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, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM TO
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Commission File Number 000-32951
CRESCENT FINANCIAL CORPORATION
(Exact name of small business issuer as specified in its charter)
NORTH CAROLINA 56-2259050
(State of Incorporation) (IRS Employer
Identification Number)
1005 HIGH HOUSE ROAD, CARY, NORTH CAROLINA 27513
(Address of principal executive offices)
(919) 460-7770
(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
28, 2003 was 2,464,737.
Page No.
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002................. 3
Consolidated Statements of Operations
Three Month Periods Ended March 31, 2003
and 2002............................................. 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002........... 5
Notes to Consolidated Financial Statements.............. 6 - 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations............................... 8 - 21
Item 3 - Controls and Procedures.................................... 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................ 23
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Part I. Financial Information
Item 1 - Financial Statements
CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
================================================================================
March 31, 2003 December 31,
(Unaudited) 2002*
-------------- ------------
(dollars in thousands)
ASSETS
Cash and due from banks $ 6,865 $ 9,461
Interest-earning deposits with banks 1,606 80
Federal funds sold 37,411 16,691
Investment securities available for sale at fair value 26,495 28,287
Loans 132,577 125,673
Allowance for loan losses (1,807) (1,711)
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NET LOANS 130,770 123,962
Accrued interest receivable 660 552
Federal Home Loan Bank stock 500 500
Bank premises and equipment 1,724 1,631
Other assets 1,028 841
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TOTAL ASSETS $207,059 $182,005
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $ 61,175 $ 40,339
Savings 1,326 1,435
Money market and NOW 48,442 46,085
Time 67,549 65,246
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TOTAL DEPOSITS 178,492 153,105
Federal Home Loan Bank advances 10,000 10,000
Accrued expenses and other liabilities 646 1,168
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TOTAL LIABILITIES 189,138 164,273
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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;
2,143,249 shares outstanding 2,143 2,143
Additional paid-in capital 14,605 14,605
Retained earnings 938 575
Accumulated other comprehensive income (Note D) 235 409
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TOTAL STOCKHOLDERS' EQUITY 17,921 17,732
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COMMITMENTS (Note B)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $207,059 $182,005
======== ========
* 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, 2003 and 2002
================================================================================
2003 2002
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(dollars in thousands
except per share data)
INTEREST INCOME
Loans $ 1,954 $ 1,476
Investment securities available for sale 363 340
Federal funds sold and interest-earning deposits 19 32
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TOTAL INTEREST INCOME 2,336 1,848
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INTEREST EXPENSE
Deposits 684 617
Borrowings 106 57
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TOTAL INTEREST EXPENSE 790 674
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NET INTEREST INCOME 1,546 1,174
PROVISION FOR LOAN LOSSES 108 213
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,438 961
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NON-INTEREST INCOME 304 160
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NON-INTEREST EXPENSE
Salaries and employee benefits 639 466
Occupancy and equipment 224 195
Data processing 74 60
Other 240 214
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TOTAL NON-INTEREST EXPENSE 1,177 935
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INCOME BEFORE INCOME TAXES 565 186
INCOME TAX EXPENSE (BENEFIT) 202 (29)
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NET INCOME $ 363 $ 215
========== ==========
NET INCOME PER COMMON SHARE (Note C)
Basic $ .15 $ .13
========== ==========
Diluted $ .14 $ .13
========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Note C)
Basic 2,464,737 1,668,326
========== ==========
Diluted 2,549,779 1,668,326
========== ==========
See accompanying notes.
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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, 2003 and 2002
================================================================================
2003 2002
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(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 363 $ 215
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Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation 74 77
Provision for loan losses 108 213
Deferred income taxes -- (99)
Gain on sale of assets (3) --
Net accretion (amortization) of premiums on securities 4 (2)
Change in assets and liabilities:
(Increase) in accrued interest receivable (108) (35)
(Increase) in other assets (79) (53)
Increase (decrease) in accrued interest payable (6) 5
Increase (decrease) in other liabilities 61 (146)
Payment of income taxes (576) --
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TOTAL ADJUSTMENTS (525) (40)
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NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (162) 175
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (2,440) (529)
Maturities of securities available for sale 500 600
Principal repayments of securities available for sale 3,446 643
Net increase in loans (6,917) (13,333)
Purchases of bank premises and equipment (164) (6)
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NET CASH USED BY INVESTING ACTIVITIES (5,575) (12,625)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits:
Noninterest-bearing demand 20,836 (6,617)
Savings (109) 459
Money market and NOW 2,357 534
Time deposits 2,303 4,382
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NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 25,387 (1,242)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19,650 (13,692)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 26,232 25,003
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CASH AND CASH EQUIVALENTS, END OF PERIOD $45,882 $ 11,311
======= ========
See accompanying notes.
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CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
================================================================================
NOTE A - BASIS OF PRESENTATION
In management's opinion, the financial information, which is unaudited, reflects
all adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the financial information as of and for the
three-month periods ended March 31, 2003 and 2002, in conformity with generally
accepted accounting principles. Operating results for the three-month period
ended March 31, 2003 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2003.
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 Company's 2002 annual report on Form 10-KSB. This quarterly report should
be read in conjunction with such annual report.
NOTE B - COMMITMENTS
At March 31, 2003, loan commitments are as follows
Undisbursed lines of credit $35,444,000
Stand-by letters of credit 413,000
Additionally, the Company has committed to purchase investment securities in the
aggregate amount of $1,314,000.
NOTE C - PER SHARE RESULTS
The Company effected a stock split in the form of 15% stock dividend paid on
April 25, 2003 to stockholders of record April 11, 2003. Per share data for the
periods presented have been adjusted to reflect the effects of the stock split.
Basic and diluted net income (loss) per common share have been computed by
dividing net income for each period by the weighted average number of shares of
common stock outstanding during each period after retroactively adjusting for
these stock splits.
Basic earnings per share represents income 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 solely to
outstanding stock options and are determined using the treasury stock method.
For the three months ended March 31, 2003, the weighted-average number of common
shares used in computing basic earnings per share, adjusted for the stock split
effected as a 15% stock dividend, was 2,464,737. The dilutive effect of stock
options was 85,042 shares. The weighted-average number of common shares and
dilutive potential common shares used in computing diluted earnings per share
was 2,549,779. For the three months ended March 31, 2002, the weighted-average
number of common shares used in computing basic earnings per share was
1,668,326. The Company's outstanding stock options did not have a dilutive
effect on the computation of earnings per share for the three months ended March
31, 2002.
There were 265,908 outstanding and vested stock options at March 31, 2002, which
were not included in the computation of diluted earnings per share because they
had no dilutive effect.
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NOTE D - COMPREHENSIVE INCOME
For the three months ended March 31, 2003 and 2002, total comprehensive income,
consisting of net income and unrealized securities gains and losses, net of
taxes, was $189,000 and $99,000, respectively.
NOTE E - OTHER SIGNIFICANT EVENTS
On March 12, 2003, the Company and Centennial Bank, Southern Pines, NC
("Centennial") announced the signing of a definitive agreement to merge whereby
Centennial would be merged into Crescent State Bank, a subsidiary of the
Company. The merger is subject to approval by federal and state banking
authorities and appropriate shareholder approvals. It is anticipated that the
transaction will be complete during the third quarter of 2003.
NOTE F - STOCK COMPENSATION PLANS
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, whereby compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date (or other measurement date) over the amount
an employee must pay to acquire the stock. Stock options issued under the
company's stock option plans have no intrinsic value at the grant date and,
under Opinion No. 25, no compensation cost is recognized for them. The company
has elected to continue with the accounting methodology in Opinion No. 25.
Presented below are the pro forma disclosures of net income and earnings per
share and other disclosures as if the fair value based method of accounting had
been applied.
Three Months Ended
March 31,
----------------------
2003 2002
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(Amounts in thousands,
except per share data)
Net income:
As reported $363 $215
Deduct: Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects 11 20
---- ----
Pro forma $352 $195
==== ====
Basic earnings per share:
As reported $.15 $.13
Pro forma .14 .12
Diluted earnings per share:
As reported $.14 $.13
Pro forma .14 .12
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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 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, 2003 and 2002. 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, 2003 AND DECEMBER 31, 2002
Total assets at March 31, 2003 are $207.1 million compared with $182.0 million
at December 31, 2002. Earning assets totaled $198.2 million or 96% of total
assets at March 31, 2003 compared with $170.6 million or 94% of total assets as
of December 31, 2002. Components of earning assets at March 31, 2003 are $132.6
million in net loans, $26.6 million in investment securities and FHLB stock,
$37.4 million in overnight investments and $1.6 million in interest bearing
deposits with correspondent banks. Total deposits and stockholders' equity at
March 31, 2003 were $178.5 million and $17.9 million compared to $153.1 million
and $17.7 million, respectively, at December 31, 2002.
Gross loans outstanding at March 31, 2003 increased by $6.9 million or 5% to
$132.6 million compared to $125.7 million reported at December 31, 2002. The
composition of the loan portfolio, by category, as of March 31, 2003 is 46%
commercial mortgage loans, 20% commercial loans, 18% construction loans, 12%
home equity loans and lines, 2% consumer loans and 2% residential mortgage
loans. The commercial mortgage category showed the most significant net increase
growing $8.4 million from $52.4 million at December 31, 2002 to $60.8 million at
March 31, 2003. The commercial loan portfolio increased by $2.6 million from
$24.6 million at December 31, 2002 to $27.2 million at March 31, 2003.
Residential mortgage loans increased by less than $100,000 during the three
month period. Construction and development loans, home equity lines and loans,
and personal loans to individuals all experienced net declines between December
31, 2002 and March 31, 2003. The most significant decline was in the
construction and development loan portfolio which decreased $3.5 million from
$27.5 million at December 31, 2002 to $24.0 million at March 31, 2003. The terms
and nature of construction loan financing provide for a short term building
window that is replaced by permanent financing upon completion of the project.
The decline in construction and development lending reflects the decline in
residential and commercial real estate projects due to the current economic
environment. Home equity lines and loans declined by $400,000 and consumer loans
by $300,000. The composition of the loan portfolio, by category, as of December
31, 2002 was 42% commercial mortgage loans, 22% construction loans, 19%
commercial loans, 13% home equity loans and lines, 2% consumer loans, and 2%
residential real estate mortgage loans.
- 8 -
The Company had an allowance for loan losses at March 31, 2003 of $1.8 million
or 1.36% of total outstanding loans compared to $1.7 million or 1.36% of total
outstanding loans at December 31, 2002. At March 31, 2003, there were two loans
totaling $186,000 in non-accrual status and no loans 90 days or more past due
and still accruing interest. Non-performing loans, which consist solely of loans
in nonaccrual status, represented .14% of total outstanding loans at March 31,
2003.
The Company has investment securities with an amortized cost of $26.1 million at
March 31, 2003. 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 $26.5 million. The Company's investment in debt securities
at March 31, 2003, consists of U.S. Government agency securities, collateralized
mortgage obligations, mortgage-backed securities and municipal bonds. The
portfolio decreased by $1.8 million or 6% compared with $28.3 million at
December 31, 2002. Due to the current rate environment for mortgage loans, the
portfolio has been experiencing significant principal pre-payments from
mortgage-backed securities and collateralized mortgage obligations. Activities
resulting in increases to the portfolio include the purchase of $2.4 million in
new securities. Activities' resulting in decreases to the portfolio include $3.4
million of principal re-payments, $500,000 in bond maturities, a $282,000
decline in market value and $4,000 in net premium amortization. The Company also
owned $500,000 of Federal Home Loan Bank stock at both March 31, 2003 and
December 31, 2002. At March 31, 2003, the Company had committed to purchase $1.3
million in securities to be issued in April 2003.
Federal funds sold at March 31, 2003 are $37.4 million reflecting a $20.7
million increase over the $16.7 million reported at December 31, 2002. The
Company holds funds in overnight investments to provide liquidity for future
loan demand and to satisfy fluctuations in deposit levels. Overnight funds tend
to increase sharply at month-end due to several real estate settlement deposit
accounts maintained by attorney customers. The month-end balance of Federal
funds sold is not reflective of the normal daily balance of overnight
investments. At March 31, 2003, the increase in the balance of Federal funds
sold due to the sharp fluctuation in the real estate settlement accounts was
approximately $33.3 million. The daily average balances for Federal funds sold
for the three-month period ended March 31, 2003 was $5.8 million.
Interest-earning deposits held at correspondent banks increased by approximately
$1.5 million from $81,000 at December 31, 2002 to $1.6 million at March 31,
2003. The increase represents principal and interest payments from the
investment portfolio waiting to be re-invested.
Non-earning assets decreased by approximately $2.2 million between December 31,
2002 and March 31, 2003. Non-interest bearing cash due from banks decreased by
$2.6 million during the three months ended March 31, 2003. Cash due from banks
includes amounts represented by checks in the process of being collected through
the Federal Reserve payment system. 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 Consolidated
Statement of Cash Flows. Other assets increased by $389,000 over the three-month
period ended March 31, 2003. In addition to expected increases in accrued
interest receivable due to an increased volume of earning assets, the Company
began purchasing bank and computer equipment for use in the new branch in Holly
Springs, North Carolina. The branch is expected to open in May 2003. There were
two vehicles repossessed in conjunction with loan charge-offs that are carried
as assets in the aggregate amount of $20,000.
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Total deposits increased by $25.4 million between December 31, 2002 and March
31, 2003 from $153.1 million to $178.5 million. Non-interest bearing demand
deposits increased by $20.8 million over the three months from $40.3 million on
December 31, 2002 to $61.2 million on March 31, 2003. The interest bearing
deposit categories increased by $4.6 million between December 31, 2002 and March
31, 2003. The interest bearing demand and time deposit categories increased by
$2.6 million and $2.3 million, respectively, while the money market and
statement savings categories declined by $240,000 and $109,000, respectively.
The introduction of a high yielding, relationship-based interest bearing
transaction account has caused existing customers to shift funds from the money
market category to the interest-bearing demand category.
As previously mentioned in the discussion of Federal funds sold, the Bank
maintains a number of deposit relationships with real estate settlement
attorneys. The nature of the settlement attorneys' business dictates that cash
flows into their deposit accounts prior to settling a real estate transaction
and flows out following the transaction. The majority of real estate
transactions tend to occur toward the end of each month. At March 31, 2003,
aggregate balances in the real estate settlement deposit accounts were $52.9
million compared to $31.5 million at December 31, 2002. Of the $52.9 million in
real estate settlement deposits on March 31, 2003, $40.6 million is in the
non-interest bearing demand deposit category and $12.3 million is in the
interest bearing demand category. At December 31, 2002, $21.8 million of the
$31.5 million was in the non-interest bearing demand deposit category and the
remaining $9.7 million was in the interest bearing category. The average
aggregate quarterly balances in these real estate settlement accounts were
approximately $19.6 million and $22.2 million on March 31, 2003 and December 31,
2002, respectively. Excluding the temporary, month-end effect of the real estate
settlement deposit accounts, total deposits at March 31, 2003 would have been
approximately $145.2 million and $143.8 million at December 31, 2002.
The composition of the deposit base, by category, at March 31, 2003 is as
follows: 38% time deposits, 34% non-interest-bearing demand deposits, 17%
interest-bearing demand deposits, 10% money market and 1% statement savings. The
composition of the deposit base, by category, at December 31, 2002 was 43% time
deposits, 26% non-interest-bearing demand deposits, 18% interest-bearing demand
deposits, 12% money market and 1% statement savings. Time deposits of $100,000
or more totaled $35.3 million at March 31, 2003 compared to $34.0 million at
December 31, 2002. During 2002, the Company began to use brokered certificates
of deposit as an alternative funding source. Brokered deposits represent a
source of fixed rate funds priced at or below rates being offered in our local
marketplace. Additionally, brokered deposits do not need to be collateralized
like Federal Home Loan Bank borrowings. Brokered deposits were $10.9 million at
both March 31, 2003 and December 31, 2002.
The Company had $10.0 million of Federal Home Loan Bank borrowings outstanding
at both March 31, 2003 and December 31, 2002. The total borrowings are comprised
of two $5.0 million advances. The first advance contract was entered into on
July 6, 2001 and has a final maturity of July 6, 2011. The advance carries a
fixed interest rate of 4.44% and is continuously convertible every three months
after July 7, 2003 to a variable rate equal to the three month London Inter-Bank
Offering Rate (LIBOR). The second advance contract was entered into on July 16,
2002 and has a final maturity of July 16, 2012. The advance carries a fixed
interest rate of 3.84% and can be converted every three months after July 16,
2003 to a variable rate equal to the three month LIBOR only if the three month
LIBOR rate, just prior to a reset date, is greater than or equal to 7.0%.
- 10 -
Accrued interest payable and other liabilities decreased by $522,000 to $646,000
at March 31, 2003 compared with $1.2 million at December 31, 2002. The decrease
is primarily the result of paying 2002 income taxes of $576,000 during the first
quarter of 2003.
Between December 31, 2002 and March 31, 2003, total stockholders' equity rose by
$189,000. The increase resulted from net income for the quarter of $363,000 less
unrealized losses on available for sale securities of $174,000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2003 AND 2002
Net Income. Net income for the three-month period ending March 31, 2003 was
$363,000 or $.15 per basic ($.14 diluted) share compared with net income of
$215,000 or $.13 per basic and diluted share for the three-month period ended
March 31, 2002. Annualized return on average assets was .86% and .75% for the
two periods ended March 31, 2003 and 2002, respectively. Return on average
equity for the current period was 8.17% compared to 8.19% for the prior period.
Despite higher earnings during the three-months ended March 31, 2003, return on
average equity declined due to the sale of 690,000 additional shares in August
2002. During 2002, the Company recognized a deferred tax asset generated in
periods before profitability was achieved. The recognition of the deferred tax
asset resulted in a tax benefit for the three-month period ended March 31, 2002.
Comparing results of operations on a pre-tax basis, the Company made $565,000
for the three-month period ended March 31, 2003 and $186,000 for the prior
period.
Results of operations for the three-month period ended March 31, 2003, when
compared with the period ended March 31, 2002, were positively impacted by
strong earning asset growth over the past twelve months resulting in improved
net interest income. An increase in non interest income and a reduction in the
provision for loan losses also had positive impacts on net income, despite the
increase in non interest expenses and income taxes.
Net Interest Income. Net interest income increased by $372,000 or 32% from $1.2
million for the three-month period ended March 31, 2002 to $1.5 million for the
three-month period ended March 31, 2003. Despite continued declines in the yield
on interest earning assets, total interest income increased due to strong growth
in average earning assets. Total interest expense from deposits and other
borrowings also increased due to growth in interest-bearing liabilities needed
to fund the higher volume of assets. The Company's net interest margin and
interest spread declined as yields on interest earning assets dropped more than
the cost of interest-bearing liabilities.
Total average earning assets increased $50.7 million or 45% from an average of
$112.4 million as of March 31, 2002 to an average of $163.1 million for the
quarter ended March 31, 2002 to $129.1 million for the quarter ended March 31,
2003. The average balance of the investment securities portfolio for the
three-month period ended March 31, 2003 was $27.5 million, increasing by $5.0
million or 22% compared to an average of $22.5 million at March 31, 2002. The
average balance of federal funds sold and other earning assets increased to $6.4
million for the three-month period ended March 31, 2003 compared to $4.0 million
for the prior period. The net growth in total average earning assets accounted
for a $784,000 increase in interest income, which was partially offset by a
$296,000 decrease in interest income due to lower yields realized on earning
assets. Total interest income increased by $488,000 for the current three-month
period compared to the same period from the prior year. Total interest expense
experienced a net increase of $116,000. Interest expense increased by $297,000
due to
- 11 -
growth in interest-bearing funds and declined by $181,000 due to the lower
interest rate environment.
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, 2003 was 3.84% compared to 4.24% for the
three-month period ended March 31, 2002. The average yield on earning assets for
the current three-month period declined 86 basis points to 5.81% compared with
6.67% for the prior year period, while the average cost of interest-bearing
funds decreased by 58 basis points to 2.64% from 3.22%. The interest rate
spread, which is the difference between the average yield on earning assets and
the cost of interest-bearing funds, decreased by 28 basis points from 3.45% for
the first quarter of 2002 to 3.17% for the first quarter of 2003.
With the exception of a 25 basis point reduction in short-term rates in November
2002, rates were fairly level since December 2001. The Company has tried to
position its balance sheet to take advantage of an environment in which rates
increase moderately. Therefore, over the past fifteen months, approximately 60%
to 65% of new loan volume has been priced at a variable interest rate. The rate
on a typical variable loan might adjust based on the Prime lending rate
(currently at 4.25%) plus 1% to 2%. This will continue to have a detrimental
impact on the overall yield on earning assets. Additionally, principal
prepayments on mortgage-backed securities and collateralized mortgage
obligations have increased significantly and have been reinvested at lower
current market rates. The drop in the yield on earning assets has been more
pronounced than the decline in the cost of interest-bearing funds.
There were no short-term interest rate reductions between December 2001 and
December 2002. During 2001, there were eleven reductions in short-term interest
rates. Interest rates on the one-year certificates of deposit have declined by
over 420 basis points since early 2000. As shorter-term time deposits have
matured and renew, there has been some tendency for customers to extend the term
of their deposits into the two and three year time horizons to earn additional
income. As a result, the cost of funds has not fallen by the same magnitude as
the yield on earning assets. While this has an unfavorable impact on the net
interest margin in the short run, the lower deposit rates will be enjoyed for a
longer period than previously experienced.
As previously stated, the Company is well positioned for a moderate increase in
interest rates. If interest rates increase over the short-term, yield on loans
will increase faster than the cost of funds and the net interest margin should
increase. If rates continue to hold steady, as has been the case, or we
experience more rate reductions, there could be downward pressure on the net
interest margin. Due to a more efficient mix of earning assets, the net interest
margin for the quarter ended March 31, 2003 has actually improved over the that
of the final two quarters of 2002.
Provision for Loan Losses. The Company's provision for loan losses for the
three-month period ended March 31, 2003 was $108,000 compared to $213,000
recorded for the same period in 2002. Provision for loan losses is 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 decrease in the loan loss provision is due to a reduction in loan
growth in the first quarter of 2003 compared to the same quarter in 2002. The
allowance for loan losses was $1.8 million at March 31, 2003, representing 1.36%
of total outstanding loans.
- 12 -
Non-Interest Income. For the three-month period ended March 31, 2003,
non-interest income was $304,000 compared to $160,000 for the same period in
2002. The largest components of non-interest income in the first quarter of 2003
were $132,000 in mortgage loan origination fees, $96,000 in customer service
charges, and $38,000 in service charges and fees on deposit accounts. The
Company also recognized $15,000 in investment referral fees during the
three-month period.
A significant portion of non-interest income is derived from the mortgage loan
origination fees. The volume of these fees has been driven, to a large extent,
by refinancing due to the favorable interest rate environment. Should interest
rates increase and the anticipated reduction in refinancing activity is not
replaced with an increase in purchase money activity, mortgage loan origination
fees could decline.
Non-Interest Expenses. Non-interest expenses were $1.2 million for the
three-month period ended March 31, 2003 compared with $935,000 for the same
period ended March 31, 2002. The largest component of non-interest expense for
the current period was personnel expense. Salaries and benefits expense was
$639,000 for the three-month period ended March 31, 2003, compared to $466,000
for the same period in the prior year. The increase is primarily due to adding
staff to support the Company's growth. The staff hired for the new branch office
to open in Holly Springs, North Carolina has been in place since the first of
the year. The office should be open in early May 2003. Additionally, the
significant increase in mortgage loan originations resulted in a higher
commission pay-out. Management anticipates personnel expense to continue to
increase as opportunities to hire quality employees present themselves.
Occupancy and equipment expenses increased by $29,000 or 15% from $195,000 for
the three-month period ended March 31, 2002 to $224,000 for the current year
period. The new Holly Springs, North Carolina branch accounted for $15,000 in
occupancy expenses during the quarter. Data processing costs increased from
$60,000 for the three-months ended March 31, 2002 to $74,000 for the current
three-month period. The Company outsources its data processing and expenses are
closely tied 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 $26,000 to $240,000 for the first
quarter of 2003 compared with $214,000 for the first quarter in the prior year.
The increase was primarily 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 recorded income tax expense of $202,000
during the three-months ended March 31, 2003 compared with a tax benefit of
$29,000 for the prior year period. The Company had generated deferred tax assets
during the periods prior to achieving profitability. Those assets were not
recognized until the Company displayed the ability to utilize those deferred
benefits against future earnings. By recording positive earnings during the
final three quarters of 2001, the Company demonstrated its ability to fully
utilize those benefits. The deferred asset was recognized at a rate of $99,000
per quarter during 2002, thereby reducing income tax expense. Therefore, the
$29,000 income tax benefit for the three months ended March 31, 2002 results
from current income taxes of $70,000 net of the $99,000 deferred benefit.
- 13 -
NET INTEREST INCOME
Net interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (1) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (2) the relative
amounts of interest-earning assets and interest-bearing liabilities ("net
interest-earning balance"). The following tables set forth information relating
to average balances of the Company's assets and liabilities for the three-month
periods ended March 31, 2003 and 2002. 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 table, non-accrual loans are
included, when applicable, in the average loan balance.
------------------------------------------------------------------------------------------------------------------
For the Three-Months Ended March 31,
-------------------------------------------------------------------
2003 2002
-------------------------------- --------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- -------- ---------- -------- -------- ----------
Dollars in thousands)
Interest-earnings assets
Loan portfolio $129,098 $1,954 6.14% $ 85,833 $1,476 6.97%
Investment securities 27,557 363 5.27% 22,534 340 6.04%
Fed funds and other interest-earning assets 6,444 19 1.20% 3,990 32 3.25%
-------- ------ ------ -------- ------ ------
Total interest-earning assets 163,099 2,336 5.81% 112,357 1,848 6.67%
Noninterest-bearing assets 7,574 4,321
-------- --------
Total assets $170,673 $116,678
======== ========
Interest-bearing liabilities
Interest-bearing NOW $ 24,101 63 1.06% $ 14,240 62 1.77%
Money market and savings 19,585 62 1.28% 21,690 111 2.08%
Time deposits 67,235 559 3.37% 43,801 444 4.11%
Borrowings 10,543 106 4.02% 5,307 57 4.30%
-------- ------ ------ -------- ------ ------
Total interest-bearing liabilities 121,464 790 2.64% 85,038 674 3.22%
Other liabilities 31,218 20,985
-------- --------
Total Liabilities 152,682 106,023
Stockholders' equity 17,991 10,655
-------- --------
Total liabilities & stockholders' equity $170,673 $116,678
======== ========
------ ------
Net interest income $1,546 $1,174
====== ======
Interest rate spread 3.17% 3.45%
====== ======
Net interest-margin 3.84% 4.24%
====== ======
Percentage of average interest-earning assets
to average interest-bearing liabilities 134.28% 132.13%
====== ======
-----------------------------------------------------------------------------------------------------------------
- 14 -
VOLUME/RATE VARIANCE ANALYSIS
The following tables analyze the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities for the three-month periods ended March 31, 2003
and 2002. The table distinguishes between (i) changes attributable to volume
(changes in volume multiplied by the prior period's rate), (ii) changes
attributable to rate (changes in rate multiplied by the prior period's volume),
and (iii) net change (the sum of the previous columns). The change attributable
to both rate and volume (changes in rate multiplied by changes in volume) has
been allocated equally to both the changes attributable to volume and the
changes attributable to rate.
--------------------------------------------------------------------------------
Three Months Ended March 31,
2003 vs. 2002
(in Thousands)
----------------------------
Increase (Decrease) Due to
----------------------------
Volume Rate Total
------ ---- -----
Interest Income
Loan portfolio 699 (221) 478
Investment Securities 71 (48) 23
Fed funds and other interest-earning assets 14 (27) (13)
--- ---- ---
Total interest-earning assets 784 (296) 488
Interest Expense
Interest-bearing NOW 35 (34) 1
Money market and savings (9) (41) (49)
Time deposits 216 (101) 115
Borrowings 55 (5) 49
--- ---- ---
Total interest-bearing liabilities 297 (181) 116
Net interest income 487 (115) 372
=== ==== ===
--------------------------------------------------------------------------------
- 15 -
NONPERFORMING ASSETS
The table below 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.
--------------------------------------------------------------------------------------
At March 31, At December 31,
---------------- ----------------
2003 2002 2002 2001
------- ------ ------ -------
(Dollars in thousands)
Nonaccrual loans $ 186 $ -- $ -- $ 429
Restructured loans -- -- -- --
------- ------ ------ -------
Total nonperforming loans 186 -- -- 429
Real estate owned -- 341 -- --
------- ------ ------ -------
Total nonperforming assets $ 186 $ 341 $ -- $ 429
======= ====== ====== =======
Accruing loans past due 90 days or more $ -- $ -- $ -- $ --
Allowance for loan losses 1,806 1,329 1,711 1,116
Nonperforming loans to period end loans .14% 0.00% 0.00% .53%
Allowance for loan losses to period end loans 1.36% 1.42% 1.36% 1.38%
Allowance for loan losses to nonperforming loans 970.97% 0.00% 0.00% 260.14%
Nonperforming assets to total assets .09% .27% 0.00% .33%
--------------------------------------------------------------------------------------
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 as
nonaccrual or restructured loans above, but about which we have serious doubts
as to the borrower's ability to comply with present repayment terms. These loans
are likely to be included later in nonaccrual, past due or restructured loans,
so they are considered by our management in assessing the adequacy of our
allowance for loan losses. At March 31, 2003, we had identified one loan as a
potential problem loan. The unsecured loan is in the amount of $31,000.
At March 31, 2003, we had two loans in nonaccrual status totaling $186,000. One
of these loans is in the amount of $180,000 and is secured by one-to-four family
residential property. The Company has begun the process to foreclose and expects
to own the property in the second quarter of 2003. Management believes that the
Company will need to invest
- 16 -
approximately $20,000 to prepare the property for sale. The potential loss that
may be realized is $20,000 to $30,000. The second loan in the amount of $6,000
is secured by a vehicle and the personal guarantee of the borrower's father. The
potential loss that may be realized on the loan is approximately $3,000.
Interest foregone on nonaccrual loans was approximately $2,000 for the
three-month period ended March 31, 2003. There were no nonaccrual loans at March
31, 2002.
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 Loan Administration function. The internal grading
system is reviewed and tested periodically by an independent third party credit
review firm. The testing process involves the evaluation of a sample of new
loans, loans having been identified as possessing potential weakness in credit
quality, past due loans and nonaccrual loans to determine the ongoing
effectiveness of the internal grading system. The loan grading system is used to
assess the adequacy of the allowance for loan losses.
Management has developed a model for evaluating the adequacy of the allowance
for loan losses. The model 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. For the three-
- 17 -
month period ended March 31, 2003, there were $13,000 in net loan charge-offs
and at March 31, 2003 there were $186,000 in non-performing loans. The allowance
for loan losses at March 31, 2003 was $1.8 million, which represents 1.36% 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,
-----------------------------------------
2003 2002
------------------- -------------------
% of Total % of Total
Amount Loans (1) Amount Loans (1)
------ ---------- ------ ----------
(Dollars in thousands)
Residential real estate loans $ 9 1.78% $ 7 1.95%
Home equity loans and lines 84 11.83% 55 11.77%
Commercial mortgage loans 663 45.76% 400 34.28%
Construction loans 369 18.06% 422 29.09%
Commercial and industrial loans 608 20.46% 330 19.83%
Loans to individuals 73 2.11% 115 3.08%
------ ------ ------ ------
Total loans $1,806 100.00% $1,329 100.00%
====== ====== ====== ======
(1) Represents total of all outstanding loans in each category as a percent of
total loans outstanding
--------------------------------------------------------------------------------
- 18 -
The following table presents information regarding changes in the allowance for
loan losses for the periods indicated:
--------------------------------------------------------------------------------------
Changes in Allowance for Loan Losses
For the Period Ended March 31,
------------------------------
2003 2002
-------- -------
(Dollars in thousands)
Balance at the beginning of the year $ 1,711 $ 1,116
Charge-offs:
Commercial and industrial loans 18 --
Loans to individuals 3 --
-------- -------
Total charge-offs 21 --
-------- -------
Recoveries 8 --
-------- -------
Net charge-offs 13 --
Provision for loan losses 108 213
-------- -------
Balance at the end of the year $ 1,806 $ 1,329
======== =======
Total loans outstanding at period-end $132,570 $93,559
Average loans outstanding for the period $129,097 $85,833
Allowance for loan losses to total loans outstanding 1.36% 1.42%
Ratio of net charge-offs to average loans outstanding 0.01% 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, brokered time deposits 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, 2003, liquid assets (cash and due from banks, interest-earning
deposits with banks, federal funds sold and investment securities available for
sale) were approximately $72.4 million, which represents 35% of total assets and
41% of total deposits. Supplementing this liquidity, the Company has available
lines of credit from various correspondent banks of approximately $36.5 million
of which $10.0 million is outstanding at March 31, 2003. At March 31, 2003,
outstanding commitments for undisbursed lines of credit and letters of credit
amounted to $35.9 million. Additionally, at March 31, 2003, the Company has an
outstanding commitment to purchase securities totaling $1.3 million to be issued
in April 2003. Management intends to fund anticipated loan closings and
operational needs through cash and
- 19 -
cash equivalents on hand, brokered deposits, scheduled principal repayments from
the loan and securities portfolios and anticipated increases in deposits.
Certificates of deposits represented 38% of the Company's total deposits at
March 31, 2003 compared with 43% at December 31, 2002. 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 20% of the Company's
total deposits at March 31, 2003 compared to 22% at year-end December 31, 2002.
While these deposits are generally considered rate sensitive and the Company
will need to pay competitive rates to retain these deposits at maturity, there
are other subjective factors that will determine the Company's continued
retention of those deposits.
Under federal capital regulations, Crescent State Bank must satisfy certain
minimum leverage ratio requirements and risk-based capital requirements. At
March 31, 2003, the Bank's equity to asset ratio was 8.65%. All capital ratios
place the Bank in excess of the minimum required to be deemed an adequately
capitalized bank by regulatory measures. The Bank's ratio of Tier I capital to
risk-weighted assets at March 31, 2003 was 9.21%.
IMPACT OF INFLATION AND CHANGING PRICES
A commercial bank has an asset and liability composition that is distinctly
different from that of a company with substantial investments in plant and
inventory because the major portions of its assets are monetary in nature. As a
result, a bank's performance may be significantly influenced by changes in
interest rates. Although the banking industry is more affected by changes in
interest rates than by inflation in the prices of goods and services, inflation
is a factor that may influence interest rates. However, the frequency and
magnitude of interest rate fluctuations do not necessarily coincide with changes
in the general inflation rate. Inflation does affect operating expenses in that
personnel expenses and the cost of supplies and outside services tend to
increase more during periods of high inflation.
FORWARD-LOOKING INFORMATION
This quarterly report 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 -
Item 3. Controls and Procedures
As of March 31, 2003, an evaluation was performed under the supervision and with
the participation of the Company's management, including the CEO and CFO, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's management, including
the CEO and CFO, concluded that the Company's disclosure controls and procedures
were effective as of March 31, 2003. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to March 31, 2003.
- 21 -
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
During the quarter ended March 31, 2003, the following Current
Reports on Form 8-K were filed with the Securities Exchange
Commission:
Form 8-K, dated January 14, 2003, included information regarding
the January 14, 2003 press release announcing Crescent Financial
Corporation's fourth quarter and year-end earnings. The Company
reported net income of $401,000 for the three-month period ended
December 31, 2002 and $1.2 million for the year ended December
31, 2002. Total assets at December 31, 2002 were $182.0 million.
Form 8-K, dated March 12, 2003, included information regarding
the Agreement and Plan of Reorganization and Merger entered into
by and between Crescent Financial Corporation, Crescent State
Bank and Centennial Bank on March 12, 2003.
Form 8-K, dated March 20, 2003, included information regarding
the 15% stock dividend declared by Crescent Financial Corporation
on March 20, 2003, payable on April 25, 2003 to stockholders of
record on April 11, 2003.
- 22 -
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 FINANCIAL CORPORATION
Date: May 12, 2003 By: /s/ Michael G. Carlton
-------------------------------------
Michael G. Carlton
President and Chief Executive
Date: May 12, 2003 By: /s/ Bruce W. Elder
-------------------------------------
Bruce W. Elder
Vice President and Secretary
- 24 -
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael G. Carlton, the Chief Executive Officer of Crescent Financial
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Crescent
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this quarterly report is being prepared;
b. Evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date");
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date; and
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors:
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 12, 2003 By: /s/Michael G. Carlton
-------------------------------------
Michael G. Carlton
President and Chief Executive Officer
- 25 -
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Bruce W. Elder, the Vice President and Secretary of Crescent Financial
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Crescent
Financial Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in
this quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and
have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this quarterly report is being prepared;
b. Evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date");
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date; and
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit
committee of the Company's board of directors:
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 12, 2003 By: /s/ Bruce W. Elder
-------------------------------------
Bruce W. Elder
Vice President and Secretary,
Principal Financial Officer
- 26 -