Crescent Financial Corporation Announces Results for Q2 2010

CARY, N.C., July 28, 2010 (GLOBE NEWSWIRE) -- Crescent Financial Corporation (Nasdaq:CRFN), (the "Company") parent company of Crescent State Bank headquartered in Cary, North Carolina, announced an unaudited net loss for the three months ended June 30, 2010, before adjusting for the effective dividend on preferred stock, of ($4,010,000) compared to net income of $574,000 for the prior year period. After adjusting for $421,000 and $422,000 in dividends and accretion on preferred stock for the two respective periods, net loss attributable to common shareholders for the current period was ($4,431,000) or ($0.46) per diluted share compared with net income attributable to common shareholders of $152,000 or $0.02 per diluted share for the quarter ended June 30, 2009. Despite improvements in net interest income, expansion of net interest margin and higher non-interest revenue, earnings in the current period were impacted by higher loan loss provisions and expenses related to the loan collection and foreclosure process. 

Net Interest Income

Net interest income for the three-month period ended June 30, 2010 increased by $269,000 or 4% to $7.5 million compared with $7.3 million for the period ended June 30, 2009. The yield on average earning assets increased by 8 basis points from 5.74% to 5.82%. In the stable interest rate environment we have experienced since the beginning of 2009, the cost of interest bearing deposits has declined from 3.17% in the prior year period to 2.57% for the quarter ended June 30, 2010. The cost of borrowings has increased from 2.91% to 3.49% as we have taken advantage of the low interest rate environment to extend our borrowings and lock-in favorable long-term pricing to improve our interest rate risk profile. The tax equivalent net interest margin improved to 3.33% for the quarter ended June 30, 2010 compared to 3.00% for the prior year quarter.

On a linked quarter basis, net interest income increased by $77,000 or 1%. The increase is attributable to a slight improvement in the yield on earning assets coupled with a continued reduction in the cost of interest-bearing liabilities. The yield on earning assets increased by 4 basis points from 5.78%, the cost of interest-bearing liabilities declined by 2 basis points from 2.80% and net interest margin improved 6 basis points from 3.27%. 

Provision for Loan Losses and Asset Quality

The provision for loan losses was $8.4 million for the quarter ended June 30, 2010, increasing by $7.3 million when compared to the $1.1 million recorded for the comparative period from the prior year. The size of the provision was due to the increased level of charge-offs for the quarter. Annualized net charge-offs for the current quarter were 3.73% compared to 1.38% for the first quarter of 2010 and 0.94% for the second quarter of 2009. The allowance for loan losses as a percentage of total gross outstanding loans was 2.59% at June 30, 2010, 2.26% at March 31, 2010 and 2.31% at December 31, 2009. 

Nonperforming loans as a percentage of total loans outstanding was 1.68% at June 30, 2010 compared to 3.95% at March 31, 2010 and 2.39% at December 31, 2009. Total nonperforming assets, which include nonaccrual loans, loans past due 90 days or more and still accruing, other real estate owned and repossessed loan collateral, as a percentage of total assets at June 30, 2010 was 2.84% compared with 3.71% at March 31, 2010 and 2.40% at December 31, 2009. The loan loss reserve coverage ratio, which shows the reserve as a percentage of nonperforming loans, was 154% at June 30, 2010, 57% at March 31, 2010 and 95% at December 31, 2009.

The charge-offs recorded by the Company during the second quarter have significantly reduced the level of total nonperforming loans and assets. The level of provisioning during the second quarter has increased both the size of the loan loss reserve as a percentage of total loans and the coverage ratio to nonperforming loans. While certain asset quality ratios at the end of June are encouraging, management cautions that the results should not be interpreted as a signal that the end of the current credit cycle is eminent. The Company will continue to devote resources to managing problem credits and adequately provide for possible future loan losses.

Non-Interest Income

Non interest income increased by $338,000 to $1.1 million compared to $752,000 for the period ended June 30, 2009. During the three-month period ended June 30, 2009, the Company recognized a $219,000 impairment on a nonmarketable equity investment. Other components of the increase in noninterest income over the two comparative periods includes an increase of $78,000 in customer service fees and service charges on deposit accounts and an increase of $45,000 in mortgage loan related revenue. Customer service fees increased from $326,000 to $401,000 and service charges on deposit accounts increased from $70,000 to $73,000. The Company has implemented a correspondent bank platform for its mortgage division and we have begun originating loans in our name and selling them in the secondary market. Mortgage loan related revenue now includes both brokered origination fees as well as gains on sales of loans. 

On a linked quarter basis, non-interest income increased by $45,000. Customer service fees and service charges on deposit accounts increased by $42,000 and mortgage loan related revenue increased by $23,000.  Revenue from brokerage referrals declined by $23,000.

Non-Interest Expenses

Non-interest expenses increased by $860,000 or 14% to $7.2 million compared to $6.3 million for the prior year period. The Company experienced a $1.1 million increase in loan collection expenses compared to the three-month period ended June 30, 2009. Total loan collection expenses for the current quarter totaled $1.3 million compared to $227,000. The expenses were primarily the net result of $901,000 in valuation write-downs on existing other real estate owned, $441,000 in expenses related to the acquisition or ongoing servicing of foreclosed and repossessed loan collateral and $64,000 in net gains on the disposition of other real estate owned. The Company had increases in data processing, occupancy and personnel of $91,000, $90,000 and $32,000, respectively, related to the opening of two full-service offices in Raleigh, North Carolina in 2009 and an increase in account volumes. The increases were more than offset by a $498,000 decrease in FDIC insurance premiums. The decrease in FDIC insurance premiums is attributed to recording the $493,000 special FDIC assessment during the second quarter of 2009.

On a linked quarter basis, non-interest expenses increased by $1.0 million from $6.2 million for the three-month period ended March 31, 2010. The increase was primarily driven by loan collection expenses which increased by $1.0 million from $354,000 for the prior period. Occupancy expense increased by $37,000 and data processing increased by $7,000 while personnel and FDIC insurance premiums decreased by $80,000 and $34,000, respectively.

Six-Month Period

For the six months ended June 30, 2010, the Company reported a net loss, before adjusting for the effective dividend on preferred stock, of ($3,467,000) compared to net income of $1,185,000 for the six months ended June 30, 2009. After adjusting for $841,000 and $590,000 in dividends and accretion on preferred stock for the two respective comparative periods, net loss attributable to common shareholders for the current period was ($4,308,000) or ($0.45) compared to net income of $595,000 or $0.06 for the prior year six-month period. Net interest income increased by 3% or $499,000 to $15.0 million from $14.5 million. The decrease in interest expense on interest-bearing liabilities due to lesser volume and a reduced cost of funds more than offset the reduction in interest income from the smaller average earning asset base. The tax equivalent net interest margin for the current six-month period expanded by 27 basis points from 3.03% to 3.30%. The provision for loan losses was $10.2 million for the six-month period ended June 30, 2010 compared to $2.8 million for the prior year period. The larger provision reflects current economic conditions, credit quality and an increase in net charge-offs. Non-interest income increased by $596,000. For the six-month period ended June 30, 2009, the Company recognized a $406,000 impairment on a nonmarketable equity investment.  Other large components of the increase include a $122,000 increase in customer service fees and service charges on deposit accounts, a $37,000 increase in small, non-yield related loan modification and underwriting fees and a $25,000 increase in brokerage referral fees. Non-interest expenses increased by $1.4 million, or 12%, with over $1.3 million of the increase in the loan collection expense category. The Company converted its data processing platform during the first quarter of 2009 and incurred approximately $235,000 of one-time, non-recurring expenses. 

Balance Sheet

Crescent Financial Corporation has unaudited total assets at June 30, 2010 of $985.7 million. Total assets have declined since December 31, 2009 by approximately 5% or $47.1 million. Total gross loans have decreased by $49.9 million from $759.3 million at December 31, 2009 to $709.4 million at June 30, 2010. Approximately $24.5 million of the decline is attributed to transferring assets from the loan account to other real estate owned or repossessions and charge-offs related to those accounts. The remaining $25.4 million is comprised of payments and payoffs of approximately $47.1 million net of $21.7 million in new loans. Loan demand continues to be soft in our markets. 

Total deposits have declined by $409,000 between December 31, 2009 and June 30, 2010, but the mix of deposits has changed significantly. Time deposits have declined by $33.7 million during the first half of 2010, which includes a $22.5 million reduction in brokered deposits. Time deposits comprise 56% of total deposits at June 30, 2010 compared to 61% at December 31, 2009. Total non-time deposits grew by $33.3 million during the first half of 2010 with interest-bearing checking, savings and non-interest checking increasing by $31.4 million, $7.6 million and $483,000, respectively. The Company continues to experience great success in generating core deposits through Crescent Rewards, a high-yield checking product introduced in December 2008. Money market account balances have declined by $6.1 million, approximately half of which relates to one commercial relationship whose business activity is very seasonal in nature. 

Total borrowings have declined by $45.0 million since December 31, 2009 the majority of which represented overnight borrowings. Although overnight borrowings were available at a very low cost, liquidity being generated through declines in both the loan and investment portfolios has been used to pay down overnight borrowing resulting in a reduction in interest rate risk should short term rates begin to increase. Total stockholders' equity was $87.1 million at June 30, 2010 compared to $89.5 million at year end. The net decrease was primarily related to the net loss for the year and an increase in other comprehensive income. Total risk-based capital ratios at both the Company and Crescent State Bank remain very strong and are 13.65% and 13.52%, respectively, at June 30, 2010.

Mike Carlton, President and CEO, stated, "The second quarter was one of continued recognition of the impact of the current economic climate. The Company recorded significant charge-offs and replenished our reserve for loan losses to a level that management deems appropriate at June 30, 2010. In doing so, the earnings for the Company suffered, but several of our asset quality ratios compared favorably to those presented as of  March 31, 2010. We would caution that while the ratios are improved, they are as of one point in time and the economic climate in which we operate still holds uncertainties. Management continues to expend substantial resources on reviewing and managing both the loan and problem asset portfolios. Despite the loss recorded for the quarter, Crescent's capital ratios continue to be strong and will permit us to work through this credit cycle." 

Crescent State Bank is a state chartered bank operating fifteen banking offices in Cary (2), Apex, Clayton, Holly Springs, Southern Pines, Pinehurst, Sanford, Garner, Raleigh (3), Wilmington (2) and Knightdale, North Carolina.  Crescent Financial Corporation stock can be found on the NASDAQ Global Market trading under the symbol CRFN. Investors can access additional corporate information, product descriptions and online services through the Bank's website at www.crescentstatebank.com.

Information in this press release contains "forward-looking statements." These statements involve risks and uncertainties that could cause actual results to differ materially, including without limitation, the effects of future economic conditions, governmental fiscal and monetary policies, legislative and regulatory changes, the risks of changes in interest rates and the effects of competition. Additional factors that could cause actual results to differ materially are discussed in Crescent Financial Corporation's recent filings with the Securities Exchange Commission, including but not limited to its Annual Report on Form 10-K and its other periodic reports.