Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CRFN > SEC Filings for CRFN > Form 10-Q on 14-May-2013All Recent SEC Filings

Show all filings for CRESCENT FINANCIAL BANCSHARES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CRESCENT FINANCIAL BANCSHARES, INC.


14-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Crescent Financial Bancshares, Inc. (the "Company" or "Crescent Financial"), is a bank holding company incorporated under the laws of Delaware in 2011 and is a successor company to Crescent Financial Corporation, which was a bank holding company incorporated under the laws of North Carolina in 2001. The Company conducts its business operations primarily through its commercial bank subsidiary, VantageSouth Bank (formerly known as Crescent State Bank). The Company's headquarters are located in Raleigh, North Carolina. Crescent Financial is a subsidiary of Piedmont Community Bank Holdings, Inc. ("Piedmont"). VantageSouth Bank (or the "Bank") was incorporated in 1998 as a North Carolina-chartered commercial bank and, as of April 1, 2013, operates forty-five banking offices in central and eastern North Carolina.

Management's discussion and analysis is intended to assist readers in understanding and evaluating the financial condition and consolidated results of operations of the Company. This discussion and analysis includes descriptions of significant transactions, trends and other factors affecting the Company's operating results for the successor three months ended March 31, 2013, the successor period from February 1 to March 31, 2012 ("2012 successor period") and the predecessor period from January 1 to January 31, 2012 ("2012 predecessor period") as well as the financial condition of the Company as of March 31, 2013 and December 31, 2012. Because of the separate reporting for predecessor and successor periods in 2012, the Company's results of operations between these periods and the three months ended March 31, 2013 are not comparable. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and accompanying notes included in this report.

ECB Bancorp, Inc. Merger

On April 1, 2013, the Company completed the merger of ECB Bancorp, Inc. ("ECB") with and into the Company (the "ECB merger"). The ECB merger was completed pursuant to an Agreement and Plan of Merger dated as of September 25, 2012 (the "Merger Agreement"). Immediately following the ECB merger, The East Carolina Bank, a wholly-owned subsidiary of ECB, was merged with and into VantageSouth Bank. Upon the closing of the ECB merger, each outstanding share of ECB common stock was converted into the right to receive 3.55 shares of common stock of the Company. The aggregate merger consideration consisted of approximately 10,312,186 shares of the Company's common stock. Based upon the $3.94 per share closing price of the Company's common stock on March 28, 2013, the transaction value was $40.6 million. Following the ECB merger, Piedmont owns approximately 70 percent of the Company's outstanding common stock.

Pursuant to the Merger Agreement, the Company agreed to exchange each share of ECB's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, into one share of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series B. At the closing of the ECB merger, the Company also issued a warrant to purchase 514,693.2 shares of the Company's common stock to the U.S. Treasury Department ("Treasury") in exchange for the warrant issued by ECB to Treasury on January 16, 2009 to purchase 144,984 shares of ECB's common stock, which reflects the exchange ratio associated with the ECB merger.

As of March 31, 2013, ECB had total assets of $866.0 million, loans of $497.3 million, deposits of $732.0 million, and shareholders' equity of $80.9 million. The Company's first quarter 2013 financial results do not reflect ECB's financial condition or results of operations since the ECB merger was completed subsequent to quarter end. In connection with the ECB merger on April 1, 2013, the Company applied the acquisition method of accounting to ECB's balance sheet. Therefore, all acquired assets and liabilities will be adjusted to fair value, and the historical allowance for loan losses will be eliminated. Goodwill will be recorded to the extent that the combined purchase price and fair value of non-controlling interests exceeds the fair value of acquired net assets. A gain will be recorded in the Company's second quarter 2013 earnings to the extent that the fair value of acquired net assets exceeds the combined purchase price and fair value of non-controlling interests. The Company is currently in the process of finalizing its preliminary valuations of ECB's assets and liabilities.

Merger of Entities Under Common Control and Change in Reporting Entity

On November 30, 2012, the Company completed the merger of VantageSouth Bank ("Legacy VantageSouth") into Crescent State Bank in a share exchange. All outstanding Legacy VantageSouth shares of common stock were converted into Crescent Financial's shares at a 5.3278 exchange ratio for a total transaction value of approximately $35.0 million. At the time of merger, Piedmont Community Bank Holdings, Inc. ("Piedmont") owned all outstanding shares of Legacy VantageSouth except for directors' qualifying shares. Piedmont owned approximately 90 percent of the Company's outstanding common stock following the merger. The Company re-branded its wholly-owned banking subsidiary as VantageSouth Bank immediately following the merger.

- 28 -

The merger of Legacy VantageSouth into Crescent Financial was a merger of commonly-controlled companies and was accounted for in a manner similar to a pooling of interests transaction. Thus, the Company's financial statements were retrospectively adjusted to combine the financial condition and the results of operations of Crescent Financial and Legacy VantageSouth from the date the two companies became commonly controlled by Piedmont. Due to the application of push-down accounting to Legacy VantageSouth's books on February 1, 2012, which was the date that Piedmont purchased the bank's remaining non-controlling equity interests, periods prior to this date are denoted as "Predecessor Company" and periods after this date are denoted as "Successor Company."

Executive Summary

The following is a summary of the Company's financial results and significant events in the first quarter of 2013:

Net loss was $806 thousand in the first quarter of 2013, which included significant merger and system conversion costs, while net income was $57 thousand in the 2012 successor period and $529 thousand in the 2012 predecessor period.

The merger with ECB was completed on April 1, 2013, which provides the Company with $2.0 billion in total assets and an expanded network of ATMs and forty-five branches in central and eastern North Carolina. ECB's data processing system conversion was also completed in April 2013, and the combined bank now operates on a single technology platform with common business processes and policies across the organization.

Merger and system conversion costs totaled $1.6 million in the first quarter of 2013 while such costs totaled $497 thousand in the 2012 Successor Period and $78 thousand in the 2012 Predecessor Period.

Annualized net loan growth in the first quarter of 2013 was 17 percent, which was driven by loan originations of $81.2 million. Net loan growth over the trailing four quarters was 13 percent.

Revenue mix improved as non-interest income increased to 26 percent of total revenues in the first quarter of 2013 from 18 percent in the 2012 Successor Period and 16 percent in the 2012 predecessor period.

Asset quality continued to improve as nonperforming assets decreased to 1.48 percent of total assets as of March 31, 2013 from 1.71 percent of total assets as of December 31, 2012 and 2.54 percent of total assets as of March 31, 2012.

Analysis of Results of Operations

Net loss was $806 thousand in the first quarter of 2013 while net income was $57 thousand in the 2012 successor period and $529 thousand in the 2012 predecessor period. After preferred stock dividends, net loss attributable to common stockholders was $0.03 per common share in the first quarter of 2013. Net loss attributable to common stockholders was $0.01 per common share in the 2012 successor period, and net income available to common stockholders was $0.01 per common share in the 2012 predecessor period.

Two commonly-used measures of bank profitability are return on average assets (net income as a percentage of average total assets)and return on average stockholders' equity (net income as a percentage of average stockholders' equity). Annualized return on average assets was (0.30) percent in the first quarter of 2013 compared to 0.03 percent for the 2012 successor period and 0.58 percent for the 2012 predecessor period. Annualized return on average stockholders' equity for the first quarter of 2013 was (1.88) percent compared to 0.20 percent for the 2012 successor period and 3.67 percent for the 2012 predecessor period.

Net Interest Income

Three Months Ended March 31, 2013

Net interest income in the first quarter of 2013 totaled $9.9 million. Taxable equivalent net interest margin ("NIM") declined from 4.42 percent in the 2012 successor period and 4.55 percent in the 2012 predecessor period to 4.24 percent in the first quarter of 2013. The decrease in NIM was primarily due to a decline in earning asset yields resulting from the origination of new loans at lower current market rates and the reinvestment of matured or sold securities at lower current market rates. Taxable equivalent yield on interest-earning assets declined from 5.18 percent in the 2012 successor period and 5.35 percent in the 2012 predecessor period to 4.91 percent in the first quarter of 2013. The cost of interest-bearing liabilities partially offset lower earning asset yields as it fell from 0.92 percent in the 2012 successor period and 0.95 percent in the 2012 predecessor period to 0.76 percent in the first quarter of 2013.

- 29 -

Income accretion on purchased loans totaled $3.6 million in the first quarter of 2013, which consisted of $3.4 million of accretion on purchased credit-impaired ("PCI") loans and $118 thousand of accretion income on purchased non-impaired loans. PCI loan accretion represents all interest income recorded for those loans in the period while accretion income on purchased non-impaired loans represents accretion of the fair value discount on the effective yield method, which increased interest income above contractual yields. The time deposit fair value premium amortization totaled $484 thousand, which reduced interest expense, while accretion of the fair value discount on long-term debt totaled $38 thousand, which increased interest expense. Time deposit amortization and long-term debt accretion reduced the Company's cost of interest-bearing liabilities by 0.22 percent in the first quarter of 2013.

Average earning assets totaled $956.1 million in the first quarter of 2013 and consisted of $783.0 million in average loans, $143.5 million in average investment securities, and $29.6 million in average federal funds sold and other interest-earning assets. Average loan balances in the period were positively impacted by strong loan growth in the current quarter. Annualized net loan growth in the first quarter of 2013 was 17 percent, which was driven by loan originations of $81.2 million.

Average interest-bearing liabilities totaled $842.2 million in the first quarter of 2013, which included $811.8 million in average interest-bearing deposits, $7.2 million in average short-term borrowings, and $23.2 million in average long-term debt.

2012 Successor Period

Net interest income totaled $6.9 million in the 2012 successor period. NIM was 4.42 percent in the 2012 successor period which was a decline from 4.55 percent in the 2012 predecessor period. The yield on earning assets was 5.18 percent in the 2012 successor period, which was down from 5.35 percent in the 2012 predecessor period. Funding costs declined to 0.92 percent in the 2012 successor period from 0.95 percent in the 2012 predecessor period.

Income accretion on purchased loans totaled $2.8 million in the 2012 Successor Period, which consisted of $2.5 million of accretion on PCI loans and $309 thousand of accretion income on purchased non-impaired loans. Net amortization of fair value premiums on interest-bearing liabilities in the 2012 Successor Period totaled $588 thousand which reduced the Company's cost of interest-bearing liabilities by 0.45 percent.

Average earning assets totaled $956.1 million in the 2012 Successor Period and consisted of $736.4 million in average loans, $178.0 million in average investment securities, and $41.6 million in average federal funds sold and other interest-earning assets. Average interest-bearing liabilities totaled $792.6 million in the 2012 Successor Period, which included $763.3 million in average interest-bearing deposits, $5.1 million in average short-term borrowings, and $24.2 million in average long-term debt.

2012 Predecessor Period

Net interest income totaled $3.6 million in the 2012 predecessor period. NIM was 4.55 percent, the yield on earning assets was 5.35 percent, and the cost of interest-bearing liabilities was 0.95 percent in the 2012 predecessor period.

Income accretion on purchased loans totaled $1.6 million in the 2012 predecessor period, which consisted of $1.4 million of accretion on PCI loans and $192 thousand of accretion income on purchased non-impaired loans. Net amortization of fair value premiums on interest-bearing liabilities in the 2012 predecessor period totaled $298 thousand which reduced the Company's cost of interest-bearing liabilities by 0.45 percent.

Average earning assets totaled $934.3 million in the 2012 predecessor period and consisted of $730.4 million in average loans, $180.2 million in average investment securities, and $23.7 million in average federal funds sold and other interest-earning assets. Average interest-bearing liabilities totaled $787.3 million in the 2012 predecessor period, which included $762.1 million in average interest-bearing deposits, $968 thousand in average short-term borrowings, and $24.2 million in average long-term debt.

- 30 -

The following table summarizes the major components of net interest income and the related yields and costs for the periods presented.

                                                              Successor Company                                                      Predecessor Company
                                      Three Months Ended                         Period from February 1 to                         Period from January 1 to
                                        March 31, 2013                                 March 31, 2012                                  January 31, 2012
                            Average                                        Average                                          Average
(Dollars in thousands)      Balance        Interest*     Yield/Cost*       Balance        Interest*     Yield/Cost*         Balance        Interest*     Yield/Cost*

Assets
Loans (1)                $   783,023     $    10,697           5.54 %   $   736,434     $     7,302           6.05 %     $   730,387     $     3,807           6.15 %
Investment securities
(2)                          143,475             857           2.42         178,013             803           2.75           180,220             419           2.74
Federal funds and other       29,625              16           0.22          41,618              16           0.23            23,719               4           0.20
Total interest-earning
assets                       956,123          11,570           4.91 %       956,065           8,121           5.18 %         934,326           4,230           5.35 %
Non interest-earning
assets                       134,333                                        111,784                                          134,240
Total assets             $ 1,090,456                                    $ 1,067,849                                      $ 1,068,566

Liabilities and Equity
Interest-bearing demand  $   183,667             139           0.31 %   $   162,954     $       156           0.58 %     $   172,363     $       108           0.74 %
Money market and savings     264,917             343           0.53         207,934             239           0.70           184,716              96           0.61
Time                         363,248             820           0.92         392,458             600           0.93           404,999             326           0.95
Total interest-bearing
deposits                     811,832           1,302           0.65         763,346             995           0.80           762,078             530           0.82
Short-term borrowings          7,200              12           0.68           5,083               2           0.24               968               -              -
Long-term debt                23,211             270           4.72          24,186             201           5.07            24,217             103           5.02
Total interest-bearing
liabilities                  842,243           1,584           0.76 %       792,615           1,198           0.92 %         787,263             633           0.95 %
Non interest-bearing
deposits                      67,970                                         99,925                                          107,156
Other liabilities              6,427                                          5,089                                            4,184
Total liabilities            916,640                                        897,629                                          898,603
Stockholders' equity         173,816                                        170,220                                          169,963
Total liabilities and
stockholders' equity     $ 1,090,456                                    $ 1,067,849                                      $ 1,068,566

Net interest income,
taxable equivalent                       $     9,986                                    $     6,923                                      $     3,597
Interest rate spread (3)                                       4.15 %                                         4.26 %                                           4.40 %
Tax equivalent net
interest margin (4)                                            4.24 %                                         4.42 %                                           4.55 %

Percentage of average
interest-earning assets
to average
interest-bearing
liabilities                                                  113.52 %                                       120.62 %                                         118.68 %


* Taxable equivalent basis

(1) Loans include loans held for sale in addition to nonaccrual loans.

(2) Yields related to investment securities exempt from income taxes are stated on a taxable-equivalent basis assuming a federal income tax rates of 34.0 percent. The taxable-equivalent adjustment was $42 thousand, $47 thousand, and $24 thousand for 2013 and the 2012 Successor and Predecessor Periods, respectively.

(3) Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(4) Net interest margin represents annualized net interest income divided by average interest-earning assets.

The Company has not included a standard table presenting the variances between the periods caused by changes in interest rates versus changes in volumes because of the incomparability of the periods, which is due to the difference in the number of days in each period and the difference in the basis of accounting between the periods.

- 31 -

Provision for Loan Losses

Three Months Ended March 31, 2013

Provision for loan losses totaled $1.9 million in the first quarter of 2013.
Annualized net charge-offs in this period were 0.21 percent of average loans.
The allowance for loan losses ("ALL") and related provision were calculated in
separate models for the Company's following three portfolio categories: new
loans, purchased non-impaired loans, and PCI loans. The following table
summarizes the change in ALL for each loan category in the quarter ended
March 31, 2013.
(Dollars in thousands)        New Loans       Purchased Non-Impaired       PCI        Total

Balance at January 1, 2013   $    2,665     $                 55         $ 1,278    $ 3,998
Net charge-offs                     (56 )                   (355 )             -       (411 )
Provision for loan losses           225                      510           1,205      1,940
Balance at March 31, 2013    $    2,834     $                210         $ 2,483    $ 5,527

The ALL of $2.8 million on new loans as of March 31, 2013 was 0.87 percent of related outstanding balances, excluding the guaranteed portion of loans originated through the U.S. Small Business Administration's ("SBA") lending program. For new loans, the evaluation of the adequacy of the ALL includes both loans evaluated collectively for impairment and loans evaluated individually for impairment. The determination of loss rates on loans collectively evaluated for impairment involves consideration of peer loan loss experience as well as certain qualitative factors such as current delinquency levels and trends, loan growth, loan portfolio composition, prevailing economic conditions, the loan review function, and other relevant factors. Because the Company has not yet experienced material charge-offs on the new loan portfolio, trailing two-year peer loss rates are used as a proxy for charge-off rates on the Company's new loan portfolio.

Purchased non-impaired loans were adjusted to fair value at acquisition. Following acquisition, the Company records charge-offs for losses in excess of the fair value discount and provides reserves for deterioration in credit quality on these loans. For purchased non-impaired loans, the evaluation of the adequacy of the ALL also includes both loans evaluated collectively for impairment and loans evaluated individually for impairment and involves considerations of historical loan loss experience as well as certain qualitative factors such as current delinquency levels and trends, loan growth, loan portfolio composition, prevailing economic conditions, the loan review function, and other relevant factors. The Company uses trailing two-year historical loss rates on the legacy portfolio plus qualitative factors to determine appropriate loss rates for loans evaluated collectively.

Loans acquired with evidence of credit deterioration since origination are accounted for as PCI loans. Subsequent to acquisition of these loans, estimates of cash flows expected to be collected are updated each reporting period based on assumptions regarding default rates, loss severities, and other factors that reflect current market conditions. If the Company has probable decreases in cash flows expected to be collected (other than due to decreases in interest rates), the provision for loan losses is charged, resulting in an increase to the allowance for loan losses. If there are probable and significant increases in cash flows expected to be collected, the Company will first reverse any previously established allowance for loan losses and then increase interest income as a prospective yield adjustment over the remaining life of the loans.

Results of the Company's first quarter cash flow re-estimation for PCI loans are summarized as follows.

                                                          Cash Flow       New     Previous
(Dollars in thousands)                   Impairment      Improvement     Yield      Yield

Loan pools with cash flow improvement   $      (181 )   $         688    8.39 %      7.53 %
Loan pools with impairment                    1,386                 -    6.52 %      6.52 %
Total                                   $     1,205     $         688    7.07 %      6.82 %

- 32 -

The first quarter of 2013 cash flow re-estimation indicated net reduction in estimated cash flows on purchased credit-impaired loan pools of $517 thousand. The $688 thousand of estimated cash flow improvement on related loan pools will be recorded as additional interest income as a prospective yield adjustment over the remaining life of the loans. The $1.2 million impairment was recorded to provision for loan losses in the first quarter of 2013. This impairment was primarily related to the default of one legacy commercial real estate loan in the quarter, which reduced expected cash flows on that commercial real estate pool. The pool-level impairment and cash flow improvement were calculated as the difference between the pool-level recorded investment and the net present value of estimated cash flows at the time of the cash flow re-estimation.

2012 Successor Period

Provision for loan losses totaled $869 thousand in the 2012 successor period. Net charge-offs in this period totaled $538 thousand, and annualized net charge-offs were 0.45 percent of average loans.

2012 Predecessor Period

Provision for loan losses totaled $195 thousand in the 2012 predecessor period, which was all related to new loans and Legacy VantageSouth loans. There was no provision in this one-month period related to the purchased non-impaired or PCI loan portfolios. Legacy VantageSouth's loan portfolio, prior to that company's combination with Rowan and Crescent Financial, did not reflect Piedmont's basis in this period. Therefore, all of these loans were subjected to the same ALL model based on whether they were individually or collectively evaluated for impairment. There were no net charge-offs in this one-month period.

Non-Interest Income

The following table provides a summary of non-interest income for the periods
presented.
                                                                Successor                       Predecessor
                                                                 Company                          Company
                                                 Three Months                                   Period from
                                                     Ended        Period from February 1        January 1 to
(Dollars in thousands)                          March 31, 2013       to March 31, 2012        January 31, 2012

Mortgage banking income                         $         391     $            496            $          225
Government-guaranteed lending                           1,119                   (6 )                      98
Service charges and fees on deposit accounts              515                  349                       194
Earnings on bank-owned life insurance                     195                  134                        70
Gain on sale of available for sale securities           1,092                  192                         -
Other                                                     150                  307                        70
Total non-interest income                       $       3,462     $          1,472            $          657

Three Months Ended March 31, 2013

Non-interest income in the first quarter of 2013 totaled $3.5 million. Government-guaranteed lending income totaled $1.1 million in the first quarter of 2013, which included gains on sales of the guaranteed portion of certain SBA loans originated by the Company as well as servicing fees on previously sold SBA loans. The Company sells the guaranteed portion of certain SBA loans in the . . .

  Add CRFN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CRFN - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.