<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File No. 0-20251
Crescent Banking Company
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Georgia 58-1968323
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(State of Incorporation) (I.R.S. Employer Identification No.)
251 Highway 515, Jasper, GA 30143
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(Address of principal executive offices) (Zip Code)
(706) 692-2424
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(Registrant's telephone number, including area code)
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common stock, $1.00 par value per share, 706,354 shares issued and
outstanding as of November 05, 1997. 3,334 shares are held as treasury stock.
Exhibit Index located on page 17.
1
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CRESCENT BANKING COMPANY
INDEX
<TABLE>
<S> <C> <C>
Part 1. Financial Information Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 8
Part II. Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
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PART I - FINANCIAL INFORMATION
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
----------------------------------
<S> <C> <C>
Assets
Cash and due from banks $3,061,099 $3,011,864
Federal funds sold 710,000 570,000
Interest bearing deposits in other banks 564,309 76,703
Securities available for sale 940,975 882,475
Securities held for investment, at cost (fair value of
approximately $1,717,660, at September 30, 1997 and
$749,386 at December 31, 1996) 1,728,739 748,630
Mortgage loans held for sale 54,813,319 32,996,668
Loans 35,534,901 28,500,400
Less allowance for loan losses (475,078) (335,512)
----------------------------------
Loans, net 35,059,823 28,164,888
Premises and equipment, net 2,180,354 2,195,828
Other real estate 151,909 727,159
Purchased mortgage servicing rights 4,144,342 4,093,493
Other assets 1,963,924 1,184,644
----------------------------------
$105,318,793 $74,652,352
==================================
Liabilities
Deposits
Noninterest -bearing demand deposits $12,120,174 $12,655,027
Interest -bearing demand 13,312,667 11,547,662
Savings 1,438,191 1,366,145
Time, $100,000 and over 9,132,062 6,857,157
Other time 27,065,134 23,319,917
----------------------------------
Total deposits 63,068,228 55,745,908
Drafts payable 14,034,849 2,438,733
Deferred taxes payable 1,303,111 721,239
Accrued interest and other liabilities 1,218,265 675,849
Other borrowings 17,243,752 7,396,755
----------------------------------
Total liabilities 96,868,205 66,978,484
Shareholders' equity
Common stock, par value $1.00; 2,500,000 shares authorized;
Issued and outstanding shares - 706,354 at 9/30/97
and 704,854 at 12/31/96 706,354 704,854
Surplus 6,369,186 6,355,686
Retained earnings 1,411,139 649,419
Less cost of 3,334 shares acquired for the treasury (36,091) (36,091)
----------------------------------
Total stockholders' equity 8,450,588 7,673,868
----------------------------------
$105,318,793 $74,652,352
==================================
</TABLE>
See notes to Consolidated Financial Statements.
3
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CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1997 1996 1997 1996
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans 939,312 677,781 2,498,529 2,023,225
Interest and fees on mortgage loans held for sale 1,139,377 502,660 2,677,881 1,662,542
Interest on securities:
Taxable 34,995 19,496 88,403 67,859
Nontaxable 3,888 3,838 11,514 11,514
Interest on deposits in other banks 18,098 18,447 48,965 56,342
Interest on Federal funds sold 21,378 15,692 71,665 48,899
---------------------------- ----------------------------
2,157,048 1,237,914 5,396,957 3,870,381
Interest expense
Interest on deposits 696,646 526,146 1,936,096 1,482,013
interest on other borrowings 184,694 17,762 342,851 60,056
---------------------------- ----------------------------
881,340 543,908 2,278,947 1,542,069
Net interest income 1,275,708 694,006 3,118,010 2,328,312
Provision for loan losses (Note 4) 67,800 0 143,120 --
---------------------------- ----------------------------
Net interest income after provision for loan losses 1,207,908 694,006 2,974,890 2,328,312
Other income
Service charges on deposit accounts 52,011 46,864 158,861 144,789
Mortgage servicing fee income 253,308 189,090 741,593 508,681
Gestation fee income 346,957 205,210 917,665 714,580
Gains on sale of mortgage servicing rights 984,711 262,990 1,650,248 624,345
Gains on sale of mortgage loans held for sale 232,324 286,821 850,508 947,429
Other 27,301 23,739 46,107 48,498
---------------------------- ----------------------------
1,896,612 1,014,714 4,364,982 2,988,322
Other expenses
Salaries and employee benefits 1,000,936 670,682 2,734,469 2,037,012
Net occupancy and equipment expense 99,428 103,660 274,646 271,160
Supplies, postage, and telephone 169,448 95,615 468,266 311,756
Advertising 144,024 77,608 420,772 239,641
Insurance expense 21,272 18,976 67,542 66,077
Depreciation and amortization 217,257 207,787 629,899 530,359
Legal and professional 240,577 140,389 586,785 498,831
Director fees 33,350 32,900 98,200 81,350
Mortgage subservicing expense 77,570 67,643 235,709 187,907
Other 149,808 105,013 351,725 343,631
---------------------------- ----------------------------
2,153,670 1,520,273 5,868,013 4,567,724
Income before income taxes 950,850 188,447 1,471,859 748,910
Applicable income taxes 381,270 94,264 583,768 323,733
---------------------------- ----------------------------
Net income 569,580 94,183 888,091 425,177
============================ ============================
Per share of common stock
Net income $0.81 $0.13 $1.26 $0.60
Cash dividends $0.06 -- $0.18 --
Weighted average shares outstanding 706,354 704,854 705,431 704,854
</TABLE>
4
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CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1997 1996
---------------------------------
<S> <C> <C>
Operating Activities
Net Income $888,091 $425,177
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan loss 143,120 -
Depreciation and amortization 629,899 530,359
Provision for deferred taxes 581,872 299,073
Gains on sales of mortgage servicing rights (1,650,248) (624,345)
Increase in mortgage loans held for sale (21,816,651) (10,252,144)
Increase in interest receivable (188,259) (124,896)
Increase (decrease) in drafts payable 11,596,116 (1,092,898)
Increase (decrease) in interest payable 4,066 (47,970)
Increase in other assets and liabilities, net (63,829) (492,026)
---------------------------------
Net cash used in operating activities (9,875,823) (11,379,670)
Investing Activities
Net decrease in interest-bearing deposits
in other banks (487,606) 3,468,361
Acquisition of securities available for sale (250,000) --
Proceeds from sale of securities available for sale 191,500 --
Acquisition of securities held to maturity (1,865,661) --
Proceeds from maturities of securities held to maturity 47,610 38,626
Proceeds from sale of securities held to maturity 837,942 --
Acquisition of purchased mortgage servicing rights (5,036,755) (3,806,176)
Proceeds from sales of purchased mortgage
servicing rights 6,216,069 4,958,381
Increase in Federal funds sold, net (140,000) 1,020,000
Net increase in loans (6,462,805) (3,425,639)
Purchase of premises and equipment (183,182) (177,316)
---------------------------------
Net cash provided by (used in) investing activities (7,132,888) 2,076,237
Financing Activities
Net increase in deposits 7,322,320 9,016,707
Net increase in mortgage warehouse line of credit 9,846,997 1,650,000
Proceeds from exercise of stock options 15,000 -
Dividends paid (126,371) -
---------------------------------
Net cash provided by financing activities 17,057,946 10,666,707
Net increase in cash and cash equivalents 49,235 1,363,274
Cash and cash equivalents at beginning of year 3,011,864 1,791,026
---------------------------------
Cash and cash equivalents at end of year $3,061,099 $3,154,300
=================================
Supplemental Disclosure of Cash Flow Information
Cash paid during period for interest $2,274,881 $1,590,039
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
NOTE A --- GENERAL
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Article 10 of
Regulations S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments necessary
for a fair presentation of the financial position and results of operations of
the interim periods have been made. All such adjustments are of a normal
recurring nature. Results of operations for the nine months ended September 30,
1997 are not necessarily indicative of the results of operations for the full
year or any interim periods.
NOTE B --- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organizational costs: The expenses associated with the formation of the Company
- --------------------
were paid by the Company and capitalized as organizational costs and are being
amortized on the straight-line method over five years.
Earnings (loss) per share: Earnings (loss) per share have been computed using
- -------------------------
the weighted average number of shares outstanding during each period.
Cash flow information: For purposes of the statements of cash flows, cash
- ---------------------
equivalents include amounts due from banks and federal funds sold.
Reclassifications: Certain amounts as previously reported have been reclassified
- -----------------
to conform to the current period presentation.
NOTE C --- SERVICING PORTFOLIO
The Company services residential loans for various investors under contract for
a fee. As of September 30, 1997, the Company had purchased loans for which it
provides servicing with principal balances totaling $419.9 million. The Company
sold $449.1 million of mortgage servicing rights in the nine months of 1997 for
a net gain of $1.6 million.
6
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NOTE D---INCOME TAXES
The Company uses the liability method of accounting for income taxes as required
by FASB statement number 109, "Accounting for Income Taxes".
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant temporary
differences which create deferred tax assets and liabilities at January 1, 1997
are outlined in the table below. Net deferred income tax liabilities of
$1,303,111 and $721,239 at September 30, 1997 and December 31, 1996,
respectively, are included in other liabilities.
<TABLE>
<S> <C>
Deferred assets:
Allowance for loan losses $ 52,864
Net operating loss carryforward 549,801
Alternative minimum tax carryforward 42,084
Other 5,018
-----------
649,767
-----------
Deferred liabilities:
Purchased mortgage servicing rights $ 1,206,433
Tax over book depreciation 153,025
Other 11,548
-----------
1,371,006
-----------
Net deferred tax liabilities $ (721,239)
===========
</TABLE>
7
<PAGE>
Note E - Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 125
was amended by SFAS No. 127, which defers the effective date of certain
provisions of SFAS No. 125 until Jan 1, 1998. This statement provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial-
components approach that focuses on control. It distinguishes transfers that are
secured borrowings. The adoption of this statement is not expected to have a
material effect on the Company's financial statements.
The FASB has issued SFAS No. 128, "Earnings Per Share". SFAS No. 128 supercedes
Accounting Principles Board Opinion No. 15 "Earnings Per Share" and specifies
the computation, presentation, and disclosure requirements for earnings per
share (EPS) for entities with publicly held common stock or potential issuable
common stock. SFAS No. 128 replaces the presentation of primary EPS with a
presentation of basic EPS and fully diluted EPS with diluted EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the diluted EPS computation.
SFAS No. 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. The impact on the Company's financial
statements of the provisions of SFAS No. 128 is not expected to be material.
The FASB has issued SFAS No. 129, "Disclosure of Information about Capital
Structure". SFAS No. 129 is effective for financial statements for periods
ending after December 15, 1997. The Company does not expect that SFAS No. 129
will require significant revisions of prior disclosures since SFAS No. 129 lists
required disclosures that had been included in a number of previously existing
separate statements or opinions.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income". This
statement established standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
SFAS No. 130 requires all items that are required to be recognized under
accounting standards as components or comprehensive income to be reported in a
financial statement that is displayed in equal prominence with the other
financial statements. The term "comprehensive income" is used in the SFAS to
describe the total of all components of comprehensive income including net
income. "Other comprehensive income" refers to revenues, expenses, gains and
losses that are included in comprehensive income but excluded from earnings
current accounting standards. Currently, "other comprehensive income" for the
Company consists of items previously recorded directly in equity under SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities". SFAS
No. 130 is effective for financial statements beginning after December 15, 1997.
The FASB has issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information". SFAS No. 131 establishes standards for the way public
business enterprises are to report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also established standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company does not expect that SFAS No. 131 will require significant
revision of prior disclosures.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
financial statements and related notes, and the statistical information included
elsewhere herein. Certain of the matters discussed under this caption,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this Annual Report may constitute forward-looking
statements for purposes of the Securities Act of 1933, as amended and the
Securities Exchange Act of 1934, as amended and as such may involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such
forward- looking statements. The Company's actual results may differ materially
from the results anticipated in these forward looking statements due to a
variety of factors, including, without limitation: the effects of future
economic conditions; governmental monetary and fiscal policies, as well as
legislative and regulatory changes; the risk of changes in interest rates on the
level and composition of deposits, loan demand, and the values of loan
collateral, securities, and interest rate risks; the effects of competition from
other commercial banks, thrifts, mortgage banking firms, consumer finance
companies, credit unions, securities brokerage firms, insurance companies, money
market and other mutual funds and other financial institutions operating in the
Company's market area and elsewhere, including institutions operating locally,
regionally, nationally and internationally, together with such competitors
offering banking products and services by mail, telephone, and computer and the
Internet; and the failure of assumptions underlying the establishment of
reserves for possible loan losses. All written or oral forward-looking
statements attributable to the Company are expressly qualified in their entirety
by these Cautionary Statements.
Summary
The Company had a profit during the first nine months of 1997 of $888,091
compared to $425,199 for the first nine months 1996. The increase in year to
date profit is the primary result of the increase in Commercial Bank loans and a
greater volume of mortgage loans production.
Balance Sheets
The Company experienced a 41.1% increase in total assets in the first three
quarters of 1997 as the Bank's assets totaled $105.3 million as of September 30,
1997 compared to $74.7 million at December 31, 1996. The increase in the Bank's
assets has been primarily related to the increase commercial banking loans and
increase of mortgage production. The increase in mortgage production was due in
large to the start up of the New England mortgage operation.
Earning assets at September 30, 1997 (comprised of commercial bank loans,
mortgage loans held for sale, investment securities, interest-bearing balances
in other banks and temporary investments) totaled $94.1 million or 89.4% of
total assets as compared to December 31, 1996 when earning assets totaled $63.8
million or 85.4% of total assets. The increase in earning assets as a percentage
of total assets was the result of the increase in commercial bank loans and
8
<PAGE>
mortgage loans held for sale. Mortgage loans held for sale totalled $54.8
million at September 30, 1997 compared to $33.0 million at December 31, 1996.
The increase in mortgage loans held for sale was the result of the start up of
the New England mortgage operation as well as an increase in mortgage production
from the Southeast mortgage office. Mortgage loans held for sale averaged $32.4
million and constituted 47.2% of average earning assets and 40.5% of average
assets for the nine months ended September 30, 1997. Average commercial bank
loans of $31.4 million constituted 45.7% of average earning assets and 39.3% of
average total assets during the nine months ended September 30, 1997. Commercial
banking loans totaled $35.5 million at September 30,1997 compared to $28.5
million at December 31, 1996. Generally loans tend to produce higher yields than
securities and other interest-earning assets. In addition, mortgage loans held
for sale generate net interest income due to the greater rates of interest paid
to the Bank on the longer term mortgage loans over the rates of interest paid by
the Bank on its shorter term warehouse line of credit and regular funding
sources. Therefore, absolute volume of commercial loans and mortgage loans held
for sale and the volume as a percentage of total earning assets is an important
determinant of net interest margin.
The Bank invests its excess funds in U.S. Government agency obligations,
corporate securities, federal funds sold, and interest-bearing deposits with
other banks. The Bank's investments are managed in relation to loan demand and
deposit growth, and are generally used to provide for the investment of excess
funds at minimal risk while providing liquidity to fund increases in loan demand
or to offset fluctuations in deposits. Thus, investment securities are managed
in order to minimize the Company's exposure to interest rate risk. At September
30, 1997, interest-bearing deposits in other banks, investment securities, and
federal funds sold were $3.9 million compared to $2.3 million at December 31,
1996.
The allowance for loan losses represents a reserve for potential losses in
the loan portfolio. The provision for loan losses is a charge to earnings in the
current period to maintain the allowance at a level management has determined to
be adequate. The allowance for loan losses totaled $475,078 or 1.34% of total
loans at September 30, 1997, compared to $335,512 or 1.18% of total loans at
December 31, 1996. The determination of the reserve level rests upon
management's judgment about factors affecting loan quality and assumptions about
the economy. The adequacy of the allowance for loan losses is evaluated
periodically based on a review of all significant loans, with a particular
emphasis on past due and other loans that management believes require attention.
Management considers the allowance appropriate and adequate to cover possible
losses in the loan portfolio; however, management's judgment is based upon a
number of assumptions about future events which are believed to be reasonable
but which may or may not prove valid. Thus, there can be no assurance that
charge-offs in future periods will not exceed the allowance for loan losses or
that additional increases in the allowance for loan losses will not be required.
As a result of management's policy of ongoing review of the loan portfolio,
loans may be considered for classification as non-accrual when it is not
reasonable to expect collection of interest under the original terms. As of
September 30, 1997, the Bank had $4,998 of loans accounted for on a non-accrual
basis, $607,274 contractually past due more than 90 days and no loans considered
to be troubled debt restructurings, as defined by Financial Accounting Standards
Board Statement No. 15 ("FASB #15"). As of December 31, 1996, the Bank had
$167,916 of loans accounted for on a non-accrual basis, $23,140 contractually
past due more than 90 days and no loans considered to be troubled debt
restructurings as defined by FASB #15. Loans identified by
9
<PAGE>
management as potential problem loans (classified and criticized) but still on
accrual totaled $1,379,716 and $1,405,089 at September 30, 1997 and December 31,
1996, respectively. The Bank's policy is to discontinue the accrual of interest
on loans which are 90 days past due unless they are well-secured and in the
process of collection. Interest on these loans will be recognized only when
received.
The mortgage division of the Bank acquires mortgage loans from small
retail-oriented originators in the Southeast through the utilization of an $18
million warehouse line of credit and its regular funding sources. Substantially
all of the mortgage loans are currently being resold in the secondary market to
the Federal Home Loan Mortgage Corporation ("Freddie Mac"), Federal National
Mortgage Association ("Fannie Mae"), and private investors after being
"warehoused" for ten to 30 days. Warehoused loans must meet secondary market
criteria such as amount limitations and loan to value ratios to qualify for
resales to Freddie Mac and Fannie Mae. To the extent that the Bank retains the
servicing rights on mortgage loans that it resells, it collects annual servicing
fees while the loan is outstanding. The Bank periodically sells a portion of its
retained servicing rights in bulk form. The annual servicing fees and gains on
the sale of servicing rights are an integral part of the mortgage banking
operation and its contribution to net income. The Bank also currently pays a
third party subcontractor to perform servicing functions with respect to its
loans sold with retained servicing.
In addition to its mortgage division in the Southeast, the Company also
provides mortgage loan activities throughout the Northeast through its
subsidiary Crescent Mortgage, Inc. ("CMS"). The Company began the Northeast
Operations in the first quarter of this year. During the first five months of
the year, startup costs relating to this operation exceed income. Since June,
CMS has reached a volume of loan production to achieve profitability on a
monthly basis. During 1997, CMS anticipates selling substantially all mortgage
loans and servicing rights generated from the Northeast operation. Funding for
the Northeast is provided through three warehouse lines of credits totaling $32
million. The Company has commenced plans to offer a Federal Housing
Administration mortgage product through CMS. The Company plans to locate the
office in the Atlanta area to serve the Southeastern states.
For the nine months ended September 30, 1997, the mortgage operation of the
Company had acquired $504.4 million of mortgage loans and sold $482.6 million in
the secondary market with servicing rights retained by the Company. The Company
carried $54.8 million as mortgage loans held for sale on the balance sheet as
sales of the loans were pending. As of September 30, 1997, capitalized cost of
$4.1 million related to the purchase of the mortgage loans and associated
servicing rights was carried on the balance sheet as purchased mortgage
servicing rights. The Bank is amortizing the purchased mortgage servicing rights
over an accelerated period. The Bank sold $449.1 million of mortgage servicing
rights in the first nine months of 1997 for a gain of $1,650,248. As of
September 30, 1997, the Bank held the rights with respect to loans with unpaid
principal balances totaling $419.9 million. The market value of the servicing
portfolio is contingent upon many factors including interest rate environment,
estimated life of the servicing portfolio, loan quality of the servicing
portfolio and coupon rate of the loan portfolio. There can be no assurance that
the Bank will continue to experience a market value of the servicing portfolio
in excess of the cost to acquire the servicing rights nor can there be any
assurance as to the expected life of the servicing portfolio.
10
<PAGE>
The Bank's deposits increased $7.4 million to total $63.1 million at
September 30, 1997. The increase in deposits resulted from normal deposit
growth. Interest-bearing deposits represented 81% of total deposits at September
30, 1997, with certificates of deposit representing 71% of total interest-
bearing deposits, compared to December 31, 1996 when interest-bearing deposits
represented 77% of total deposits with certificates of deposit representing 70%
of total interest-bearing deposits. The increase of interest bearing deposits as
a percentage of total deposits was the result of an increase of interest bearing
deposits. The composition of these deposits is indicative of the rate conscious
market in which the Bank operates.
Capital
Capital adequacy is measured by risk-based capital guidelines as well as
against leverage ratios. The risk-based capital guidelines developed by
regulatory authorities assign weighted levels of risk to asset categories to
establish capital requirements. These guidelines currently require a minimum of
8.00% of total capital to risk-adjusted assets. One-half of the required capital
must consist of tangible common shareholders' equity and qualifying perpetual
preferred stock ("Tier 1 capital"). The leverage guidelines specify a ratio of
Tier 1 capital to total assets of 3.0% if certain requirements are met,
including having the highest regulatory rating, or between 4.0% and 5.0%
otherwise. The guidelines also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the guidelines indicate
that the Federal Reserve Board will continue to consider a "Tangible Tier 1
leverage ratio" (deducting all intangibles) in evaluating proposals for
expansion or new activity. The Federal Reserve Board has not advised the Company
and the FDIC has not advised the Bank of any specific minimum leverage ratio or
tangible Tier 1 leverage ratio applicable to it. The Bank has agreed with the
Department of Banking and Finance to maintain a leverage ratio of 8.0%. At
September 30, 1997, the Bank's leverage ratio was 8.57%.
As of September 30, 1997 total shareholders' equity was $8.5 million or
8.1% of total assets compared to $7.7 million or 10.3% of total assets at
December 31, 1996. The decrease in the shareholders' equity to asset ratio from
December 31, 1996 to September 30, 1997 was the result of a 41% increase in
total assets. In June 1997, the Company received $15,000 through the exercise of
outstanding stock option in regard to 1,500 shares. As of September 30, 1997,
total capital to risk-adjusted assets was 12.3%, with 11.7% consisting of
tangible common shareholders' equity.
The Company is in process of a securities offering to raise an additional
$2,000,000 of capital. The Company intends to use the proceeds for general
corporate purposes including the opening of the wholesale FHA mortgage office.
In addition, the Bank will apply to the Georgia Department of Banking and
Finance in the fourth quarter to locate a full service branch in Bartow County.
Currently the Bank maintains a low production office in Bartow County. The
offering is anticipated to be completed during the first quarter of 1998.
Liquidity and Interest Rate Sensitivity
Liquidity involves the ability to raise funds to support asset growth, meet
deposit withdrawals and other borrowing needs, maintain reserve requirements,
and otherwise sustain
11
<PAGE>
operations. This is accomplished through maturities and repayments of loans and
investments, deposit growth, and access to sources of funds other than deposits,
such as the federal funds market.
Average liquid assets for the nine months ended September 30, 1997 (cash
and amounts due from banks, interest bearing deposits in other banks, federal
funds sold, mortgages held for sale net of borrowings and drafts payable and
investment securities) totaled $25.7 million or 43% of average deposits. Average
liquid assets totaled $24.1 million or 47% of average deposits at December 31,
1996.
Average loans were 53% and 55% of average deposits for September 30, 1997
and December 31, 1996, respectively. Average deposits were 86 % and 90% of
average earning assets for September 30, 1997 and December 31, 1996,
respectively.
The Bank actively manages the levels, types and maturities of earning
assets in relation to the sources available to fund current and future needs to
ensure that adequate funding will be available at all times. In addition to the
mortgage warehouse line of credit, the Company also maintains a federal funds
line of credit totalling $4.6 million. Management believes its liquidity sources
are adequate to meet its operating needs.
Net interest income, the Bank's primary source of earnings, can fluctuate
with significant interest rate movements. To lessen the impact of these margin
swings, the balance sheet should be structured so that repricing opportunities
exist for both assets and liabilities in roughly equivalent amounts at
approximately the same time intervals. Imbalances in these repricing
opportunities at any point in time affect interest rate sensitivity.
Interest rate sensitivity refers to the responsiveness of interest-earning
assets and interest-bearing liabilities to changes in market interest rates. The
rate-sensitive position, or gap, is the difference in the volume of rate-
sensitive assets and liabilities, at a given time interval. The general
objective of gap management is to actively manage rate-sensitive assets and
liabilities to reduce the impact of interest rate fluctuations on the net
interest margin. Management generally attempts to maintain a balance between
rate-sensitive assets and liabilities to minimize the overall interest rate
risks to the Bank.
Interest rate sensitivity varies with different types of interest-earning
assets and interest-bearing liabilities. Overnight federal funds, on which rates
are susceptible to change daily, and loans which are tied to the prime rate
differ considerably from long-term investment securities and fixed-rate loans.
Similarly, time deposits over $100,000 and certain interest-bearing demand
deposits are more interest sensitive than savings deposits.
The following table shows the interest sensitivity gaps for four different
time intervals as of September 30,1997. The Bank was in a cumulative asset-
sensitive position for all time intervals. This means that during these periods
of asset sensitivity, if interest rates decline, the net interest margin will
decline. Conversely, if interest rates increase over this period, the net
interest margin will improve. Since all interest rates and yields do not adjust
at the same velocity, this is only a general indicator of rate sensitivity.
12
<PAGE>
INTEREST RATE SENSITIVITY GAPS
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Amounts Repricing In
--------------------
0-90 91-365 1-5 Over 5
Days Days Years Years
---- ---- ----- -----
(Millions of dollars)
<S> <C> <C> <C> <C>
Interest-earning assets $75.6 $ 5.4 $10.5 $2.8
Interest-bearing liabilities 39.7 20.9 7.6 -
------ -------- ------ ----
Interest sensitivity gap $35.9 $ (15.5) $ 2.9 $2.8
====== ======== ====== ====
</TABLE>
The mortgage division has adopted a policy intended to minimize potential
interest rate risk incurred as a result of market movements between the time
commitments to purchase mortgage loans are made and the time the loans are
closed. Accordingly, commitments to purchase loans will be covered either by a
mandatory sale into the secondary market or by the purchase of an option to
deliver to the secondary market a mortgage-backed security. The mandatory sale
commitment is fulfilled with loans closed by the Company or through "pairing
off" the committment. Under certain conditions the Company achieves best
execution by pairing off the commitment which is selling the closed loans and
fulfilling the commitment with loans purchased through the secondary market. The
Company considers the cost of its hedge as part of its mortgage servicing rights
portfolio and therefore does not recognize gains on the execution of the hedge,
but reduces the cost basis of the servicing rights.
While other hedging techniques may be used, speculation is not allowed under the
mortgage division's secondary marketing policy. As of September 30, 1997 the
Bank had to place purchase commitment agreements terminating from October to
January with respect to an aggregate of approximately $64.0 million to hedge the
mortgage pipeline of $91.7 million for which the Company has interest rate risk.
Attempting to minimize the interest-rate sensitivity gap is a continual
challenge in a changing interest rate environment.
Results of Operations
The primary source of revenue for the Bank is net interest income, which is
the difference between income on interest-earning assets, such as investment
securities and loans, and interest-bearing sources of funds, such as deposits
and borrowings. The level of net interest income is determined primarily by the
average balances ("volume") of interest-earning assets and the various rate
spreads between the interest-earning assets and the Bank's funding sources.
Changes in net interest income from period to period result from increases or
decreases in volume of interest-earning assets and interest-bearing liabilities,
increases or decreases in the average rates earned and paid on such assets and
liabilities, the ability to manage the earning-asset portfolio (which includes
loans) and the availability of particular sources of funds, such as non-interest
bearing deposits.
The Bank's increase in interest income from $3.9 million for the nine
months ended September 30, 1996 to $5.4 million for the nine months ended
September 30, 1997 is attributable to the growth of earning assets. The Bank's
interest expense increased from $1.5 million for the
13
<PAGE>
nine months ended September 30, 1996 to $2.3 million for the nine months ended
September 30, 1997. The increase in interest expense is primarily the result of
higher average of interest bearing deposits in the first nine months of 1997, in
addition to a higher level of average borrowed funds related to the mortgage
operation. For the nine months ended September 30, 1997 and 1996, interest
expense accounted for 28% and 25% of total expenses, respectively. The increase
in the Bank's interest income from $1.2 million for the three months ended
September 30, 1996 to $2.2 million for the three months ended September 30 ,1997
was the result of a higher average balance of Commercial Bank loans in addition
to a higher level of mortgage loans held for sale. The increase in the Bank's
interest expense from $543,908 for the three months ended September 30, 1996 to
$881,340 for the three months ended September 30, 1997 was the result of a
higher level of average deposits and other borrowed funds. For the three months
ended September 30, 1997 and 1996, interest expense accounted for 28% and 26% of
total expenses, respectively.
Net interest income for the first nine months of 1997 was $3.1 million. The
Bank's net interest margin for the first nine months 1997 was 6.1%. Interest
spread, which represents the difference between average yields on earning assets
and average rates paid on interest-bearing liabilities, was 5.8%. Net interest
income, net interest margin and interest spread for the first nine months 1996
were $2.3 million, 6.2% and 5.8%, respectively. Net interest income for the
three months ended September 30, 1997 was $1,275,708 compared to $694,006 for
the three months September 30, 1996. Net interest margin and interest spread for
the three months ended September 30, 1997 were 6.4% and 5.9%, compared to the
three months ended September 30, 1996, 5.9% and 5.7%, respectively. The increase
in net interest income is primarily the result of a higher level of commercial
Bank loans and mortgage loans fee income associated with the closings of
mortgage loans held for sale. These mortgage fees are accounted for as interest
income. The Company closed $504.4 million of mortgage loans in the first nine
months of 1997 compared to $344.9 million in the first nine months of 1996.
The Bank made provisions to the allowance for loan losses in the total
amount of $143,120 during the first nine months of 1997. The Bank did not make a
provision to the allowance for loan losses in the first nine months of 1996.
During the first nine months of 1997, the Bank had net charge offs of $3,554,
compared to net charge offs of $158,399 during the first nine months of 1996.
Other income was $4.4 million for the first nine months of 1997, compared
to $3.0 million for the first nine months of 1996. The increase was primarily
related to an increase gains on the sale of mortgage servicing rights as a
result of the startup of the New England mortgage operations. Other expenses
were $5.9 million in the first nine months of 1997, compared to $4.6 million in
the first nine months of 1996. The increase in other expenses in the first nine
months of 1997 was related to the start up mortgage operation in the Northeast.
Other income was $1.9 million for the third quarter 1997 compared to $1 million
for the third quarter 1996. The increase in other income for the third quarter
1997 was the result of the larger gain on sale of mortgage servicing rights. The
Company sold $214.3 million of mortgage servicing rights for a gain of
$1,650,248 in the first nine months of 1997, compared to sales of $377 million
for a gain of $624,345 in the first nine months of 1996. Other expenses totaled
$2.2 million for the third quarter of 1997 compared to $1.5 million for the
third quarter 1996. The increase in other expense was a result of an increase in
salaries and benefits and other start up costs related to the Northeast mortgage
operation.
14
<PAGE>
The Company had net income of $888,091 for the first nine months of 1997,
compared to net income of $425,177 for the first nine months of 1996. The
increase in net income is reflective of the start up costs of the Northeast
mortgage operation, an increase in mortgage production and an increase in
Commercial Bank loans. The Company had income of $569,580 for the third quarter
1997 compared to $94,183 in the third quarter 1996.
Effects of Inflation
Assets and liabilities of financial institutions are virtually all monetary
in nature. Therefore, inflation does not affect a financial institution as
strongly as do changes in interest rates. While the general level of inflation
does underlie most interest rates, interest rates react more to changes in the
expected rate of inflation and to changes in monetary and fiscal policy.
Inflation affects operating expenses in that salaries, supplies and outside
services tend to increase during periods of high inflation.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company. Incorporated by
reference from Exhibit 3.1 to the Company's Registration
Statement on Form S-4 dated January 27, 1992, File No.
33-45254 (the "Form S-4")
3.2 Bylaws of the Company. Incorporated by reference from Exhibit
3.2 to the Form S-4.
11. Statement regarding computation of per share earnings
27. Financial Data Schedule
(b) Reports on Form 8-K - None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRESCENT BANKING COMPANY
---------------------------------------
(Registrant)
Date: November 13, 1997 /s/ J. Donald Boggus, Jr.
------------------------- --------------------------------------
J. Donald Boggus, Jr.
President, Chief Executive Officer and
Chief Financial Officer
16
<PAGE>
INDEX TO EXHIBITS
Exhibit
- -------
3.1 Articles of Incorporation of the Company. Incorporated by
reference from Exhibit 3.1 to the Company's Registration
Statement on Form S-4 dated January 27, 1992, File No. 33-
45254 (the "Form S-4")
3.2 Bylaws of the Company. Incorporated by reference from Exhibit
3.2 to the Form S-4.
11. Statement Regarding Computation of Per Share Earnings.
27. Financial Data Schedule.
17
<PAGE>
EXHIBIT 11 - STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
PRIMARY AND FULLY DILUTED BASIS:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1997 1996 1997 1996
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net income $569,580 $94,183 $888,091 $425,177
Weighted average shares outstanding 706,354 704,854 705,431 704,854
Earnings per share $0.81 $0.13 $1.26 $0.60
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,061
<INT-BEARING-DEPOSITS> 564
<FED-FUNDS-SOLD> 710
<TRADING-ASSETS> 54,813
<INVESTMENTS-HELD-FOR-SALE> 941
<INVESTMENTS-CARRYING> 1,729
<INVESTMENTS-MARKET> 1,718
<LOANS> 35,535
<ALLOWANCE> 475
<TOTAL-ASSETS> 105,319
<DEPOSITS> 63,068
<SHORT-TERM> 17,244
<LIABILITIES-OTHER> 1,218
<LONG-TERM> 0
0
0
<COMMON> 706
<OTHER-SE> 7,744
<TOTAL-LIABILITIES-AND-EQUITY> 105,319
<INTEREST-LOAN> 2,499
<INTEREST-INVEST> 99
<INTEREST-OTHER> 121
<INTEREST-TOTAL> 5,397
<INTEREST-DEPOSIT> 1,936
<INTEREST-EXPENSE> 343
<INTEREST-INCOME-NET> 3,118
<LOAN-LOSSES> 143
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,868
<INCOME-PRETAX> 1,472,859
<INCOME-PRE-EXTRAORDINARY> 1,472,859
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 888,091
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.81
<YIELD-ACTUAL> 10.30
<LOANS-NON> 5
<LOANS-PAST> 607
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,380
<ALLOWANCE-OPEN> 335
<CHARGE-OFFS> 5
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 475
<ALLOWANCE-DOMESTIC> 434
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 41
</TABLE>
