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 September 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
-------------- ----------
(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
--------------
(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
October 31, 2001 was 1,289,527.
Page No.
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets
September 30, 2001 and December 31, 2000........................................ 3
Consolidated Statements of Operations
Three and Nine Month Periods Ended September 30, 2001 and 2000 ................. 4
Consolidated Statements of Cash Flows
Nine Months Ended September 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 - 17
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders ........................ 18
Item 6. Exhibits and Reports on Form 8-K ........................................... 18
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements
-----------------------------
CRESCENT FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
================================================================================
Sept 30, 2001 December 31,
(Unaudited) 2000*
---------------- ----------------
(In Thousands)
ASSETS
Cash and due from banks $ 2,849 $ 2,479
Interest-earning deposits with banks 3,098 143
Federal funds sold 13,842 6,260
Investment securities available for sale at fair value 21,711 13,589
Loans 74,171 48,469
Allowance for loan losses (962) (630)
----------------- -----------------
NET LOANS 73,209 47,839
Bank premises and equipment 906 1,022
Federal Home Loan Bank stock, at cost 250 100
Other assets 736 585
---------------- ----------------
TOTAL ASSETS $ 116,601 $ 72,017
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $ 24,757 $ 8,422
Savings 623 485
Money market and NOW 25,869 23,882
Time 49,360 28,910
---------------- ----------------
TOTAL DEPOSITS 100,609 61,699
Advances from Federal Home Loan Bank 5,000 -
Accrued expenses and other liabilities 395 324
---------------- ----------------
TOTAL LIABILITIES 106,004 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 (808) (960)
Accumulated other comprehensive income 490 39
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 10,597 9,994
---------------- ----------------
COMMITMENTS (Note C)
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 116,601 $ 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 September 30, 2001 and 2000
===============================================================================
Three-month Periods Nine-month Periods
Ended Sept 30, Ended Sept 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
(In Thousands, except per share data)
INTEREST INCOME
Loans $ 1,454 $ 881 $ 4,073 $ 2,039
Investment securities available for sale 325 208 805 623
Federal funds sold and interest-bearing deposits 110 29 381 65
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME 1,889 1,118 5,259 2,727
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 860 507 2,509 1,163
Borrowings 56 7 59 20
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 916 514 2,568 1,183
----------- ----------- ----------- -----------
NET INTEREST INCOME 973 604 2,691 1,544
PROVISION FOR LOAN LOSSES 74 83 336 249
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 899 521 2,355 1,295
----------- ----------- ----------- -----------
NON-INTEREST INCOME 113 47 298 105
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits 442 281 1,221 753
Occupancy and equipment 190 158 564 426
Data processing 53 41 148 122
Other 195 128 568 374
----------- ----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE 880 608 2,501 1,675
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 132 (40) 152 (275)
INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 132 $ (40) $ 152 $ (275)
=========== =========== =========== ===========
BASIC AND DILUTED NET INCOME
(LOSS) PER COMMON SHARE $ 10 $ (.03) $ .12 $ (.21)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (Note D) 1,289,527 1,289,527 1,289,527 1,289,527
=========== =========== =========== ===========
See accompanying notes.
-4-
CRESCENT STATE BANK
STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, 2001 and 2000
===============================================================================
Nine Months Ended September 30
2001 2000
-------- --------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 152 $ (275)
-------- --------
Adjustments to reconcile net income (loss) to net cash used by
operating activities
Depreciation 235 150
Provision for loan losses 336 249
(Gain) loss on sale of securities available for sale (4) --
Net amortization (accretion) of premiums and discounts on securities (23) (15)
Change in assets and liabilities
(Increase) in accrued interest receivable (143) (179)
(Increase) Decrease in other assets (8) (272)
Increase in accrued interest payable 100 42
Increase (Decrease) in other liabilities (28) 34
-------- --------
TOTAL ADJUSTMENTS 465 9
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 617 (266)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (12,452) (1,811)
Maturities of securities available for sale 1,750 550
Proceeds from sales of securities available for sale 1,992 500
Principal repayments of securities available for sale 915 484
Net increase in loans (25,706) (18,921)
Purchases of bank premises and equipment (118) (464)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (33,619) (19,662)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits:
Noninterest-bearing demand 16,335 2,906
Savings 139 60
Money market and NOW 1,986 12,165
Time deposits 20,449 10,790
Net increase in borrowed funds 5,000 --
NET CASH PROVIDED BY FINANCING ACTIVITIES 43,909 25,921
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,907 5,993
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,882 1,697
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,789 7,690
======== ========
-5-
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
nine month periods ended September 30, 2001 and 2000, in conformity with
generally accepted accounting principles. Operating results for the three and
nine month periods ended September 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 September 30, 2001, loan commitments are as follows
Undisbursed lines of credit $ 22,984,000
Stand-by letters of credit 284,000
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. 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. Per share results for 2000 have been restated to include the effects of
the stock split.
NOTE E - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations and SFAS
No. 142, Goodwill and other Intangible Assets. SFAS No. 141 requires that all
business combinations entered into after June 30, 2001 be accounted for under
the purchase method. SFAS No. 142 requires that all intangible assets, including
goodwill that results from business combinations, be periodically (at least
annually) evaluated for impairment, with any resulting impairment loss being
charged against earnings. Also, under SFAS No. 142, goodwill resulting from any
business combination accounted for according to SFAS No. 141 will not be
amortized, and the amortization of goodwill related to business combinations
entered into prior to June 30, 2001 will be discontinued effective, for the
Company, January 1, 2002. The adoption of the provisions of SFAS No. 141 and
SFAS 142 effective January 1, 2002, is not expected to affect the Company's
financial statements.
-6-
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 September 30, 2001 and December 31, 2000
-----------------------------------------------------------------------------
Total assets of Crescent Financial Corporation have grown $44.6 million or 62%
during the past nine months from $72.0 million at December 31, 2000 to $116.6
million as of September 30, 2001. Earning assets at September 30, 2001 totaled
$112.6 million, or 97% of total assets, and consisted of $74.2 million in gross
loans, $21.5 million in investments (amortized cost), $13.8 million in overnight
investments and $3.1 million in interest-bearing deposits held at correspondent
banks. Total deposits and stockholders' equity as of September 30, 2001 were
$100.6 million and $10.6 million, respectively. At September 30, 2001, the
Company had borrowings of $5.0 million from the Federal Home Loan Bank of
Atlanta.
Gross loans outstanding at September 30, 2001 were $74.2 million representing an
increase of $25.7 million or 53% over the $48.5 million reported at December 31,
2000. The commercial real estate category showed the most significant net
increase growing $14.3 million from $29.3 million to $43.6 million. The
commercial real estate category includes both mortgages secured by commercial
properties and construction loans made to commercial builders and secured by
either residential or commercial property. Growth in other loan categories
included $6.9 million in commercial loans, $1.8 million in home equity lines and
loans, $1.7 million in consumer loans, and $1.0 million in loans secured by a
first trust on residential real estate. Of the Bank's total loan portfolio, 74%
of the outstanding loan dollars are secured by either commercial or residential
real estate. Crescent State Bank maintained an allowance for loan losses of
$962,000 or 1.30% of outstanding loans as of September 30, 2001. No material
changes have occurred in the quality of the Company's assets since December 31,
2000. As of September 30, 2001, there was one loan that was thirty days or more
past due in the amount of $429,000.
Federal funds sold increased by approximately $7.6 million during the nine-month
period to $13.8 million at September 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. Overnight investments averaged $7.1 million for
the second quarter, which represented 7% of total average assets for the
quarter.
There was a net change of $8.1 million in the investment securities portfolio
during the nine-month period ended September 30, 2001. Increases to the
investment portfolio resulted from purchases of $12.3 million and an increase in
the unrealized gain on securities available for sale of $451,000. Decreases in
the portfolio resulted from $2.0 million in sales of securities,
-7-
$1.8 million in maturities and $915,000 in principal repayments on
mortgage-backed securities. Additional shares of Federal Home Loan Bank of
Atlanta stock were purchased in the amount of $150,000.
Interest bearing deposits with correspondent banks increased by $3.0 million
between December 31, 2000 and September 30, 2001. A $3.0 million certificate of
deposit (CD) was purchased from a local financial institution in late March
2001. The CD earns a 6.3% rate of interest and is due to mature in late February
2002.
Non-earning assets increased by approximately $406,000 between December 31, 2000
and September 30, 2001. The increase is primarily 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 nine months of 2001, deposits increased by $38.9 million or 63%
to close at $100.6 million on September 30, 2001. Of the total increase, $22.6
million was concentrated in the interest-bearing deposit categories. Time
deposits rose by $20.4 million, money market accounts by $2.4 million, and a
statement savings balances increased by $138,000. The interest bearing NOW
category experienced a $395,000 decline during the first nine months of 2001.
The decline in interest bearing NOW accounts was more than offset by a $16.3
million increase in non-interest bearing demand accounts. Several Bank customers
are real estate settlement attorneys and maintain large balances during a period
running from the last few days of one month into the first few days of the next
month. In the past, most of these attorneys chose to participate in the IOLTA
(Interest on Lawyers Trust Accounts) program. Interest earned on the IOLTA NOW
accounts was remitted directly from the Bank to the North Carolina State Bar
Association. During the third quarter of 2001, a number of the attorneys who
maintained large IOLTA accounts decided to no longer participate in this program
and changed their accounts to non-interest bearing demand. Because of this large
influx of funds toward the end of each month, the September 30, 2001 balance of
non-interest bearing demand accounts of $24.8 million is $6.1 million higher
than September's monthly average of $18.7 million. Time deposits as of September
30, 2001 were $49.4 million representing 49% of total deposits. Time deposits of
$100,000 or more totaled $21.9 million at the end of the period.
In early July 2001, the Bank borrowed a $5.0 million convertible advance from
the Federal Home Loan Bank of Atlanta. The borrowing is a fixed rate advance
with a ten-year maturity and is convertible to a floating rate at the option of
the lender after three years. The advance was used to purchase an investment
security with a seven-year average life. The transaction was designed to provide
additional interest income in a falling interest rate environment.
Between December 31, 2000 and September 30, 2001, total stockholders' equity
increased by $603,000. The increase resulted from the net income for the
nine-month period of $152,000 and the rise in market value on investments
available for sale of $451,000.
Comparison of Results of Operations for the Three-Month Periods Ended September
-------------------------------------------------------------------------------
30, 2001 and 2000
-----------------
Net income for the three-month period ending September 30, 2001 was $132,000 or
$.10 per basic and fully diluted share compared to a net loss of $40,000 or
$(.03) per share for the same
-8-
period in 2000. Annualized return on average assets was 0.50% and (0.30)% for
the two comparative periods ended September 30, 2001 and 2000, respectively. The
results for the three-month period ended September 30, 2001 represent the second
consecutive quarter of profitability for the Company. For the three-month
periods ended September 30, 2001 and 2000, net income before loan loss provision
was $205,000 and $43,000, respectively. The $162,000 or 375% increase was to due
to increases in net interest income and non-interest income which exceeded the
increase in non-interest expenses. Net interest income before loan loss
provision increased by $368,000 or 61% and non-interest income experienced an
increase of $66,000 or 142%. During the three months ended September 30, 2001,
non-interest expenses increased by $272,000 or 45% compared with the prior year
period. The increases were consistent with those that might be expected at a
company growing at the rate experienced by Crescent Financial Corporation.
--------------------------------------------------------------------------------
Table 1. Rate/Volume Analysis
The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume), and (iii) net change (the sum of the previous columns).
The change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated equally to both the changes attributable
to volume and the changes attributable to rate.
----------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30,
2001 vs. 2000
(in Thousands)
------------------------------------------------
Increase (Decrease) Due to
------------------------------------------------
------------------------ -------------
Volume Rate Total
------------------------ -------------
Loan portfolio 692 (119) 573
Investment Securities 115 2 117
Fed funds and other interest-earning assets 87 (6) 81
------------------------ -------------
Total interest-earning assets 894 (123) 771
Deposits 410 (57) 353
Borrowings 51 (2) 49
------------------------ -------------
Total interest-bearing liabilities 461 (59) 402
Net interest income 433 (64) 369
======================== =============
---------------------------------------------------------------------------------------------------------------------
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 September 30, 2001 was $973,000 compared
with $604,000 for the prior year period. Net interest margin declined by 92
basis points to 3.83% for the three-month period ended September 30, 2001
compared to 4.75% for the prior period. The average yield on total earning
assets for the three-month period ended September 30, 2001 was 7.43%. This
represents a 146 basis point decline from the 8.89% yield reported at September
30, 2000. The cost of interest-bearing funds decreased from 5.36% to 4.61% or 75
basis points. The interest rate spread, which is the difference between the
average yield on earning assets and the
-9-
cost of interest-bearing funds, decreased to 2.82% from 3.53%. 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 slightly
from 133% to 128%. The increase in net interest income was due to continued
growth in earning asset volumes and mitigated by a larger concentration of
overnight funds and a rapidly declining interest rate environment.
As shown in Table 1, net income has increased as a result of the high rate of
growth in earning assets enjoyed by the Bank over the past twelve months.
Average earning assets for the current quarter were $100.8 million compared with
$50.4 million for the prior year period, while average interest bearing
liabilities increased to $74.7 million from $38.0 million. The Bank earns a
spread between the cost of funding earning assets and the yield realized on
those assets. For the quarter ended September 30, 2001, the 100% growth in
average earning assets compared to the quarter ended September 30, 2000 resulted
in an increase in net interest income of $433,000.
The category of earning assts experiencing the greatest growth was the loan
portfolio. The average balance of the loan portfolio during the three-months
ended September 30, 2001 was $70.0 million or $34.7 million higher than the
average from the prior year period. This increase accounted for $692,000 of the
total $894,000 increase in interest income. Average investment securities
increased from $13.4 million for the third quarter of 2000 to $20.8 million for
the current quarter resulting in an increase of interest income of $115,000. The
average balance of Federal funds sold and other earning assets increased by $8.3
million, from $1.8 million for the third quarter of 2000 to $10.1 million for
the third quarter of 2001. Of the $10.1 million, $3.0 million is an eleven-month
certificate of deposit, purchased from a correspondent bank in March 2001,
yielding 6.3%. The remaining $7.1 million were overnight investments. This level
of liquidity is higher than the Bank would typically like to maintain in a rate
environment where short-term interest rates have declined so quickly. Management
believes maintaining these funds short-term for appropriate variable rate loan
opportunities will yield greater long-term results than purchasing investment
securities at the current interest rate levels. Growth in average federal funs
sold and other earning assets resulted in an increase in interest income of
$87,000.
Average interest bearing liabilities for the current three-month period were
$78.7 million compared to $38.0 million for the third quarter of 2000. The
increase in average interest bearing deposits accounted for $36.1 million of the
total growth in interest bearing liabilities. The Bank borrowed a $5.0 million
convertible advance from the Federal Home Loan Bank in early July 2001. The
advance has a ten-year maturity with a fixed rate of 4.44% that is convertible
to LIBOR (London InterBank Offering Rate) in three years and quarterly
thereafter. The increase in average interest bearing liabilities increased
interest expenses by $461,000.
The potential increase in net interest income due to growth in average earning
assets was mitigated by a rapid decline in interest rates between September 30,
2000 and September 30, 2001. In response to a weakening in the economy, the
Federal Reserve has eased monetary policy eight times between January 1, 2001
and September 30, 2001, resulting in a 350 basis point decline in the short-term
and prime-lending rates. 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 92 basis
points between the comparative periods ended September 30, 2001 and 2000.
-10-
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Table 2. Average Balances, Interest and Average Yields/Cost
(Dollars in Thousands)
For the Three-Months Ended September 30,
---------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
---------------------------------------------------------------------------
Loan portfolio $ 69,980 $ 1,454 8.24% $ 35,237 $ 881 9.92%
Investment securities 20,762 325 6.26% 13,414 208 6.19%
Fed funds and other interest-earning assets 10,074 110 4.33% 1,803 29 6.53%
---------------------------------------------------------------------------
Total earning assets 100,816 1,889 7.43% 50,454 1,118 8.89%
Noninterest-bearing assets 3,844 2,338
------------- ------------
Total assets $ 104,660 $ 52,792
============= ============
Deposits $ 73,748 $ 860 4.63% $ 37,585 $ 507 5.35%
Borrowings 5,000 56 4.44% 435 7 0.0675
---------------------------------------------------------------------------
Total interest-bearing liabilities 78,748 916 4.61% $38,020 $ 514 5.36%
Other liabilities 15,825 4,948
Total Liabilities 94,573 42,968
Stockholders' equity 10,087 9,824
------------- ------------
Total liabilities & stockholders' equity $ 104,660 52,792
============= ============
------------ ------------
Net interest income $ 973 $ 604
============ ============
Interest rate spread 2.82% 3.53%
==============
Net yield on interest-earning assets 3.83% 4.75%
============== ============
Percentage of average interest-earning
assets to average interest bearing
liabilities 128.02% 132.70%
============== ============
--------------------------------------------------------------------------------------------------------------------------
Approximately 55% of the Bank's loan portfolio was priced off the prime-lending
rate. As the prime rate declined, 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 prior year. These factors caused
the average yield on the loan portfolio to fall 168 basis points. The investment
portfolio was structured with mortgage-backed products to serve as a hedge for
the loan portfolio in the face of volatile interest rates. The average yield on
the investment portfolio for the current period has increased by 7 basis points
compared to the prior period. The investment portfolio was designed to provide a
higher yield in a falling interest rate environment. The average yield on Fed
funds sold and other interest earning assets has dropped by 220 basis points
despite the 350 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.
The declining interest rate environment had a negative impact on total interest
income of $123,000.
The Bank's average cost of interest-bearing funds for the three-month period
ending September 30, 2001 was 4.61%, or 75 basis points lower than the 5.36%
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
-11-
decline in the prime-lending rate. Therefore, when rates decline 350 basis
points over a nine-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. The decline in interest rates reduced interest expense by $59,000 for
the quarter.
Provision For Loan Losses
-------------------------
Crescent State Bank maintains an allowance for loan losses. During the
three-month period ended September 30, 2001, $74,000 was provided for the
allowance compared with $83,000 during the three-month period ended September
30, 2000. Management believes the current reserve for loan losses is adequate.
Non-Interest Income
-------------------
Non-interest income for the three-month period ended September 30, 2001
increased by $66,000 to $113,000 compared with $47,000 for the prior period. The
largest components of non-interest income for the current period were $47,000 in
customer service charges, $41,000 in brokered mortgage loan and other loan
related fees and $22,000 in service charges on deposit accounts. Customer
service charges, which include fees from returned checks, merchant Visa and
MasterCard, safe deposit box rental and debit card commissions, experienced the
greatest growth with a $29,000 increase over the period ended September 30,
2000. Increases in loan related activities and fee income from service charges
on deposits were $27,000 and $12,000, respectively. 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 $881,000 in non-interest expenses during the three-month
period ended September 30, 2001 compared to $608,000 for the same period ended
September 30, 2000. The 45% 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 71% of the total $273,000 increase.
The largest component of non-interest expense for the third quarter of 2001 was
salaries and employee benefits of $442,000. Salary and employee benefits expense
increased by $161,000 or 57% compared with the three-month period ended
September 30, 2000. As of September 30, 2001, there were 29 full-time and 4
part-time employees operating four banking offices compared with 19 full-time, 3
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 $32,000 or 20%, to $190,000 for
the three-month period ended September 30, 2001 from $158,000 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
accounted for $30,000 of the total increase
Data processing expenses rose by $13,000 for the current period to $54,000. 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 $19,000 per month throughout the remainder of the year.
Other non-interest expenses for the quarter ended September 30, 2001 totaled
approximately $195,000. This represents a 53% increase over the prior year
period. The largest components of other expense were professional fees of
$60,000, office supplies and printing expenses of
-12-
$27,000 and advertising and marketing expenses of $33,000. Professional fees
increased by $30,000 over the prior period due to increases in legal fees
associated with the formation of the holding company, the commencement of
directors' fees and the outsourcing of internal audit and independent loan
review functions. Office supplies and printing expenses increased by $7,000 and
advertising and marketing expenses increased by $10,000 compared to the third
quarter 2000. The Bank's new Clayton office, which opened in December 2000,
accounted for $4,000 of the $7,000 office supplies increase and $6,000 of the
$10,000 increase in advertising and marketing expenses. 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 Nine Month Periods Ended September
------------------------------------------------------------------------------
30, 2001 and 2000
-----------------
Net income for the nine-month period ending September 30, 2001 was $152,000 or
$.12 per share compared with a net loss of $275,000 or $(.21) per share for the
period ended September 30, 2000. Annualized return on average assets was .22%
and (.82)% and return on average equity was 2.00% and (3.70)% for the two
periods ended September 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.
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 nine-month period ended September 30,
2001 was approximately $2.7 million, representing a $1.2 million or 74% increase
over the $1.5 million reported for the prior year period. Net interest margin
declined by 79 basis points to 4.04% for the nine-month period ended September
30, 2001 compared to 4.83% for the prior period. The average yield on total
earning assets for the current period was 7.90%. This represents an 58 basis
point decrease compared with the 8.48% yield reported for the period ended
September 30, 2000. The cost of interest-bearing funds declined 29 basis points
from 5.14% to 4.85% 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 3.05% from 3.33%. During the current
nine-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 140% to 126%.
As shown in Table 3, 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 nine-month period ended September 30, 2001 increased by $46.1
million or 107% to $89.0 million compared to $42.9 million for the prior
nine-month period. The average balance of interest bearing liabilities for the
nine-months ended September 30, 2001 was $70.7 million compared to $30.6 million
for the prior nine-month period. The Bank's net interest income increases due to
the spread between the interest rate earned on average earning assets and the
interest rate paid to fund those assets. Average earning asset growth resulted
in an increase in net interest income of more than $1.2 million.
-13-
--------------------------------------------------------------------------------
Table 3. Rate/Volume Analysis
The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume), and (iii) net change (the sum of the previous columns).
The change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated equally to both the changes attributable
to volume and the changes attributable to rate.
Nine Months Ended September 30,
2001 vs. 2000
(in Thousands)
----------------------------------
Increase (Decrease) Due to
----------------------------------
Volume Rate Total
----------------- -------
Loan portfolio 2,210 (176) 2,034
Investment Securities 165 17 182
Fed funds and other interest-earning assets 326 (10) 316
----------------- -------
Total interest-earning assets 2,701 (169) 2,532
Deposits 1,400 (54) 1,346
Borrowings 43 (4) 39
----------------- -------
Total interest-bearing liabilities 1,443 (58) 1,385
Net interest income 1,257 (110) 1,147
================= =======
--------------------------------------------------------------------------------
The increase in total average loans outstanding from the prior nine-month period
to the current period was $34.1 million or 122% and accounted for $2.2 million
of the total increase in interest income. Average balances of investment
securities increased from $13.5 million for the nine-month period ended
September 30, 2000 to $17.0 million for the same period ended September 30,
2001. Interest income for the current nine-month period improved by $165,000 due
to the increase in volume. The average balance of the federal funds sold and
other earning asset category increased by $8.5 million to $9.9 million compared
to $1.3 million for the nine-months ended September 30, 2000. Of the total
increase in average federal funds sold and other earning assets, $2.2 million
represented the eleven-month certificate of deposit, purchased from a
correspondent bank in March 2001, earning 6.30%. The remaining $6.3 million
increase was overnight investments. This level of liquidity is higher than the
Bank would typically like to maintain in a rate environment where short-term
interest rates have declined so quickly. Management believes maintaining these
funds short-term for appropriate variable rate loan opportunities will yield
greater long-term results than purchasing investment securities at the current
interest rate levels. Growth in average federal funds sold and other earning
assets resulted in an increase in interest income of $326,000.
Earning assets were funded to a large extent by interest bearing liabilities.
The average balance of interest bearing liabilities for the nine-month period
ended September 30, 2001 increased by $40.1 million compared to the same period
of the prior year. Of the total increase, $38.7 million was attributable to
interest bearing deposits. The increase in average interest bearing deposits
accounted for almost all of the $1.4 million increase in interest expense
between the nine-month periods ended September 30, 2001 and 2000. Average
borrowings increased from $417,000 to
-14-
$1.8 million due to the Federal Home Loan Bank advance originated in early July
2001. Interest expense from the growth in borrowed money rose by $43,000.
--------------------------------------------------------------------------------
Table 4. Average Balances, Interest and Average Yields/Cost
(Dollars in Thousands)
Nine Months Ended September 30,
---------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
---------------------------------------------------------------------
Loan portfolio $62,133 $ 4,073 8.76% $ 27,990 $ 2,039 9.70%
Investment securities 16,998 805 6.31% 13,520 623 6.14%
Fed funds and other interest-earning assets 9,884 381 5.15% 1,351 65 6.44%
-----------------------------------------------------------------
Total earning assets 89,015 5,259 7.90% 42,861 2,727 8.48%
Noninterest-bearing assets 3,637 1,932
------- --------
Total assets $92,652 $ 44,793
======= ========
Deposits $68,935 $ 2,509 4.87% $ 30,234 $ 1,163 5.12%
Borrowings 1,800 59 4.38% 417 20 6.53%
-----------------------------------------------------------------
Total interest-bearing liabilities 70,735 2,568 4.85% $ 30,651 $ 1,183 5.14%
Other liabilities 11,898 4,237
Total Liabilities 82,633 34,888
Stockholders' equity 10,019 9,905
------- --------
Total liabilities & stockholders' equity $92,652 44,793
======= ========
------- --------
Net interest income $ 2,691 $ 1,544
======= ========
Interest rate spread 3.05% 3.33%
====== ======
Net yield on interest-earning assets 4.04% 4.83%
====== ======
Percentage of average interest-earning
assets to average interest bearing
liabilities 125.84% 139.84%
====== ======
--------------------------------------------------------------------------------
The potential increase in net interest income due to growth in average earning
assets was mitigated by the rapid decline in interest rates experienced this
year. In response to a weakening in the economy, the Federal Reserve eased
monetary policy eight times between January 1, 2001 and September 30, 2001,
resulting in a 350 basis point decline in the short-term and prime-lending
rates. 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 79 basis points
between the comparative periods ended September 30, 2001 and 2000.
Between January 1, 2001 and September 30, 2001, approximately 65% to 55% of the
Bank's loan portfolio was priced off the prime-lending rate. As the prime rate
declined, 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 prior year. These factors caused the average yield on the
loan portfolio to fall 94 basis points. The investment portfolio was structured
with mortgage-backed products to hedge the impact that volatile interest rates
could have on the loan portfolio. The average yield on the investment portfolio
for the current period has increased by 17 basis points compared to the prior
period. The investment portfolio was structured to
-15-
provide a higher yield in a falling interest rate environment. The average yield
on Fed funds sold and other interest earning assets has dropped by 129 basis
points despite the 350 basis point drop in short-term rates. The impact was
lessened due to the $3.0 million investment in an eleven-month certificate of
deposit earning 6.30% in March 2001. The declining interest rate environment had
a negative impact on total interest income of $169,000.
The Bank's average cost of interest-bearing funds for the nine-month period
ending September 30, 2001 was 4.85%, or 29 basis points lower than the 5.14%
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 decline 350 basis points over a
nine-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. The
falling interest rate environment has reduced interest expense by $58,000 during
the nine-month period ended September 30, 2001.
Provision For Loan Losses
-------------------------
Crescent State Bank maintains an allowance for loan losses inherent in the
portfolio. During the nine-month period ended September 30, 2001, $336,000 was
provided for the allowance compared with $249,000 during the nine-month period
ended September 30, 2000. Management believes the current reserve for loan
losses is adequate.
Non-Interest Income
-------------------
Non-interest income for the nine-month period ended September 30, 2001 increased
by $193,000 or 184% to $298,000 compared with $105,000 for prior period. The
largest components of non-interest income for the current period were customer
service charges of $115,000 and brokered mortgage loan and other loan related
fees of $109,000. Brokered mortgage loan and other loan related fees increased
by $83,000 or 309% and customer service fees increased by $68,000 or 143%.
Service charge income on deposit accounts and other miscellaneous fees were
$63,000 and $7,000, respectively. 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 $2.5 million in non-interest expenses during the nine-month
period ended September 30, 2001 compared to $1.7 million for the period ended
September 30, 2000. The 49% 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 $606,000 or 73% of the total $827,000 increase.
The largest component of non-interest expense for the first nine months of 2001
was salaries and employee benefits. Salaries and employee benefits expense
increased by 62% from $753,000 for the prior period to $1.2 million during the
current nine-month period. As of September 30, 2001, there were 29 full-time and
4 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.
-16-
Occupancy expense during the current period increased to $564,000 from $427,000
or 32%. During the current nine-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 $26,000 during the current period to
$148,000 compared to $122,000 for the nine-months ended September 30, 2000. Due
to increased account volumes and physical locations, data processing charges are
expected to average approximately $19,000 through the remainder of 2001.
Other non-interest expenses for the nine-months ended September 30, 2000 totaled
approximately $568,000. This represents a 52% increase over prior year period
non-interest expenses of $373,000. Total expenses for professional services for
the current period were $173,000 compared with $75,000 for the prior period.
Growth in professional fees was due to the commencement of director's fees
beginning on January 1, 2001, legal fees associated with the formation of the
holding company and the outsourcing of internal audit and loan review functions.
Other large components of non-interest expenses include office supplies and
printing, advertising and marketing, and loan related expenses. For the
nine-months ended September 30, 2001, these expenses were $85,000, $82,000 and
$43,000, 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.
-17-
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Bank during the quarter
ended September 30, 2001.
-18-
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: November 8, 2001 By: /s/ Michael G. Carlton
------------------------------------
Michael G. Carlton
President and Chief Executive
Date: November 8, 2001 By: /s/ Bruce W. Elder
------------------------------------
Bruce W. Elder
Senior Vice President and Chief
Financial Officer
-19-