, by category, as of March 31, 2002 is 34%
commercial mortgage loans, 29% construction loans, 20% commercial loans, 14%
residential real estate loans and 3% consumer and other loans. The commercial
mortgage category showed the most significant net increase growing $6.8 million
from $25.3 million at December 31, 2001 to $32.1 million at March 31, 2002. The
net growth in the construction loans category was $4.1 million, increasing from
$23.2 million at December 31, 2001 to $27.3 million at March 31, 2002. Loans
secured by residential real estate experienced net growth of $2.8 million during
the three-month period ended March 31, 2002 from $10.0 million to $12.8 million.
The commercial and consumer loan categories experienced net decreases of
$764,000 and $9,000, respectively during the first quarter of 2002. The
composition of the loan portfolio, by category, as of December 31, 2001 was 31%
commercial mortgage loans, 29% construction loans, 24% commercial loans, 12%
residential real estate loans and 4% consumer and other loans.
The Company had an allowance for loan losses at March 31, 2002 of $1.3 million
or 1.42% of total outstanding loans compared to $1.1 million or 1.38% of total
outstanding loans at December 31, 2001. At March 31, 2002, there were no loans
in non-accrual status, no loans 90 days or more past due and still accruing
interest and two loans with an aggregate outstanding balance of $136,000 past
due thirty days or more. At December 31, 2001, there was one loan in the amount
of $429,000 in non-accrual status. Non-performing loans represented .53% of
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total outstanding loans at December 31, 2001. There were no loans past due 90
days or more and still accruing interest, and there were no other loans past due
thirty days or more on December 31, 2001.
The Company has investment securities with an amortized cost of $21.8 million at
March 31, 2002. All investments are accounted for as available for sale under
Financial Accounting Standards Board (FASB) No. 115 and are presented at their
fair market value of $21.9 million. The portfolio decreased by $900,000 or 4%
compared with $22.8 million at December 31, 2001. The Company's investment in
debt securities at March 31, 2002, consists of U.S. Government agency
securities, collateralized mortgage obligations, mortgage-backed securities and
municipal bonds. Additions to the investment portfolio included $529,000 in new
purchases and $2,000 of net purchase discount accretion. Activities resulting in
portfolio decreases included $600,000 in bond maturities, $643,000 of principal
re-payments, and a $188,000 decline in the fair market value of the portfolio.
Federal funds sold at March 31, 2002 are $6.1 million or $4.2 million less than
the $10.3 million reported at December 31, 2001. The Company holds funds in
overnight investments to provide liquidity for future loan demand and to satisfy
fluctuations in deposit levels. During the first quarter of 2002, excess
overnight funds were used to fund strong loan growth and to satisfy deposit
fluctuations. Overnight funds tend to increase sharply at month-end due to
several real estate settlement accounts maintained by bank customers.
Interest-earning deposits held at correspondent banks declined by approximately
$3.8 million from $4.6 million at December 31, 2001 to $768,000 million at March
31, 2002. The Company had previously owned a $3.0 million certificate of deposit
with a correspondent bank that matured in February 2002. Excess interest-bearing
deposits were primarily used to fund the strong loan demand satisfy deposit
volume fluctuations.
Non-earning assets decreased by approximately $5.1 million between December 31,
2001 and March 31, 2002. Non-interest bearing cash due from banks decreased by
more than $5.6 million during the first quarter. Cash due from banks includes
amounts represented by checks in the process of being collected through the
Federal Reserve payment system. On December 31, 2001, there was a significant
dollar volume of checks accepted for deposit and sent to the Federal Reserve
Bank for processing. Funds represented by these checks were not yet collected
and therefore could not be invested overnight. For more details regarding the
increase in cash and cash equivalents, see the Cash Flow Statement. Other assets
increased by $573,000 primarily due to the foreclosure on real estate securing a
loan. For more details, see the section entitled Non-Performing Assets.
At March 31, 2002, total deposits decreased by $1.3 million to $111.9 million
from $113.2 million at December 31, 2001. Non interest-bearing demand deposits
decreased by $6.6 million during the first quarter of 2002. The Company
maintains a number of non interest-bearing real estate escrow accounts for
settlement attorneys. Balances in these accounts fluctuate from month to month
based on economic conditions and the activity in the local residential housing
market. Deposit balances in real estate escrow accounts declined by
approximately $7.9 million between December 31, 2001 and March 31, 2002. The
interest-bearing deposit categories increased by $5.4 million during the first
quarter of 2002 with time deposits growing by $4.4 million, statement savings by
$460,000, money market by $355,000 and interest-bearing demand deposits by
$179,000. The composition of the deposit base, by category, at March 31, 2002 is
as follows: 45% time deposits, 20% money market and savings, 19%
non-interest-bearing demand deposits, and 16% interest-bearing demand deposits.
The composition of the deposit base, by category, at December 31, 2001 was 41%
time deposits,
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24% non-interest-bearing demand deposits, 19% money market and savings, and 16%
interest-bearing demand deposits. Time deposits of $100,000 or more totaled
$24.6 million at March 31, 2002 compared to $21.6 million at December 31, 2001.
Brokered deposits at March 31, 2002 were $5.0 million. There were no brokered
deposits at December 31, 2001.
At March 31, 2002 and December 31, 2001, the Company had $5.0 million of
borrowings with the FHLB. The advance carries an interest rate of 4.44% and
matures on July 6, 2011 but is continuously convertible every three months after
July 7, 2003 to a variable rate at three month London Inter-Bank Offering Rate.
Accrued expenses and other liabilities decreased by $141,000 to $428,000 at
March 31, 2002 compared with $569,000 at December 31, 2001. The decrease was due
to the payment of federal and state income taxes and other previously accrued
expenses.
Between December 31, 2001 and March 31, 2002, total stockholders' equity rose by
$99,000. The net increase resulted from net income for the first quarter of
$215,000 and an $116,000 decline in the unrealized gain on investments available
for sale.
COMPARISON OF RESULTS OF OPERATIONS FOR THE PERIODS ENDED
MARCH 31, 2002 AND 2001
Net Income. Net income for the three-month period ending March 31, 2002 was
$215,000 or $.15 per basic and diluted share compared with a net loss of $39,000
or $(.03) per basic and diluted share for the three-month period ended March 31,
2001. The 2001 per share data has been adjusted for 1.125-to-1 stock split
effected as a dividend payable on April 15, 2002 to shareholders of record March
15, 2002. Annualized return on average assets was .75% and (.18)% for the two
periods ended March 31, 2002 and 2001, respectively. Return on average equity
for the current period was 8.19% compared to (1.58)% for the prior period.
Results of operations for the three-month period ended March 31, 2002, when
compared with the period ended March 31, 2001, were positively impacted by
strong earning asset growth, improved efficiency in the composition and funding
of earning assets, and solid improvement in non interest income. Net income was
tempered by increases in both the provision for loan losses and non-interest
expenses.
Net Interest Income. Net interest income increased by $368,000 or 46% from
$806,000 at March 31, 2001 to $1.2 million at March 31, 2002. Total interest
income benefited from strong growth in average earning assets that more than
offset the lower asset yields resulting from the significant reductions in
short-term interest rates. Despite the lower yields, the net margin improved due
to a more favorable mix of average earning assets during the three-months ended
March 31, 2002 compared to that of the prior year period.
Total average earning assets increased $33.1 million or 42% from an average of
$79.3 million as of March 31, 2001 to an average of $112.4 million as of March
31, 2002. The Company experienced strong loan growth during the twelve-month
period March 31, 2001 to March 31, 2002 resulting in the average balance of
loans outstanding increasing by $33.4 million. Average loans outstanding during
the first quarter of 2002 were $85.8 million compared to $52.4 million for the
prior year period. The average balance of the investment securities portfolio
for the three-month period ended March 31, 2002 was $22.5 million increasing by
$7.8 million or 53% compared to an average of $14.7 million at March 31, 2001.
The average balance of federal funds sold and other earning assets declined to
$4.0 million for the three-month period ended March 31, 2002 compared to $12.3
million for the prior period. During the first three months of
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2002, excess overnight investments were used to fund strong loan demand and
satisfy deposit fluctuation. The net growth in total average earning assets
accounted for a $710,000 increase in interest income. This increase was somewhat
mitigated by a $498,000 decrease in interest income due to significantly lower
yields realized on earning assets. Total interest expense experienced a net
decrease of $156,000. The net decrease was the result of a decrease of $351,000
from lower rates paid on interest-bearing funds and an increase of $195,000 from
an increase in the volume of interest-bearing funds.
Net interest margin is interest income earned on loans, securities and other
earning assets, less interest expense paid on deposits and borrowings, expressed
as a percentage of total average earning assets. The net interest margin for the
three-month period ended March 31, 2002 was 4.24% compared to 4.12% for the
three-month period ended March 31, 2001. Despite lower yields on earning assets,
the net margin improved due to a more efficient mix of average earning assets
during the first quarter of 2002 compared to the first quarter of the prior
year. The Federal Reserve Open Market Committee (FOMC) reduced short-term
interest rates eleven times during 2001 for a total of 475 basis points. The
average yield on earning assets for the current three-month period declined 169
basis points to 6.67% compared with 8.36% for the prior year period, while the
average cost of interest-bearing funds decreased by 206 basis points to 3.22%
from 5.28%. The decrease in the average yield was less pronounced than the
decrease in the average cost of funds due to the shifting of short-term
investments into higher yielding asset types. The percentage of average
short-term investments to total average earning assets for the three-months
ended March 31, 2002 was 4% compared to 16% for the comparative period ended
March 31, 2001. The interest rate spread, which is the difference between the
average yield on earning assets and the cost of interest-bearing funds,
increased by 37 basis points from 3.08% for the first quarter of 2001 to 3.45%
for the first quarter of 2002. The percentage of average interest earning assets
to average interest-bearing liabilities increased to 132% for the current period
from 124% for the prior period. This is due to an increase in the percentage of
average non interest-bearing deposits to average total deposits to 19% for the
three-month period ended March 31, 2002 from 12% for the comparative prior year
period.
Provision for Loan Losses. The Company's provision for loan losses for the
three-month period ended March 31, 2002 was $213,000, representing an $82,000 or
63% increase over the $131,000 recorded for the same period in 2001. Provisions
for loan losses are charged to income to bring the allowance for loan losses to
a level deemed appropriate by management based on factors discussed under
"Analysis of Allowance for Loan Losses." The increase in the loan loss provision
in the current quarter as compared to that of the prior year is principally due
to the growth in total outstanding loans occurring between December 31, 2001 and
March 31, 2002. The allowance for loan losses is $1.3 million at March 31, 2002,
representing 1.42% of total outstanding loans.
Non-Interest Income. For the three-month period ended March 31, 2002,
non-interest income was $160,000 compared to $81,000 for the same period in
2001. The largest components of non-interest income in the first quarter of 2002
were $64,000 in customer service charges, $64,000 in mortgage loan origination
fees, and $27,000 in service charges and fees on deposit accounts. Management
expects the level of other non-interest income to increase with the volume of
deposit accounts and with the introduction of new products such as receivables
factoring and investment services.
Non-Interest Expenses. Non-interest expenses were $935,000 for the three-month
period ended March 31, 2002 compared with $795,000 for the same period ended
March 31, 2001. The largest component of non-interest expense for the current
period was personnel expense.
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Salaries and benefits expense was $466,000 for the three-month period ended
March 31, 2002, representing a $78,000 or 20% increase over the $388,000
recorded for the same period in the prior year. The increase is primarily due to
adding staff to support the Company's growth. Management anticipates personnel
expense to continue to increase as opportunities to hire quality employees
present themselves.
Occupancy expenses increased by $12,000 or 7% from $183,000 for the three-month
period ended March 31, 2001 to $195,000 for the current year period. Data
processing costs increased from $48,000 for the three-months ended March 31,
2001 to $60,000 for the current three-month period. The Company outsources its
data processing and expenses are tied closely to transaction and account
volumes. As the Company continues to grow in accordance with its strategic plan,
management expects both occupancy and data processing costs to increase.
Other non-interest expenses increased by $38,000 to $214,000 for the first
quarter of 2002 compared with $176,000 for the first quarter in the prior year.
The increase was primarily as a result of the Company's continued growth. The
largest components of other non-interest expenses include professional fees and
services, office supplies and printing, advertising and loan related fees.
Management expects that as the complexity and size of the Company increases,
expenses associated with these categories will continue to increase.
Provision for Income Taxes. The Company recognized an income tax benefit of
$29,000 during the first three-months of 2002. The benefit resulted from the
recognition of deferred tax assets generated in periods before the Company
achieved profitability. No income tax benefit or expense was recorded for the
three-month period ended March 31, 2001.
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NET INTEREST INCOME
Net interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (1) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (2) the relative
amounts of interest-earning assets and interest-bearing liabilities ("net
interest-earning balance"). The following table sets forth information relating
to average balances of the Company's assets and liabilities for the years ended
March 31, 2002 and 2001. The table reflects 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 table, non-accrual loans are
included in the average loan balance.
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Average Balances, Interest and Average Yields/Cost
(Dollars in Thousands)
Three Months Ended March 31,
-------------------------------------------------------------------------------
2002 2001
-------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------------------------------------------------------------------------------
Interest-earnings assets
------------------------
Loan portfolio $ 85,833 $ 1,476 6.97% $ 52,357 $ 1,233 9.55%
Investment securities 22,534 340 6.04% 14,668 230 6.27%
Fed funds and other interest-earning assets 3,990 32 3.25% 12,305 173 5.70%
-------------------------------------------------------------------------------
Total earning assets 112,357 1,848 6.67% 79,330 1,636 8.36%
Noninterest-bearing assets 4,321 3,244
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Total assets $ 116,678 $ 82,574
========== =========
Interest-bearing liabilities
----------------------------
Deposits $ 79,731 $ 617 3.14% $ 63,755 $ 830 5.28%
Borrowings 5,307 57 4.30% - - -
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Total interest-bearing liabilities 85,038 674 3.22% 63,755 830 5.28%
Non interest-bearing deposits 20,507 8,534
Other liabilities 478 310
Total Liabilities 106,023 72,599
Stockholders' equity 10,655 9,975
---------- ---------
Total liabilities & stockholders' equity $ 116,678 $ 82,574
========== =========
-------- ---------
Net interest income $ 1,174 $ 806
======== =========
Interest rate spread 3.45% 3.08%
======= =======
Net yield on interest-earning assets 4.24% 4.12%
======= =======
Percentage of average interest-earning
assets to average interest bearing
liabilities 132.13% 124.43%
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VOLUME/RATE VARIANCE ANALYSIS
The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume), and (iii) net change (the sum of the previous columns).
The change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated equally to both the changes attributable
to volume and the changes attributable to rate.
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Rate/Volume Analysis
Three Months Ended March 31,
2002 vs. 2001
(in Thousands)
------------------------------------------------
Increase (Decrease) Due to
------------------------------------------------
Volume Rate Total
------------------------- ------------
Interest Income
---------------
Loan portfolio 682 (439) 243
Investment Securities 120 (10) 110
Fed funds and other interest-earning assets (92) (49) (141)
------------------------- ------------
Total interest-earning assets 710 (498) 212
Interest Expense
----------------
Deposits 166 (379) (213)
Borrowings 29 28 57
------------------------- ------------
Total interest-bearing liabilities 195 (351) (156)
Net interest income 515 (147) 368
========================= ============
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NONPERFORMING ASSETS
The table sets forth, for the period indicated, information about our nonaccrual
loans, restructured loans, total nonperforming loans (nonaccrual loans plus
restructured loans), and total nonperforming assets.
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At March 31, At December 31,
------------------- -------------------
2002 2001 2001 2000
------ ------- ------ -------
(Dollars in thousands)
Nonaccrual loans $ - $ - $ 429 $ -
Restructured loans - - - -
------ ------- ------ -------
Total nonperforming loans - - 429 -
Real estate owned 341 - - -
------ ------- ------ -------
Total nonperforming assets $ 341 $ - $ 429 $ -
====== ======= ====== =======
Accruing loans past due
90 days or more $ - $ - $ - $ -
Allowance for loan losses 1,329 761 1,116 630
Nonperforming loans to
period end loans 0.00% 0.00% 53% 0.00%
Allowance for loan losses
to period end loans 1.42% 1.30% 1.38% 1.30%
Allowance for loan losses
to nonperforming loans 0.00% 0.00% 260.14% 0.00%
Nonperforming assets
to total assets 27% 0.00% 33% 0.00%
---------------------------------------------------------------------------------------
Our financial statements are prepared on the accrual basis of accounting,
including the recognition of interest income on loans, unless we place a loan on
nonaccrual basis. We account for loans on a nonaccrual basis when we have
serious doubts about the collectibility of principal or interest. Generally, our
policy is to place a loan on nonaccrual status when the loan becomes past due 90
days. We also place loans on nonaccrual status in cases where we are uncertain
whether the borrower can satisfy the contractual terms of the loan agreement.
Amounts received on nonaccrual loans generally are applied first to principal
and then to interest only after all principal has been collected. Restructured
loans are those for which concessions, including the reduction of interest rates
below a rate otherwise available to that borrower or the deferral of interest or
principal, have been granted due to the borrower's weakened financial condition.
We accrue interest on restructured loans at the restructured rates when we
anticipate that no loss of original principal will occur. Potential problem
loans are loans which are currently performing and are not included in
nonaccrual or restructured loans above, but about which we have serious doubts
as to the borrower's ability to comply with present repayment terms. These loans
are likely to be included later in nonaccrual, past due or restructured loans,
so they are considered by our management in assessing the adequacy of our
allowance for loan losses. At March 31, 2002, we had identified no loans as
potential problem loans.
At March 31, 2002, we had no nonaccrual loans. Interest on nonaccrual loans
foregone was approximately $11,000 for the year ended December 31, 2001.
-14-
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through periodic charges to
earnings in the form of a provision for loan losses. Increases to the allowance
for loan losses occur as a result of provisions charged to operations and
recoveries of amounts previously charged-off, and decreases to the allowance
occur when loans are charged-off. Management evaluates the adequacy of our
allowance for loan losses on a monthly basis. The evaluation of the adequacy of
the allowance for loan losses involves the consideration of loan growth, loan
portfolio composition and industry diversification, historical loan loss
experience, current delinquency levels, adverse conditions that might affect a
borrower's ability to repay the loan, estimated value of underlying collateral,
prevailing economic conditions and all other relevant factors derived from the
Company's limited history of operations. Because of our limited history, we also
consider the loss experience history and allowance ratios of other similar
community banks and the knowledge and expertise obtained by management and
senior lending officers from prior years experience at former institutions.
Additionally, as an important component of their periodic examination process,
regulatory agencies review the allowance for loan losses and may require
additional provisions for estimated losses based on judgments that differ from
those of management.
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 Credit Administration function. The internal grading
system is reviewed and tested periodically by an independent third party credit
review firm. The testing process involves the evaluation of a sample of new
loans, loans having been identified as possessing potential weakness in credit
quality, past due loans and nonaccrual loans to determine the ongoing
effectiveness of the internal grading system. The loan grading system is used to
assess the adequacy of the allowance for loan losses.
Management has developed a model for evaluating the adequacy of the allowance
for loan losses. The model distinguishes between loans that will be evaluated as
a group by loan category and those loans to be evaluated individually. Using the
various evaluation factors mentioned above, management predetermined allowance
percentages for each major loan category. Loans that exhibit an acceptable level
of risk per the internal loan grading system are grouped by loan category and
multiplied by the associated allowance percentage to determine an adequate level
of allowance for loan losses.
Based on the loan grading system, management maintains an internally classified
watch list. Loans classified as watch list credits, and those loans that are not
watch list credits but possess other characteristics which in the opinion of
management suggest a higher degree of inherent risk, are evaluated individually,
by loan category, using higher allowance percentages. Using the data gathered
during the monthly evaluation process, the model calculates an acceptable range
for allowance for loan losses. Management and the Board of Directors are
responsible for determining the appropriate level of the allowance for loan
losses within that range.
The primary reason for increases to the allowance for loan losses has been
growth in total outstanding loans; however, there were other factors influencing
the provision. At March 31, 2002 and 2001, there were no material loan
charge-offs and no non-performing loans. During the third quarter of 2001,
management made an adjustment to the allowance for loan losses model to
recognize an increase in inherent risk associated with loans for acquisition,
development and construction lending as compared with commercial mortgage
lending. The adjustment in methodology regarding acquisition, development and
construction loans and current economic conditions were significant factors
contributing to the increased provision for loan losses in the three-month
period compared with the same period in the prior year. The
-15-
allowance for loan losses at March 31, 2002 was $1.3 million, which represents
1.42% of total outstanding loans.
The allowance for loan losses represents management's estimate of an amount
adequate to provide for known and inherent losses in the loan portfolio in the
normal course of business. While management believes the methodology used to
establish the allowance for loan losses incorporates the best information
available at the time, future adjustments to the level of the allowance may be
necessary and the results of operations could be adversely affected should
circumstances differ substantially from the assumptions initially used. We
believe that the allowance for loan losses was established in conformity with
generally accepted accounting principles; however, there can be no assurances
that the regulatory agencies, after reviewing the loan portfolio, will not
require management to increase the level of the allowance. Likewise, there can
be no assurance that the existing allowance for loan losses is adequate should
there be deterioration in the quality of any loans or changes in any of the
factors discussed above. Any increases in the provision for loan losses
resulting from such deterioration or change in condition could adversely affect
the financial condition of the Company and results of its operations.
The following table describes the allocation of the allowance for loan losses
among various categories of loans for the dates indicated.
--------------------------------------------------------------------------------------------------------
Allocation of Allowance for Loan Losses
At March 31,
-------------------------------------------------------------
2002 2001
--------------------- ---------------------------
% of Total % of Total
Amount Loans (1) Amount Loans (1)
------ ----------- ------ ------------
(Dollars in thousands)
Residential real estate loans $ 62 13.73% $ 62 17.81%
Commercial mortgage loans 400 34.27% 201 27.94%
Construction loans 422 29.09% 232 32.17%
Commercial and industrial loans 330 19.87% 225 19.24%
Loans to individuals 115 3.04% 41 2.84%
------ ------ ------ ------
Total loans $1,329 100.00% $ 761 100.00%
====== ====== ====== ======
(1) Represents total of all outstanding loans in each category as a percent of total loans outstanding
--------------------------------------------------------------------------------------------------------
-16-
The following table presents information regarding changes in the allowance for
loan losses for the years indicated:
-------------------------------------------------------------------------------------------------------------------------------
Changes in Allowance for Loan Losses
For the Period Ended March 31,
-------------------------------------------
2002 2001
------------------- ---------------
(Dollars in thousands)
Balance at the beginning of the year $ 1,116 $ 630
Charge-offs:
Commercial and industrial loans - -
Loans to individuals - -
------------------- ---------------
Total charge-offs - -
------------------- ---------------
Recoveries - -
------------------- ---------------
Net charge-offs - -
Provision for loan losses 213 131
------------------- ---------------
Balance at the end of the year $ 1,329 $ 761
=================== ===============
Total loans outstanding at period-end $ 93,559 $ 58,561
Average loans outstanding for the period $ 85,833 $ 52,357
Allowance for loan losses to total loans outstanding 1.42% 1.30%
Ratio of net charge-offs to average loans outstanding 0.00% 0.00%
-------------------------------------------------------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Maintaining adequate liquidity while managing interest rate risk is the primary
goal of the Company's asset and liability management strategy. Liquidity is the
ability to fund the needs of the Company's borrowers and depositors, pay
operating expenses, and meet regulatory liquidity requirements. Maturing
investments, loan and mortgage-backed security principal repayments, deposit
growth and borrowings from the Federal Home Loan Bank and other correspondent
banks are presently the main sources of the Company's liquidity. The Company's
primary uses of liquidity are to fund loans and to make investments.
As of March 31, 2002, liquid assets (cash and due from banks, interest-earning
deposits with banks, federal funds sold and investment securities available for
sale) were approximately $33.2 million, which represents 26% of total assets and
30% of total deposits. Supplementing this liquidity, the Company has available
lines of credit from various correspondent banks of approximately $17.6 million
of which $5.0 million is outstanding at March 31, 2002 and December 31, 2001. At
March 31, 2002, outstanding commitments for undisbursed lines of credit and
letters of credit amounted to $25.1 million. Management intends to fund
anticipated loan closings and operational needs through cash and cash
equivalents on hand, brokered deposits, scheduled principal repayments from the
loan and securities portfolios and anticipated increases in deposits.
-17-
Certificates of deposits represented 45% of the Company's total deposits at
March 31, 2002 compared with 41% at December 31, 2001. The Company's growth
strategy will include marketing efforts focused at increasing the relative
volume of low cost transaction deposit accounts; however, time deposits will
continue to play an important role in the Company's funding strategy.
Certificates of deposit of $100,000 or more represented 21% of the Company's
total deposits at March 31, 2002 compared to 19% at year-end December 31, 2001.
While these deposits are generally considered rate sensitive, management
believes the majority of them are relationship-oriented. While the Company will
need to pay competitive rates to retain these deposits at maturity, there are
other subjective factors that will determine the Company's continued retention
of those deposits.
Under federal capital regulations, Crescent State Bank must satisfy certain
minimum leverage ratio requirements and risk-based capital requirements. At
March 31, 2002, the Bank's equity to asset ratio was 8.25%. All capital ratios
place the Bank in excess of the minimum required to be deemed a well-capitalized
bank by regulatory measures. The Bank's ratio of Tier I capital to risk-weighted
assets at March 31, 2002 was 9.89%.
ASSET/LIABILITY MANAGEMENT
The Company's asset/liability management, or interest rate risk management,
program is focused primarily on evaluating and managing the composition of its
assets and liabilities in view of various interest rate scenarios. Factors
beyond the Company's control, such as market interest rates and competition, may
also have an impact on the Company's interest income and interest expense.
In the absence of other factors, the yield or return associated with the
Company's earning assets generally will increase from existing levels when
interest rates rise over an extended period of time and, conversely, interest
income will decrease when interest rates decline. In general, interest expense
will increase when interest rates rise over an extended period of time and,
conversely, interest expense will decrease when interest rates decline.
Interest Rate Gap Analysis. As a part of its interest rate risk management
policy, the Company calculates an interest rate "gap." Interest rate "gap"
analysis is a common, though imperfect, measure of interest rate risk, which
measures the relative dollar amounts of interest-earning assets and
interest-bearing liabilities which reprice within a specific time period, either
through maturity or rate adjustment. The "gap" is the difference between the
amounts of such assets and liabilities that are subject to repricing. A
"positive" gap for a given period means that the amount of interest-earning
assets maturing or otherwise repricing within that period exceeds the amount of
interest-bearing liabilities maturing or otherwise repricing within the same
period. Accordingly, in a declining interest rate environment, an institution
with a positive gap would generally be expected, absent the effects of other
factors, to experience a decrease in the yield on its assets greater than the
decrease in the cost of its liabilities and its income should be negatively
affected. Conversely, the yield on its assets for an institution with a positive
gap would generally be expected to increase more quickly than the cost of funds
in a rising interest rate environment, and such institution's net interest
income generally would be expected to be positively affected by rising interest
rates. Changes in interest rates generally have the opposite effect on an
institution with a "negative gap."
The table below sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 2002 that are projected to
reprice or mature in each of the future time periods shown. Except as stated
below, the amounts of assets and liabilities shown which reprice or mature
within a particular period were determined in accordance with the contractual
-18-
terms of the assets or liabilities. Loans with adjustable rates are shown as
being due at the end of the next upcoming adjustment period. Money market
deposit accounts and negotiable order of withdrawal or other transaction
accounts are assumed to be subject to immediate repricing and depositor
availability and have been placed in the shortest period. In making the gap
computations, none of the assumptions sometimes made regarding prepayment rates
and deposit decay rates have been used for any interest-earning assets or
interest-bearing liabilities. In addition, the table does not reflect scheduled
principal payments that will be received throughout the lives of the loans or
investments. The interest rate sensitivity of the Company's assets and
liabilities illustrated in the following table would vary substantially if
different assumptions were used or if actual experience differs from that
indicated by such assumptions.
Terms to Repricing at March 31, 2002
-----------------------------------------------------------------
More Than More Than
1 Year 1 Year to 3 Years to More Than
or Less 3 Years 5 Years 5 Years Total
----------- ---------- ----------- ----------- -----------
(Dollars in thousands)
INTEREST-EARNING ASSETS:
Loans receivable:
Resdiential real estate $ 11,147 $ 957 $ 777 $ - $ 12,881
Commercial mortgages $ 18,114 $ 4,583 $ 4,057 $ 5,388 $ 32,142
Construction 27,281 - - - 27,281
Commercial and industrial loans 13,082 2,888 2,659 - 18,629
Home equity lines and loans 10,744 208 99 - 11,051
Loans to individuals 1,353 814 685 - 2,852
Interest-earning deposits with banks 768 - - - 768
Federal funds sold 6,074 - - - 6,074
Investment securities available for sale 4,175 6,512 4,565 6,680 21,932
Federal Home Loan Bank stock 250 - - - 250
----------- ---------- ----------- ----------- -----------
Total interest-earning assets $ 82,244 $ 15,754 $ 12,743 $ 12,068 $ 122,809
=========== ========== =========== =========== ===========
INTEREST-BEARING LIABILITIES:
Deposits:
Money market, NOW and savings $ 40,927 $ - $ - $ - $ 40,927
Time 30,561 14,829 5,090 - 50,4809
Borrowings - - - 5,000 5,000
----------- ---------- ----------- ----------- -----------
Total interest-bearing liabilities $ 71,488 $ 14,829 $ 5,090 $ 5,000 $ 96,407
=========== ========== =========== =========== ===========
INTEREST SENSITIVITY GAP PER
PERIOD $ 10,756 $ 925 $ 7,653 $ 7,068 $ 26,402
CUMULATIVE INTEREST SENSITIVITY
GAP $ 10,756 $ 11,681 $ 19,334 $ 26,402 $ 26,402
CUMULATIVE GAP AS A PERCENTAGE
OF TOTAL INTEREST-EARNING ASSETS 8.76% 9.51% 15.74% 21.50% 21.50%
CUMULATIVE INTEREST-EARNING
ASSETS AS A PERCENTAGE OF
CUMULATIVE INTEREST-BEARING
LIABILITIES 115.05% 113.53% 118.56% 127.39% 127.39%
Loans repricing after March 31, 2003 totaled $22.8 million and consist entirely
of fixed rate loans.
-19-
IMPACT OF INFLATION AND CHANGING PRICES
A commercial bank has an asset and liability composition that is distinctly
different from that of a company with substantial investments in plant and
inventory because the major portions of its assets are monetary in nature. As a
result, a bank's performance may be significantly influenced by changes in
interest rates. Although the banking industry is more affected by changes in
interest rates than by inflation in the prices of goods and services, inflation
is a factor that may influence interest rates. However, the frequency and
magnitude of interest rate fluctuations do not necessarily coincide with changes
in the general inflation rate. Inflation does affect operating expenses in that
personnel expenses and the cost of supplies and outside services tend to
increase more during periods of high inflation.
FORWARD-LOOKING INFORMATION
This annual report to stockholders contains certain forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and other business of Crescent Financial Corporation that are subject
to various factors which could cause actual results to differ materially from
those estimates. Factors that could influence the estimates include changes in
national, regional and local market conditions, legislative and regulatory
conditions, and the interest rate environment.
-20-
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Bank during the
quarter ended March 31, 2002.
-21-
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Bank has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
CRESCENT STATE BANK
Date: May 6, 2002 By: /s/ Michael G. Carlton
----------------------------------
Michael G. Carlton
President and Chief Executive
Date: May 6, 2002 By: /s/ Bruce W. Elder
----------------------------------
Bruce W. Elder
Senior Vice President and
Chief Financial Officer
-22-