Crescent Financial Corporation Announces Third Quarter Results

CARY, N.C., Oct. 29, 2010 (GLOBE NEWSWIRE) -- Crescent Financial Corporation (Nasdaq:CRFN), parent company of Crescent State Bank headquartered in Cary, North Carolina, announced an unaudited net loss for the three months ended September 30, 2010, before adjusting for the effective dividend on preferred stock, of ($1,884,000) compared with net income of $636,000 for the three month period ended September 30, 2009. After adjusting for dividends and accretion on preferred stock of $423,000 and $422,000, respectively for each period, the net loss attributable to common shareholders for the current period was ($2,307,000) or ($0.24) per diluted share compared to net income attributable to common shareholders of $214,000 or $0.02 per diluted share for the prior year period. Financial results for the third quarter of 2010 were negatively impacted by an increase in loan loss provision, expenses related to the loan collection process and the increased level of loans moved to nonaccrual status.

Net Interest Income

Net interest income for the three-month period ended September 30, 2010 decreased by $600,000 to $6.8 million compared with $7.4 million for the period ended September 30, 2009. The yield on average earning assets decreased by 32 basis points from 5.77% to 5.45%, of which 20 basis points was due to the reversal of accrued but uncollected interest income on loans moved into nonaccrual status during the quarter. The cost of interest bearing deposits declined from 3.03% in the prior year period to 2.63% for the quarter ended September 30, 2010. The tax equivalent net interest margin was 3.08% for both comparative quarters as the decline in the percentage of average earning assets to average interest bearing liabilities offset the improvement in the interest rate spread..

Net interest income for the current three-month period declined by $727,000 when compared to the second quarter of 2010 as a result of lower earning assets volume and the reversal of interest income on nonaccrual loans. Approximately $453,000 of previously accrued interest income was reversed during the third quarter. The yield on earning assets decreased by 37 basis points from 5.82%, the cost of interest-bearing liabilities declined by 15 basis points from 2.78%, and the net interest margin declined by 25 basis points from 3.33%. 

Provision for Loan Losses and Asset Quality

The provision for loan losses was $4.9 million for the quarter ended September 30, 2010, an increase of $3.0 million over the $1.9 million recorded for the third quarter of 2009. The increase in the provision was due to the need for additional loan loss reserves resulting from qualitative factors driven by economic conditions, the level of historical charge-offs and specific reserves determined through the analysis of impaired loans. Annualized net charge-offs were 2.96% for the current quarter, 3.73% for the second quarter of 2010 and 0.68% for the third quarter of 2009. The allowance for loan losses as a percentage of total gross outstanding loans was 2.60% at September 30, 2010, 2.59% at June 30, 2010 and 1.79% at September, 2009. 

Nonperforming loans as a percentage of total loans held for investment was 4.42% at September 30, 2010 compared to 1.68% at June 30, 2010 and 2.14% at September 30, 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 September 30, 2010, was 4.71% compared with 2.84% at June 30, 2010 and 2.05% at September 30, 2009. The loan loss reserve coverage ratio, which is the reserve as a percentage of nonperforming loans, was 59% at September 30, 2010, 154% at June 30, 2010 and 83% at September 30, 2009. The reduction in the loan loss reserve coverage ratio is primarily due to the increase of specific reserves during the second quarter of 2010 on loans that were not moved to nonaccrual status until the third quarter of 2010.

The level of non-performing assets increased during the third quarter of 2010 due to the deterioration of several construction land development and commercial real estate relationships originated primarily in our Triangle and Sandhills regions. Management continues to caution that future results will be dependent on reducing the number of loans migrating into a problem status. The Company will continue to devote resources to managing problem credits and adequately providing for future loan losses.

Noninterest Income

Noninterest income increased by $187,000 or 17% to $1.3 million for the current period compared to $1.1 million for the period ended September 30, 2009. The increase in noninterest income is primarily attributed to an increase of $254,000 in mortgage loan related revenue and $40,000 in customer service fees and service charges on deposit accounts. The Company has established 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 the sale of loans. Noninterest income for the third quarter of 2009 includes a $110,000 gain on the sale of investment securities.

On a linked quarter basis, non-interest income increased by $225,000. Revenue from mortgage loan related activities increased by $217,000 and income from various nonmarketable equity investments increased by $21,000. 

Noninterest Expenses

Noninterest expenses increased by $749,000 or 13% to $6.6 million in the third quarter of 2010 compared to $5.9 million for the prior year period. The Company experienced a $309,000 increase in loan collection expenses compared to the three-month period ended September 30, 2009. Total loan collection expenses for the current quarter totaled $489,000 compared to $180,000 for the prior year period. The loan collection expenses were primarily related to foreclosed and repossessed loan collateral; $389,000 in acquisition and ongoing servicing costs, $42,000 in valuation write-downs and $38,000 in net losses on disposition. Personnel expenses increased by $193,000 compared to the third quarter of 2009 due primarily to the creation of a correspondent mortgage platform and the increased volume of mortgage loan activity. Occupancy expenses were $47,000 higher in the current period compared with the prior year period primarily due to the expansion of our Operations Center in early 2010. Data processing expenses were up $30,000 due to increased account volumes over last year. FDIC deposit insurance premiums are $119,000 more than the same period a year ago.

On a linked quarter basis, non-interest expenses declined by $519,000 from $7.2 million for the three-month period ended June 30, 2010. The decrease was primarily the result of a $830,000 decline in loan collection expenses from $1.3 million for the prior period. Valuation write-downs on existing real estate owned were $42,000 for the third quarter of 2010 compared with $901,000 during the second quarter of 2010.

Nine-Month Period

For the nine months ended September 30, 2010, the Company reported a net loss, before adjusting for the effective dividend on preferred stock, of ($5,351,000) compared to net income of $1,821,000 for the nine months ended September 30, 2009. After adjusting for $1,264,000 and $1,012,000 in dividends and accretion on preferred stock for the two respective comparative periods, net loss attributable to common shareholders for the current period was ($6,615,000) or ($0.69) per share compared to net income attributed to common shareholders of $809,000 or $0.08 per share for the prior year nine-month period. Net interest income decreased by less than 1% or $101,000 to $21.8 million from $21.9 million. The tax equivalent net interest margin for the current nine-month period expanded by 19 basis points from 3.04% to 3.23%. The provision for loan losses was $15.1 million for the nine-month period ended September 30, 2010 compared to $4.8 million for the prior year period. The larger provision reflects current economic conditions, credit quality issues and an increase in net charge-offs. Non-interest income increased by $783,000 or 29% for the current nine-month period versus the same period in 2009. Non-recurring items for the nine-month period ended September 30, 2009, included the recognition of a $407,000 impairment on a nonmarketable equity investment and a $110,000 gain on the sale of investment securities. Other components of the current nine-month period increase include a $239,000 increase in mortgage loan related revenue, $163,000 increase in customer service fees and service charges on deposit accounts and a $48,000 increase in brokerage referral fees. Non-interest expenses increased by $2.2 million, or 12%, for the nine-month period ended September 30, 2010 with over $1.6 million of the increase in the loan collection expense category. Loan collection expenses for the current nine-month period were $2.1 million and include $1.1 million in expenses related to the acquisition and servicing of foreclosed and repossessed assets, $943,000 of valuation write-downs on foreclosed assets and $8,000 of net losses on disposal of foreclosed and repossessed assets. 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 reported unaudited total assets at September 30, 2010 of $972.5 million. Total assets have declined since December 31, 2009 by approximately 6% or $60.3 million. Total gross loans decreased by $64.9 million from $759.3 million at December 31, 2009 to $694.4 million at September 30, 2010. Approximately $31.7 million of the decline is attributed to transferring loans to foreclosed or repossessed assets and the charge-offs related to those accounts. The remaining $33.2 million of the decline resulted from payments and payoffs of approximately $69.7 million, net of $36.5 million in new loans. 

Total deposits declined by $5.6 million between December 31, 2009 and September 30, 2010, but the mix of deposits has changed significantly. Time deposits declined by $48.9 million, which includes a $39.3 million reduction in brokered deposits. Time deposits represent 54% of total deposits at September 30, 2010 compared to 61% at December 31, 2009. Total non-time deposits grew by $43.3 million during the first nine months of 2010 with interest-bearing checking, savings and non-interest checking increasing by $45.8 million, $7.6 million and $920,000, respectively. Money market account balances declined by $11.0 million as balances shifted into higher yielding products. The Company continues to experience great success in generating core deposits through Crescent Rewards, a high-yield checking product introduced in December 2008.   

Total borrowings have declined by $52.0 million since December 31, 2009, the majority of which represented overnight borrowings. Liquidity generated through declines in both the loan and investment portfolios was used to reduce borrowings. Total stockholders' equity was $85.6 million at September 30, 2010 compared to $89.5 million at year end 2009. The net decrease was primarily related to the net loss for the year and an increase in other comprehensive income. The total risk-based capital ratios at both the Company and Crescent State Bank remain very strong and are 13.57% and 13.24%, respectively, at September 30, 2010. Crescent State Bank exceeded "well capitalized" standards according to regulatory guidelines at September 30, 2010.

Mike Carlton, President and CEO, stated, "The economy continues to present challenges for our customers, which in turn has a direct impact on our operating performance. During the third quarter, we continued to be aggressive in identifying credits that portray collateral and cash flow weaknesses as a result of the current economic conditions. As such, the elevated amounts of loan loss provision and charge offs has negatively impacted our earnings. While total dollars of nonperforming assets increased during the quarter, the actual number of loans moving into a nonperforming status declined from the prior period. 

On a brighter side, the core bank operations remain solid. We continue to have successes in improving the mix within the deposit portfolio which has allowed us to reduce our interest expense. Additionally, we are especially pleased with the increase in noninterest income primarily attributable from the successes within the mortgage division. Our capital ratios at both the Bank and the Company remain strong." 

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.