ORGANIZATION AND OPERATIONS

VantageSouth Bancshares, Inc. (the “Company”) is a bank holding company incorporated under the laws of Delaware in 2011. The Company is a majority-owned subsidiary of Piedmont Community Bank Holdings, Inc. ("Piedmont"). On July 22, 2013, the Company changed its name from Crescent Financial Bancshares, Inc. ("Crescent") to VantageSouth Bancshares, Inc. The Company conducts its business operations primarily through its wholly-owned bank subsidiary, VantageSouth Bank (the "Bank"). The Company's headquarters are located in Raleigh, North Carolina. The Bank was incorporated in 1998 as a North Carolina-chartered commercial bank and operates forty-five banking offices in central and eastern North Carolina.

The Company also has an interest in Crescent Financial Capital Trust I (the “Trust”). The Trust was formed for the sole purpose of issuing trust preferred securities and is not consolidated with the financial statements of the Company. The proceeds from such issuances were loaned to the Company in exchange for subordinated debentures, which are the sole assets of the Trusts. The Company’s obligation under the subordinated debentures constitutes a full and unconditional guarantee by the Company of the Trust’s obligations under the trust preferred securities.

In 2010 and 2011, Piedmont acquired controlling interests in three financial institutions which are summarized below.



Acquired Institution	Acquisition Date	Percentage of Institution Initially Acquired		Purchase Price		Total Assets Acquired		Total Deposits Acquired
VantageSouth Bank	February 19, 2010	62	%	$	7,694	$	99,189	$	76,031
Community Bank of Rowan	April 19, 2011	100	%	9,500		139,353		125,741
Crescent Financial Bancshares, Inc.	November 18, 2011	88	%	75,000		995,156		678,289

On February 1, 2012, Piedmont merged Community Bank of Rowan ("Rowan") into VantageSouth Bank ("Legacy VantageSouth") and simultaneously purchased the remaining equity interests in Legacy VantageSouth from non-controlling shareholders. Then, on November 30, 2012, Piedmont merged the combined Legacy VantageSouth into Crescent State Bank, which was immediately rebranded as VantageSouth Bank.

In 2013, the combined Company acquired another financial institution which is summarized below.



Acquired Institution	Acquisition Date	Percentage of Institution Initially Acquired		Purchase Price		Total Assets Acquired		Total Deposits Acquired
ECB Bancorp, Inc.*	April 1, 2013	100	%	$	40,629	$	856,076	$	736,114

* See further discussion of this transaction in Note C "Mergers and Acquisitions."

Basis of Presentation and Change in Reporting Entity

The merger of Legacy VantageSouth into Crescent State Bank 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 have been retrospectively adjusted to combine the financial statement balances of Crescent and Legacy VantageSouth beginning on November 18, 2011, the date the two companies became commonly controlled by Piedmont. Periods prior to the date of common control reflect Legacy VantageSouth's historical balances, which were retrospectively adjusted for the combination with Rowan, since it was the first company acquired by Piedmont. Due to the application of push-down accounting to Legacy VantageSouth's financial results on February 1, 2012, the date at which Legacy VantageSouth became substantially wholly-owned by Piedmont, balances and activity in the Company’s consolidated financial statements prior to the this date have been labeled with “Predecessor Company” while balances and activity subsequent to the this date have been labeled with “Successor Company.”

The accompanying consolidated financial statements include the accounts and transactions of the Company and the Bank. These consolidated financial statements have been retrospectively adjusted for the change in reporting entity described above. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates and Assumptions

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Change in Accounting Estimate

Due to rapidly declining loss rates in the Company's loan portfolio and in peer loan portfolios in recent quarters, in the second quarter of 2013, the Company expanded the time period of historical losses it uses to determine reserve rates for loans evaluated collectively in its allowance for loan losses ("ALLL") model from two to three years. The Company believes that this change was necessary to maintain an adequate ALLL based on its evaluation of portfolio risk and market conditions. This change in accounting estimate to expand the historical loss period from two to three years increased the provision for non-acquired loans by $168 in the second quarter of 2013.

In the fourth quarter of 2013, the Company combined its ALLL models for both non-acquired loans and purchased non-impaired loans into a single model. Prior to this change, the Company maintained separate models for these two loan groupings and based its calculation of reserve rates for non-acquired loans on peer loss rates. Because of the significant changes the Company made to credit risk management practices when it completed its various troubled bank acquisitions in recent years, management did not view historical losses from the acquired loan portfolios as the best basis for determining reserves on the non-acquired (or originated) portfolio. These peer loss rates were used as a proxy for charge-off rates on the Company's non-acquired loan portfolio in a manner similar to a de novo bank portfolio. Though there are still minimal charge-offs on the non-acquired portfolio and the enhanced credit risk management practices still prevail, the Company believes that the fourth quarter of 2013 was an appropriate time to discontinue use of peer loss data in its ALLL model. One reason for this change is that sufficient time has elapsed since the Company's first bank acquisition such that non-acquired loan performance is now factored into the entire three-year historical loss period used for the combined ALLL model. The combined ALLL model bases reserve rates by loan type and risk grade on trailing three-year historical losses, which includes historical predecessor losses from all acquired banks over this period. This change in accounting estimate decreased the provision for loan losses by $432 in the fourth quarter of 2013.