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 June 30, 2001
[ ] 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 August
9, 2001 was 1,289,527.
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Page No.
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets
June 30, 2001 and December 31, 2000.............................................. 3
Consolidated Statements of Operations
Three and Six Month Periods Ended June 30, 2001 and 2000......................... 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 and 2000.......................................... 5
Notes to Financial Statements.................................................... 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................. 7 - 14
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.......................... 16
Item 6. Exhibits and Reports on Form 8-K............................................. 16
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Part I. Financial Information
Item 1 - Financial Statements
-----------------------------
CRESCENT FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
================================================================================
June 30, 2001 December 31,
(Unaudited) 2000*
---------------- ----------------
(In Thousands)
ASSETS
Cash and due from banks $ 9,107 $ 2,479
Interest-earning deposits with banks 3,482 143
Federal funds sold 8,357 6,260
Investment securities available for sale at fair value 20,449 13,589
Loans 68,565 48,469
Allowance for loan losses (891) (630)
----------------- -----------------
NET LOANS 67,674 47,839
Bank premises and equipment 949 1,022
Federal Home Loan Bank stock, at cost 250 100
Other assets 656 585
---------------- ----------------
TOTAL ASSETS $ 110,924 $ 72,017
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $ 13,865 $ 8,422
Savings 716 485
Money market and NOW 33,566 23,882
Time 47,258 28,910
---------------- ----------------
TOTAL DEPOSITS 95,405 61,699
Advances from Federal Home Loan Bank 5,000 -
Accrued expenses and other liabilities 303 324
---------------- ----------------
TOTAL LIABILITIES 100,708 62,023
---------------- ----------------
STOCKHOLDERS' EQUITY
Preferred stock, 2001, no par value, 5,000,000 shares authorized, none
outstanding; 2000, none authorized - -
Common stock, 2001, $1 par value, 25,000,000 shares authorized, 1,289,527
shares issued and outstanding; 2000, $5 par value, 5,000,000 shares
authorized, 1,146,246 shares outstanding 1,290 5,731
Additional paid-in capital 9,625 5,184
Accumulated deficit (940) (960)
Accumulated other comprehensive income 241 39
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 10,216 9,994
---------------- ----------------
COMMITMENTS (Note C)
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 110,924 $ 72,017
================ ================
* Derived from audited financial statements.
See accompanying notes.
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CRESCENT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Periods Ended June 30, 2001 and 2000
================================================================================
Three-month Periods Six-month Periods
Ended June 30, Ended June 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
(In Thousands, except per share data)
INTEREST INCOME
Loans $ 1,387 $ 666 $ 2,620 $ 1,158
Investment securities available for sale 250 205 481 415
Federal funds sold and interest-bearing deposits 97 26 270 36
------------- ------------- ------------- -------------
TOTAL INTEREST INCOME 1,734 897 3,371 1,609
------------- ------------- ------------- -------------
INTEREST EXPENSE
Deposits 818 375 1,648 656
Borrowings 4 5 4 14
------------- ------------- ------------- -------------
TOTAL INTEREST EXPENSE 822 380 1,652 670
------------- ------------- ------------- -------------
NET INTEREST INCOME 912 517 1,719 939
PROVISION FOR LOAN LOSSES 131 100 263 166
------------- ------------- ------------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 781 417 1,456 773
------------- ------------- ------------- -------------
NON-INTEREST INCOME 104 32 184 58
------------- ------------- ------------- -------------
NON-INTEREST EXPENSE
Salaries and employee benefits 392 259 779 471
Occupancy and equipment 191 159 374 269
Data processing 46 42 94 81
Other 197 140 373 245
------------- ------------- ------------- -------------
TOTAL NON-INTEREST EXPENSE 826 600 1,620 1,066
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 59 (151) 20 (235)
INCOME TAXES - - - -
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ 59 $ (151) $ 20 $ (235)
============= ============= ============= =============
BASIC AND DILUTED NET INCOME
(LOSS) PER COMMON SHARE $ .05 $ (.12) $ .02 $ (.18)
============= ============= ============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (Note D) 1,289,527 1,289,527 1,289,527 1,289,527
============= ============= ============= =============
See accompanying notes.
-4-
CRESCENT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, 2001 and 2000
================================================================================
Six Months Ended June 30
2001 2000
---------------- ----------------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 20 $ (235)
-------------- --------------
Adjustments to reconcile net income (loss) to net cash provided (used) by operating
activities:
Depreciation 154 87
Provision for loan losses 263 166
(Gain) loss on sale of securities available for sale (4) -
Net (amortization) accretion of premiums and discounts on securities (17) (8)
Change in assets and liabilities
(Increase) in accrued interest receivable (75) (136)
(Increase) Decrease in other assets 3 (281)
Increase in accrued interest payable 40 24
Increase (Decrease) in other liabilities (60) 12
--------------- -------------
TOTAL ADJUSTMENTS 304 (136)
-------------- --------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 324 (371)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (10,696) (1,114)
Maturities of securities available for sale 1,250 250
Proceeds from sales of securities available for sale 1,992 500
Principal repayments of securities available for sale 668 309
Net increase in loans (20,097) (12,837)
Purchases of bank premises and equipment (82) (436)
--------------- --------------
NET CASH USED BY INVESTING ACTIVITIES (26,965) (13,328)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits:
Noninterest-bearing demand 5,443 1,416
Savings 231 69
Money market and NOW 9,684 10,166
Time deposits 18,347 7,500
Borrowed funds 5,000 -
NET CASH PROVIDED BY FINANCING ACTIVITIES 38,705 19,151
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 12,064 5,452
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,882 1,697
-------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,946 7,149
============== =============
See accompanying notes.
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CRESCENT FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
================================================================================
NOTE A - ORGANIZATION AND OPERATIONS
On June 29, 2001 at 6:31 pm, Crescent Financial Corporation (the "Company") was
formed as a holding company for Crescent State Bank (the "Bank"). Upon
formation, one share of the Company's $1 par value common stock was exchanged
for each of the then outstanding 1,289,527 shares of the Bank's $5 par value
common stock. The Company currently has no operations and conducts no business
on its own other than owning the Bank.
NOTE B - 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 and
six month periods ended June 30, 2001 and 2000, in conformity with generally
accepted accounting principles. Operating results for the three and six month
periods ended June 30, 2001 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 2001.
The organization and business of 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 annual report on Form 10-KSB. This
quarterly report should be read in conjunction with such annual report.
NOTE C - COMMITMENTS
At June 30, 2001, loan commitments are as follows
Undisbursed lines of credit $ 20,764,000
Stand-by letters of credit 204,000
NOTE D - 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. Outstanding stock options had no dilutive effect. Per share results for
2000 have been restated to include the effects of the stock split discussed
below.
NOTE E - STOCK DIVIDEND
On April 19, 2001, the Board of Directors of Crescent State Bank declared a
stock split effected as a 12-1/2 % dividend payable on May 25, 2001 to
stockholders of record on May 11, 2001.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------
This Quarterly Report on Form 10-QSB may contain certain forward-looking
statements consisting of estimates with respect to the financial condition,
results of operations and business of the Company that are subject to various
factors which could cause actual results to differ materially from these
estimates. These factors include, but are not limited to, general economic
conditions, changes in interest rates, deposit flows, loan demand, real estate
values, and competition; changes in accounting principles, policies, or
guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory, and technological factors affecting the
Company's operations, pricing, products and services.
Comparison of Financial Condition at June 30, 2001 and December 31, 2000
Crescent Financial Corporation has experienced significant growth during the
six-month period ended June 30, 2001. Total assets grew by $39 million or 54%
from $72.0 million at December 31, 2000 to $110.9 million at June 30, 2001.
Earning assets at June 30, 2001 totaled $100.9 million and consisted of $68.6
million in gross loans, $20.4 million in investments, $8.4 million in overnight
investments and $3.5 in interest-bearing deposits held at correspondent banks.
Total deposits and stockholders' equity as of June 30, 2001 were $95.4 million
and $10.2 million, respectively. At June 30, 2001, the Company had borrowings of
$5.0 million from the Federal Home Loan Bank of Atlanta.
Gross loans outstanding at June 30, 2001 were $68.6 million representing an
increase of $20.1 million or 41% over the $48.5 million at December 31, 2000.
The commercial real estate category showed the most significant net increase
growing $9.5 million from $29.3 million to $38.8 million. The commercial real
estate category includes both mortgages secured by commercial properties and
construction loans made to commercial builders but secured by either residential
or commercial property. Growth in other loan categories included $5.2 million in
commercial loans, $2.0 million in consumer loans, $1.7 million in loans secured
by first trust on residential real estate and $1.6 million in home equity lines
and loans. Crescent State Bank maintained an allowance for possible future loan
losses of $891,400 or 1.30% of outstanding loans as of June 30, 2001. No
material changes have occurred in the quality of the Company's assets since
December 31, 2000. Asset quality remains high, as there were no loans 30 days or
more past due as of June 30, 2001.
Federal funds sold increased by approximately $2.1 million during the six-month
period to $8.4 million at June 30, 2001. The Bank holds funds in overnight
investments to provide liquidity for future loan demand and to satisfy
fluctuations in deposit levels. The balance of Federal funds sold at the end of
each month is not indicative of the average level sold during each month. The
Bank has deposit relationships with several real estate settlement attorneys
whose escrow accounts have significant balances during a several day period from
the close of one month into the beginning of the next. During that brief period,
the Bank earns interest in the overnight investment market on the portion of
those funds that are collected. Federal funds sold averaged $4.3 million for the
second quarter, which represented less than 5% of total average assets for the
quarter.
There was a net change of $6.9 million in the investment securities portfolio
during the six-month period ended June 30, 2001. Increases to the investment
portfolio resulted from purchases of $10.5 million and an increase in the
unrealized gain on securities available for
-7-
sale of $202,000. Decreases in the portfolio resulted from $2.0 million in sales
of securities, $1.2 million in maturities and $668,000 in principal repayments
on mortgage-backed securities.
Non-earning assets increased by approximately $6.6 million between December 31,
2000 and June 30, 2001. The increase is fully attributable to the non-interest
bearing cash category. Portions of the previously mentioned real estate
settlement escrow funds are uncollected as of the end of each month. Check
deposits made to these and other accounts on the last day of the month are sent
to the Federal Reserve Bank in Charlotte for settlement, but are not available
for overnight investment until collected. For more details regarding the
increase in cash, see the Cash Flow Statement.
During the first half of 2000, deposits increased by $33.7 million or 55% to
close at $95.4 million. Of the total increase, $28.3 million was concentrated in
the interest-bearing deposit categories. Time deposits rose by $18.3 million,
interest-bearing NOW accounts by $8.8 million, money market accounts by
$918,000, and a statement savings balances increased by $231,000.
Non-interest-bearing demand deposits increased by $5.4 million or 65% during the
six-month period. A large portion of the increase in interest-bearing NOW
accounts is attributable to the aforementioned real estate settlement escrow
accounts. Time deposits as of June 30, 2001 were $47.3 million representing 49%
of total deposits. Time deposits of $100,000 or more totaled $20.6 million at
the end of the period.
Between December 31, 2000 and June 30, 2001, total stockholders' equity
increased by $222,000. The increase resulted from the net income for the
six-month period of $20,000 and the rise in market value on investments
available for sale of $202,000.
Comparison of Results of Operations for the Three-Month Ended June 30, 2001 and
2000 The Company reported net income for the three-month period ending June 30,
2001 of $59,153 or $.05 per share compared with a net loss of $150,567 or $(.12)
per share for the same period in 2000. Annualized return on average assets was
.26% and (1.37)% and return on average equity was 2.36% and (6.12)% for the two
periods ended June 30, 2001 and 2000, respectively. The Bank continued to
experience a high level of growth during the second quarter, which had a
positive impact on both net interest income and non-interest income. The
increases in income more than offset increases in non-interest expenses
associated with the growth experienced by the Company over the past twelve
months.
Net Interest Income
-------------------
The discussion of net interest income should be read in conjunction with Table
1. Rate/Volume Analysis and Table 2. Average Balances, Interest and Average
Yields/Cost. Net interest income for the three-month period ended June 30, 2001
was approximately $912,000 compared with $517,000 for the prior year period. Net
interest margin declined by 69 basis points to 4.22% for the three-month period
ended June 30, 2001 compared to 4.91% for the prior period. The average yield on
total earning assets for the three-month period ended June 30, 2001 was 8.03%.
This represents a 50 basis point decrease compared to the 8.53% yield reported
at June 30, 2000. The cost of interest-bearing funds decreased from 5.10% to
4.74% or 36 basis points. The interest rate spread, which is the difference
between the average yield on earning assets and the cost of interest-bearing
funds, decreased to 3.28% from 3.43%. During the current three-month period, the
Bank has relied more heavily on interest-bearing sources of funding as compared
with the prior period. The percentage of average earning assets to average
interest-bearing liabilities has declined from 141% to 125%. The rise in net
interest income is due to the increases in earning asset volume compared to the
prior period. The increase in net income was
-8-
mitigated to a small degree by the 275 basis points decline in short-term
interest rates since January 1, 2001.
Table 1. Rate/Volume Analysis
Three Months Ended June 30,
2001 vs. 2000
(in Thousands)
------------------------------------------------
Increase (Decrease) Due to
------------------------------------------------
Volume Rate Total
------------------------ ------------
Interest Income
Loan portfolio 787 (66) 721
Investment Securities 35 10 45
Fed funds and other interest-earning assets 75 (4) 71
------------------------ ------------
Total interest-earning assets 896 (59) 837
Interest Expense
Deposits 465 (22) 443
Borrowings 1 (2) (1)
------------------------ ------------
Total interest-bearing liabilities 466 (24) 442
Net interest income 431 (36) 395
======================== ============
As shown in Table 1 above, net interest income has grown as a result of the
continued high rate of growth the Bank enjoyed over the past twelve months.
Since June 30, 2000, average earning assets increased by $44.5 million or 105%
and average interest-bearing liabilities increased by $39.6 million or 134%. The
$36.6 million increase in average loans outstanding accounted for $787,000 of
the $837,000 increase in interest income. The average balance of Fed funds and
other interest-bearing assets increased by $5.7 million compared to the average
for the prior period. Of the total $7.3 million in this category, $3.0 million
was invested in a Certificate of Deposit with a correspondent bank and $4.3
million was the average balance maintained in overnight investments. The
percentage of average overnight investments to average assets for the second
quarter was less than 5%. The strong increases in net interest income derived
from earning asset volume increases were not fully realized due to the current
interest rate environment.
In response to weak economic conditions, the Federal Reserve has eased monetary
policy six times since January 1, 2001 resulting in a 275 basis point decline in
the prime-lending rate. As a result of the interest rate cuts and the Bank's
balance sheet structure, the average yield on the earning assets of the Bank
declined more rapidly and to a greater degree than the cost of interest-bearing
liabilities. This has caused a narrowing of the net interest margin by 69 basis
points.
Over 60% of the Bank's loan portfolio is priced off the prime-lending rate. As
the prime rate falls, these loans reprice immediately or within a one-month
period. New fixed rate loans made since January 1, 2001 carry lower rates of
interest than those made during the comparative quarter. These factors caused
the average yield on the loan portfolio to fall 110 basis points. The investment
portfolio has been structured to mitigate the potential risk of the loan
portfolio in the face of volatile interest rates. The yield of the investment
portfolio was designed to increase as short-term rates and the prime-lending
rate decrease. This strategy coupled with extending the
-9-
duration of recent purchases has resulted in a 31 basis point increase in the
average yield. The average yield on Fed funds sold and other interest earning
assets has dropped by only 118 basis points despite the 275 basis point drop in
short-term rates. The Bank invested $3.0 million in an eleven month Certificate
of Deposit earning 6.30% in March 2001.
Table 2. Average Balances, Interest and Average Yields/Cost
(Dollars in Thousands)
Three Months Ended June 30,
------------------------------------------------------------------------
2001 2000
------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------------------------------------------------------------------
Interest-earnings assets
------------------------
Loan portfolio $ 63,870 $ 1,387 8.71% $ 27,232 $ 666 9.81%
Investment securities 15,497 250 6.46% 13,375 205 6.15%
Fed funds and other interest-earning assets 7,296 97 5.36% 1,575 26 6.54%
------------------------------------------------------------------------
Total earning assets 86,663 1,734 8.03% 42,182 897 8.53%
Noninterest-bearing assets 3,817 1,968
------------ ------------
Total assets $ 90,480 $ 44,150
============ ============
Interest-bearing liabilities
----------------------------
Deposits $ 69,194 $ 818 4.74% $ 29,623 $ 375 5.07%
Borrowings 346 4 4.08% 309 5 6.75%
------------------------------------------------------------------------
Total interest-bearing liabilities 69,540 822 4.74% 29,932 380 5.10%
Other liabilities 10,945 4,351
Total Liabilities 80,485 34,283
Stockholders' equity 10,173 9,866
------------ ------------
Total liabilities & stockholders' equity $ 90,480 $ 44,149
============ ============
------------ ------------
Net interest income $ 912 $ 517
============ ============
Interest rate spread 3.28% 3.43%
============ ============
Net yield on interest-earning assets 4.22% 4.91%
============ ============
Percentage of average interest-earning
assets to average interest bearing
liabilities 124.62% 140.93%
============ ============
The Bank's average cost of interest-bearing funds for the three-month period
ending June 30, 2001 was 4.74%, or 36 basis points lower than the 5.10% reported
for the prior period. The decrease in the cost of funds was due to the falling
interest rate environment experienced since January 2001. The average cost of
funds has not declined to the same extent as the average yield on earning assets
due to the differences in repricing frequency. While the average maturity of the
Bank's time deposits is less than one year, it takes a year or more for all time
deposits to mature and renew at the lower rates. Non-maturing interest-bearing
deposit types subject to immediate repricing at the Bank's discretion typically
do not fall with the same magnitude as the decline in the prime-lending rate.
Therefore, when rates fall 275 basis points over a six-month period, the average
cost of interest-bearing funds does not decline as quickly or to the same extent
as the average yield on earning assets.
-10-
Provision For Loan Losses
-------------------------
Crescent Financial Corporation maintains an allowance for loan losses inherent
in the portfolio. During the three-month period ended June 30, 2001, $131,000
was provided for the allowance compared with $100,000 during the three-month
period ended June 30, 2000. Management believes the current reserve for loan
losses is adequate.
Non-Interest Income
-------------------
Non-interest income for the three-month period ended June 30, 2001 increased by
$72,000 or 224% to $104,000 compared with $32,000 for the prior period. The
largest components of non-interest income for the current period were $39,000 in
customer service charges, $38,000 in brokered mortgage loan fees and other loan
related charges and $23,000 in service charges on deposit accounts. Origination
fees and service release premiums on brokered mortgage loans increased by
$32,000 compared with the prior period. Customer service charges, which include
fees from returned checks, merchant Visa and MasterCard, safe deposit box rental
and debit card commissions, experienced a $24,000 increase over the three-month
period ended June 30, 2000. The Bank sold certain investment securities during
the second quarter resulting in gains on sales of $2,000. Management expects the
level of non-interest income to increase with the volume of deposit accounts and
fee-generating opportunities.
Non-Interest Expense
--------------------
The Company incurred $826,000 in non-interest expenses during the three-month
period ended June 30, 2001 compared to $600,000 for the same period ended June
30, 2000. The 38% increase in non-interest expense is due to the growth of the
Bank over the past twelve months. The overall growth in assets has required that
additional staff be hired and a new banking office was opened in December 2001
in Clayton, North Carolina. Increases in personnel and occupancy expenses
accounted for 59% of the total $226,000 increase.
The largest component of non-interest expense for the second quarter of 2001 was
salaries and employee benefits of $392,000. Salary and employee benefits expense
increased by $133,000 or 51% compared with the three-month period ended June 30,
2000. As of June 30, 2001, there were 28 full-time and 5 part-time employees
operating four banking offices compared with 19 full-time, three part-time
employees and three banking locations a year ago. As the Company continues to
grow, additional staff will be needed to support our customer base.
Occupancy and equipment expenses increased by $37,000 or 21%, to $191,000 for
the three-month period ended June 30, 2001 from $158,600 for the same prior year
period. The increase in occupancy expense is primarily due to the opening of the
new office in Clayton, North Carolina. Occupancy expenses for the new location,
including lease expense, depreciation of fixed assets and utilities are
approximately $11,000 per month.
Data processing expenses rose by $4,000 for the current period to $46,000. The
increase is due to higher account volumes and increased data line expenses
associated with the new banking location. Data processing costs are projected to
average approximately $18,000 per month throughout the remainder of the year.
Other non-interest expenses for the quarter ended June 30, 2000 totaled
approximately $197,000. This represents a 41% increase over the prior year
period. The largest components of other expense were professional fees of
$58,000, office supplies and printing expenses of $30,000 and advertising and
marketing expenses of $26,000. Professional fees increased by $34,000 over the
prior period due to increases in legal fees associated with the formation of the
-11-
holding company and the commencement of directors' fees. Office supplies and
printing expenses increased by $3,000 or 11% and advertising and marketing
expenses decreased by $8,000 compared to the second quarter 2001. The Bank's
headquarters at 1005 High House Road in Cary, North Carolina opened in April
2000 and significant marketing and advertising dollars were allocated for the
grand opening of that facility. Other non-interest expense consists of appraisal
fees and other loan related charges, telephone expense, correspondent bank
charges and other operating expenses.
Comparison of Results of Operations for the Six Months Ended June 30, 2001 and
2000 Net income for the six-month period ending June 30, 2001 was $20,026 or
$.02 per share compared with a net loss of $235,211 or $(.21) per share for the
period ended June 30, 2000. Annualized return on average assets was .05% and
(1.16)% and return on average equity was .40% and (4.74)% for the two periods
ended June 30, 2001 and 2000, respectively. Strong asset growth over the past
twelve month period has resulted in increases in both net interest income and
non-interest income. These increases more than offset the impact of the
aggressive interest rate cuts by the Federal Reserve Board of Governors and
increasing non-interest expenses due to internal expansion.
Table 3. Rate/Volume Analysis
Six Months Ended June 30,
2001 vs. 2000
(in Thousands)
------------------------------------------------
Increase (Decrease) Due to
------------------------------------------------
Volume Rate Total
------------------------ ------------
Interest Income
---------------
Loan portfolio 1,516 (54) 1,462
Investment Securities 58 8 66
Fed funds and other interest-earning assets 237 (3) 234
------------------------ ------------
Total interest-earning assets 1,812 (50) 1,762
Interest Expense
----------------
Deposits 992 0 992
Borrowings (6) (4) (10)
------------------------ ------------
Total interest-bearing liabilities 986 (4) 982
Net interest income 826 (46) 780
======================== ============
Net Interest Income
-------------------
The discussion of net interest income should be read in conjunction with Table
3. Rate/Volume Analysis and Table 4. Average Balances, Interest and Average
Yields/Cost. Net interest income for the six-month period ended June 30, 2001
was approximately $1.7 million, representing a $779,000 or 83% increase over the
$940,000 reported for the prior year period. Net interest margin declined by 65
basis points to 4.18% for the six-month period ended June 30, 2001 compared to
4.83% for the prior period. The average yield on total earning assets for the
current period was 8.19%. This represents an 8 basis point decrease compared
with the 8.27% yield reported for the period ended June 30, 2000. The cost of
interest-bearing funds increased from 4.99% to 5.00% basis points. The interest
rate spread, which is the difference between the average yield on earning assets
and the cost of interest-bearing funds, dropped to 3.19% from
-12-
3.28%. During the current six-month period, the Bank has relied more heavily on
interest-bearing sources of funding as compared with the prior period. The
percentage of average earning assets to average interest-bearing liabilities has
declined from 145% to 125%.
The increase in net interest income is due to strong earning asset growth over
the past twelve-month period. Total average earning assets for the six-month
period ended June 30, 2001 increased by $44.0 million or 113% to $83.0 million
compared to $39.0 million for the prior six-month period. The increase in total
average loans outstanding from the prior period to the current period was $33.8
million or 139% and accounted for $1.5 million of the increase in interest
income. The average balances of the fed funds sold and other earning assets
category and the investment portfolio increased by $8.7 million and $1.5
million, respectively. The asset growth in these categories resulted in
additional interest income from investments of $58,000 and $237,000 from Fed
funds and other earning assets. The falling interest rate environment that has
been in place since January 1, 2001 has had an unfavorable effect on interest
income for the six-month period ended June 30, 2001.
Table 4. Average Balances, Interest and Average Yields/Cost
(Dollars in Thousands)
Six Months Ended June 30,
------------------------------------------------------------------------
2001 2000
------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------------------------------------------------------------------
Interest-earnings assets
------------------------
Loan portfolio $ 58,145 $ 2,620 9.08% $ 24,326 $ 1,158 9.55%
Investment securities 15,085 481 6.38% 13,574 415 6.11%
Fed funds and other interest-earning assets 9,787 270 5.57% 1,124 36 6.36%
------------------------------------------------------------------------
Total earning assets 83,017 3,371 8.19% 39,024 1,609 8.27%
Noninterest-bearing assets 3,532 1,726
------------ ------------
Total assets $ 86,549 $ 40,750
============ ============
Interest-bearing liabilities
----------------------------
Deposits $ 66,489 $ 1,648 5.00% $ 26,518 $ 656 4.96%
Borrowings 174 4 4.08% 409 14 6.86%
------------------------------------------------------------------------
Total interest-bearing liabilities 66,663 1,652 5.00% 26,927 670 4.99%
Other liabilities 9,901 3,878
Total Liabilities 76,564 30,805
Stockholders' equity 10,114 9,945
------------ ------------
Total liabilities & stockholders' equity $ 86,678 $ 40,750
============ ============
------------ ------------
Net interest income $ 1,719 $ 939
============ ============
Interest rate spread 3.19% 3.28%
============ ============
Net yield on interest-earning assets 4.18% 4.83%
============ ============
Percentage of average interest-earning
assets to average interest bearing
liabilities 124.53% 144.93%
============ ============
Since January 1, 2001, the Federal Reserve Board of Governors has employed an
aggressive strategy of easing monetary policy. In response to weak economic
conditions, short-term interest rates have been lowered by 275 basis points over
a six-month period. The structure of the Bank's
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balance sheet is such that earning assets are subject to interest rate
adjustments with greater frequency than interest-bearing liabilities. Therefore,
the magnitude and speed with which rates have dropped has had a more pronounced
impact on interest income than on interest expense. Interest expense for the
six-month period ended June 30, 2001 increased by $982,000 or 147% over that
from the comparative period a year ago. The increase was the result of
significant growth in interest-bearing deposits, and was slightly mitigated by a
decline in borrowed funds and interest rates. Average interest-bearing deposits
increased by $40.0 million for the current six-month period compared with the
prior period. The breakdown of the total increase by deposit category is as
follows: $25.1 million in time deposits, $8.2 million in money market accounts,
$6.4 million in NOW and $300,000 in Savings accounts.
The current falling interest rate environment had no impact on the cost of
interest-bearing deposits. Between June 30, 1999 and June 30, 2000, short-term
interest rates were increased six times, for a total of 175 basis points, in
response to inflationary fears. During the prior comparative six-month period
January 1, through June 30, 2000, rates rose 100 basis points with the final
increase occurring in early June 2000. Rates remained constant at high levels
for the rest of 2000. During those periods of high interest rates, new time
deposits were being added and maturing time deposits were being renewed at the
then current rates increasing the average cost of time deposits. As interest
rates began to fall in early 2001, the time deposit rates were still much higher
than they had been over the previous twelve months. New and renewing time
deposits continued to increase the Bank's overall cost of funds. Although the
average cost of non-maturing interest-bearing deposits is lower in the current
six-month period, the higher average cost of time deposits offsets anticipated
favorable impact. At current interest rate levels, the average cost of time
deposits has begun to fall and since over 90% of time deposits mature in one
year or less, the cost of funds is expected to continue to fall over the next
twelve months.
Provision For Loan Losses
-------------------------
Crescent Financial Corporation maintains an allowance for loan losses inherent
in the portfolio. During the six-month period ended June 30, 2001, $263,000 was
provided for the allowance compared with $166,000 during the six-month period
ended June 30, 2000. Management believes the current reserve for possible future
is adequate.
Non-Interest Income
-------------------
Non-interest income for the six-month period ended June 30, 2001 increased by
$126,000 or 217% to $184,000 compared with $58,000 for prior period. The largest
components of non-interest income for the current period were brokered mortgage
loan and other loan related fees and customer service charges at $68,000 each.
Brokered mortgage loan and other loan related fees increased by $55,000 or 427%
and customer service fees increased by $39,000 or 133%. Service charges on
deposit accounts and other miscellaneous fees accounted for $40,000 and $4,000,
respectively. During the six-month period investment securities available for
sale were sold at a gain of $4,000. Management expects the level of non-interest
income to increase as the volume of deposit accounts and fee-generating
opportunities rises.
Non-Interest Expense
--------------------
The Company incurred $1.6 million in non-interest expenses during the six-month
period ended June 30, 2001 compared to $1.1 million for the period ended June
30, 2000. The 52% increase in non-interest expense is due primarily to opening a
fourth banking location in Clayton, North Carolina and hiring new staff to
support the overall growth in the Company. The two largest expenses associated
with expansion and growth are personnel and occupancy, which accounted for
$413,000 or 75% of the total increase.
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The largest component of non-interest expense for the first six months of 2001
was salaries and employee benefits. Salaries and employee benefits expense
increased by 65% from $471,000 for the prior period to $779,000 during the
current six-month period. As of June 30, 2001, there were 28 full-time and 5
part-time employees operating four banking offices compared with 19 full-time,
three part-time employees and three banking locations a year ago. As the Company
continues to grow, additional staff will be needed to support our customer base.
Occupancy expense during the current period increased to $374,000 from $269,000
or 39%. During the current six-month period, the Company incurred occupancy
expense on three branch locations and the corporate headquarters. Occupancy
expenses include rent, depreciation of fixed assets, utilities and real estate
taxes. During the prior period, occupancy expenses were incurred for two branch
locations and the corporate headquarters; however, the headquarters was not
occupied until April 2000 and expenses consisted of just rent expense during the
first quarter of 2000. Management expects occupancy expenses to remain fairly
constant throughout the remainder of 2001.
Data processing expenses increased by $13,000 during the current period to
$94,000 compared to $81,000 for the six-months ended June 30, 2000. Due to
increased account volumes and physical locations, data processing charges are
expected to increase slightly through the remainder of 2001.
Other non-interest expenses for the six-months ended June 30, 2000 totaled
approximately $373,000. This represents a 52% increase over prior year period
non-interest expenses of $245,000. Total expenses for professional services for
the current period were $113,000 compared with $46,000 for the prior period.
Growth in expenses was due to the commencement of director's fees beginning on
January 1, 2001 and legal fees associated with the formation of the holding
company. Other large components of other non-interest expenses include office
supplies and printing, advertising and marketing, and loan related expenses. For
the six-months ended June 30, 2001, these expenses were $57,000, $49,000 and
$30,000, respectively. Other non-interest expense consists primarily of legal
and other professional fees; appraisal fees and other loan related charges,
telephone expense and other operating expenses.
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Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Stockholders was held on April 25, 2001. Of 1,146,246
shares entitled to vote at the meeting, 926,952 shares voted. The following
matters were voted on at the meeting:
1. Authority To Reorganize Into Bank Holding Company
The proposal to enter into the Agreement and Plan of
Reorganization and Share Exchange between Crescent State Bank and
Crescent Financial Corporation, a corporation to be formed by the
Bank to become a holding company, was approved with 608,780
shares voting for, 4,240 shares voting against, and 312,932
shares abstaining.
2. Election of Directors
Brent D. Barringer, Sheila H. Ogle, Jon S. Rufty and Stephen K.
Zaytoun were all elected to three-year terms as follows:
Nominee For Against Abstain
------- --- ------- -------
Brent D. Barringer 917,022 - 9,930
Sheila H. Ogle 916,802 - 10,150
Jon S. Rufty 917,022 - 9,930
Stephen K. Zaytoun 916,802 - 10,150
3. Ratification of Appointment of Independent Public Accountants
Management's appointment of Dixon Odom, PLLC as the Bank's
independent public accountants for 2001 was approved with 917,542
shares voting for, 2,640 shares voting against, and 6,770 shares
abstaining.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. None
(b) Reports on Form 8-K.
During the quarter ended June 30, 2001, a Current Report on Form
8-K, dated June 29, 2001, was filed with the FDIC. The report
included information about the Crescent State Bank's
reorganization into a bank holding company and notified the FDIC
that future filings would be made to the Securities and Exchange
Commission.
During the quarter ended June 30, 2001, a Current Report on Form
8-K, dated June 29, 2001, was filed with the Commission. The
report included information regarding Crescent Financial
Corporations acquisition of all of the outstanding stock of
Crescent State Bank pursuant to the Agreement and Plan of
Reorganization and Share Exchange. Future filings of the
Registrant will be made to the SEC.
-16-
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: August 11, 2001 By: /s/ Michael G. Carlton
---------------------------------------
Michael G. Carlton
President and Chief Executive Officer
Date: August 11, 2001 By: /s/ Bruce W. Elder
---------------------------------------
Bruce W. Elder
Senior Vice President and
Chief Financial Officer
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