<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 March 31, 1998.
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
- --------------------------------------------------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
251 Highway 515, Jasper, GA 30143
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(706) 692-2424
- --------------------------------------------------------------------------------
(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, 861,354 shares issued and
outstanding as of May 13, 1998. 3,334 shares are held as treasury stock.
Exhibit Index located on page 19.
1
<PAGE>
CRESCENT BANKING COMPANY
INDEX
PART 1. FINANCIAL INFORMATION PAGE NO.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income And
Comprehensive Income 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 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
2
<PAGE>
PART I - FINANCIAL INFORMATION
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
------------------------------
<S> <C> <C>
Assets
Cash and due from banks $2,288,074 $3,319,054
Federal funds sold 12,780,000 1,310,000
Interest bearing deposits in other banks 745,228 1,080,469
Securities available for sale 2,795,986 2,784,066
Mortgage loans held for sale 72,548,124 49,398,871
Loans 37,288,068 36,650,206
Less allowance for loan losses (557,255) (514,634)
------------------------------
Loans, net 36,730,813 36,135,572
Premises and equipment, net 2,598,837 2,279,394
Other real estate owned 151,909 151,909
Purchased mortgage servicing rights 3,147,836 4,143,563
Accounts receivable-brokers and escrow agents 3,224,605 3,295,462
Other assets 1,204,095 647,220
------------------------------
Total Assets $138,215,507 $104,545,580
==============================
Liabilities
Deposits
Noninterest -bearing demand deposits $12,726,379 $22,437,331
Interest -bearing demand 17,578,510 15,299,574
Savings 1,676,947 1,500,665
Time, $100,000 and over 11,533,385 9,859,062
Other time 31,995,855 26,584,252
------------------------------
Total deposits 75,511,076 75,680,884
Drafts payable 22,206,293 3,163,349
Deferred taxes payable 1,993,139 1,494,465
Accrued interest and other liabilities 1,557,824 968,414
Other borrowings 25,189,126 14,308,650
------------------------------
Total liabilities 126,457,458 95,615,762
Shareholders' equity
Common stock, par value $1.00; 2,500,000 shares authorized;
861,354 and 726,354 issued and outstanding, respectively 861,354 726,354
Surplus 8,551,897 6,549,186
Retained earnings 2,398,242 1,693,113
Less cost of 3,334 shares acquired for the treasury (36,091) (36,091)
Accumulated other comprehensive income (17,353) (2,744)
------------------------------
Total stockholders' equity 11,758,049 8,929,818
------------------------------
Total liabilities and stockholders' equity $138,215,507 $104,545,580
==============================
</TABLE>
See notes to Consolidated Financial Statements.
<PAGE>
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the three months ended
March 31,
1998 1997
----------------------------------
<S> <C> <C>
Interest income
Interest and fees on loans $1,005,929 $753,460
Interest and fees on mortgage loans held for sale 1,544,842 693,362
Interest on securities:
Taxable 39,053 24,483
Nontaxable 6,099 3,838
Interest on deposits in other banks 23,810 12,264
Interest on Federal funds sold 28,421 27,711
----------------------------------
2,648,154 1,515,118
----------------------------------
Interest expense
Interest on deposits 797,229 602,504
Interest on other borrowings 275,349 86,208
----------------------------------
1,072,578 688,712
----------------------------------
Net interest income 1,575,576 826,406
Provision for loan losses 43,000 38,400
----------------------------------
Net interest income after provision for loan losses 1,532,576 788,006
Other income
Service charges on deposit accounts 44,029 52,532
Mortgage servicing fee income 254,552 243,081
Gestation fee income 290,138 271,078
Gains on sale of mortgage
servicing rights 1,708,231 378,915
Gains on sale of mortgage loans held for sale 402,738 361,901
Other 15,181 9,692
----------------------------------
2,714,869 1,317,199
Other expenses
Salaries and employee benefits 1,504,953 832,467
Occupancy and equipment expense 124,769 86,777
Supplies, postage, and telephone 225,886 101,632
Advertising 112,479 105,779
Insurance expense 17,827 17,810
Depreciation and amortization 234,712 190,880
Legal and professional 316,243 147,920
Director fees 41,750 32,000
Mortgage subservicing expense 74,599 76,777
Other 313,474 216,719
----------------------------------
2,966,692 1,808,761
Income before income taxes $1,280,753 $296,444
Applicable income taxes $521,397 $118,646
----------------------------------
Net income $759,356 $177,798
----------------------------------
Other comprehensive income, net of tax
Unrealized losses on securities available for sale
arising during period 14,609 --
----------------------------------
Comprehensive income 744,747 177,798
==================================
Basic earnings per common share $1.01 $0.25
Diluted earnings per common share $0.99 $0.25
Cash dividends per share of common stock $0.075 $0.055
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For the three months ended
March 31,
1998 1997
-------------------------------
<S> <C> <C>
Operating Activities
Net Income $759,356 $177,798
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan loss 43,000 38,400
Depreciation and amortization 234,712 190,880
Provision for deferred taxes 498,674 120,151
Gains on sales of mortgage servicing rights (1,708,231) (378,915)
Increase in mortgage loans held for sale (23,149,253) (2,592,895)
Increase in interest receivable (49,002) (48,504)
Increase in accounts receivable 70,857 (354,111)
Increase (decrease) in drafts payable 19,042,944 3,383,167
Decrease in interest payable 65,236 10,731
Increase in other assets and liabilities, net 16,301 (658,118)
-------------------------------
Net cash used in operating activities (4,175,406) (111,416)
Investing Activities
Net (increase) decrease in interest-bearing deposits
in other banks 335,241 (18,645)
Proceeds from sale of securities available for sale (542,087) 360,800
Acquisition of securities available for sale 515,558 --
Proceeds from maturities of securities held to maturity -- 21,195
Acquisition of purchased mortgage servicing rights (2,389,326) (1,375,508)
Proceeds from sales of purchased mortgage
servicing rights 4,945,283 1,980,493
Decrease (increase) in Federal funds sold, net (11,470,000) 570,000
Net increase in loans (638,241) (2,322,539)
Purchase of premises and equipment (406,154) (72,724)
-------------------------------
Net cash provided by (used in) investing activities (9,649,726) (856,928)
Financing Activities
Net increase (decrease) in deposits (169,808) (267,890)
Net increase in other borrowings 10,880,476 354,327
Proceeds form the issuance of common stock 2,137,711 --
Dividends paid (54,227) (38,584)
-------------------------------
Net cash provided by financing activities 12,794,152 47,853
Net increase in cash and cash equivalents (1,030,980) (920,491)
Cash and cash equivalents at beginning of year 3,319,054 3,011,864
-------------------------------
Cash and cash equivalents at end of year $2,288,074 $2,091,373
===============================
Supplemental Disclosure of Cash Flow Information
Cash paid during period for interest $1,007,342 $515,603
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 1 --- 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 three months ended March 31,
1998 are not necessarily indicative of the results of operations for the full
year or any interim periods.
NOTE 2 --- 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.
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 3---SERVICING PORTFOLIO
The Company services residential loans for various investors under contract for
a fee. As of March 31, 1998, the Company had purchased loans for which it
provides servicing with principal balances totaling $383.4 million.
NOTE 4---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
6
<PAGE>
at January 1, 1998 are outlined in the table below. Net deferred income tax
liabilities of $1,993,139 and $1,494,465 at March 31, 1998 and December 31,
1997, respectively, are included in other liabilities.
Deferred assets:
Allowance for loan losses $130,793
Net operating loss carryforward 74,531
Alternative minimum tax carryforward 53,006
Accrual to cash adjustment for
income tax reporting purposes 24,919
Securities available for sale 1,682
Other 39,034
--------
323,965
---------
Deferred liabilities:
Purchased mortgage servicing rights $1,563,218
Tax over book depreciation 195,336
Other 59,876
----------
1,818,430
----------
Net deferred tax liabilities $(1,494,465)
============
NOTE 5---EARNINGS PER SHARE
The following is a reconciliation of net income (the numerator) and weighted-
average shares outstanding (the denominator) used in determining basic and
diluted earnings per common share (EPS):
Three Months Ended March 31, 1998
-------------------------------------
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------------------------------
Basic EPS $759,356 753,020 $ 1.01
Effect of Dilutive Securities =========
Stock Options -- 17,532
---------------------------
Diluted EPS $759,356 770,552 $ .99
=====================================
Three Months Ended March 31, 1997
-------------------------------------
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------------------------------
Basic EPS $177,798 701,520 $ .25
Effect of Dilutive Securities =========
Stock Options -- 19,431
---------------------------
Diluted EPS $177,798 720,951 $ .25
=====================================
7
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NOTE 6---RECENT ACCOUNTING PRONOUNCEMENTS
The adoption of the provisions of SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" that became
effective on January 1, 1998 did not have a material effect on the Company's
financial statements.
The adoption of SFAS No. 130, "Reporting Comprehensive Income", that became
effective on January 1, 1998 required the Company to report comprehensive income
in the Company's Statements of Income and Comprehensive Income.
There are no other recent accounting pronouncements that have had, or are
expected to have, a material effect on the Company's financial statements.
8
<PAGE>
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 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 herein, may
constitute forwardlooking statements for purpose 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; the possible effects of the Year 2000 problem on the Company,
including such problems at the Company's vendors, counter-parties and customers;
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's net income for the quarter ended March 31, 1998 was $759,356
compared to net income of $177,798 for the quarter ended March 31, 1997. The
increase in net income from the first quarter 1997 to the first quarter of 1998
was primarily the result of higher level of mortgage production.
Balance Sheets
- --------------
The Company's assets increased 32% during the first quarter 1998 from
$104.5 million as of December 31, 1997 to $138.2 million as of March 31, 1998.
The increase in total assets was primarily the result of an increase in mortgage
loans held for sale. The increase in assets was funded with a $19 million
increase in drafts payable and a $10.9 million increase in other borrowings.
The increase in mortgage banking production and related mortgage loans held for
sale from the first quarter 1997 to the first quarter 1998, was the result of
the Company's expansion of its mortgage operation into the Northeast United
States in addition to relatively low historical mortgage rates during first
quarter 1998.
Interest-earning assets (comprised of commercial banking loans, mortgage
loans held for sale, investment securities, interest-bearing balances in other
banks and temporary investments) totaled $126.2 million or 91.3% of total assets
at March 31, 1998. This represents a 39% increase from December 31, 1997 when
earning assets totaled $90.7 million or 86.8% of total assets. The increase in
earning assets resulted primarily from a $23.1 million or 46.7% increase of
mortgage loans held for sale. The increase was primarily funded through an
increase in other borrowings. Average mortgage loans held for sale for the
three months ended March 31, 1998 of $56.1 million constituted 56.8% of average
earning assets and 50.1% of average total assets. Average mortgage loans held
for sale for the three months ended March 31, 1997 of $26.5 million constituted
43.9% of average interest-earning assets and 37.5% of average total assets.
During the first three months of 1998, average commercial banking loans
were $38.2 million and constituted 38.6% of average earning assets and 34.1% of
average total assets. For the first three months of 1997, average commercial
banking loans were $29.5 million and constituted 48.9% of average earning assets
and 41.7% of average
9
<PAGE>
total assets. Commercial banking loans are expected 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 Crescent Bank and Trust Company ("the Bank") on its shorter term
warehouse line of credit and other funding sources. Therefore, the absolute
volume of commercial banking loans and mortgage loans held for sale and the
volume as a percentage of total interest-earning assets are an important
determinant of the net interest margin thereof.
The allowance for loan losses represents a reserve for potential losses in
the Bank's commercial banking loan portfolio. The provision for loan losses is a
charge to earnings in the current period to maintain the allowance at a level
that management has determined to be adequate. The allowance for loan losses
totaled $557,255 or 1.49% of total commercial banking loans at March 31, 1998,
compared to $514,634 or 1.40% of total loans at December 31, 1997. The increase
in the allowance for loan losses for the first three months of 1998 was the
result of the provision for loan loss of $43,000. 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 is
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. The Bank does not maintain a reserve with respect to its
mortgage loans held for sale due to the low credit risk associated with the
loans during the Bank's holding period.
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 non-accrual loans will be recognized only when
received. As of March 31, 1998, the Bank had $129,496 loans accounted for on a
non-accrual basis, $11,941 contractually past due more than 90 days and no loans
considered to be troubled debt restructurings. As of December 31, 1997, the Bank
had no loans accounted for on a non-accrual basis, $61,421 contractually past
due more than 90 days and no loans considered to be troubled debt
restructurings.
Non-performing loans are defined as non-accrual and renegotiated loans.
Adding real estate acquired by foreclosure and held for sale of $151,909 with
non-performing loans results in non-performing assets of $281,405 at March 31,
1998. The Bank is currently holding the foreclosed properties for sale. At
December 31, 1997, the Bank had non-performing assets totaling $151,909.
The chart below summarizes those of the Bank's assets that management
believes warrant attention due to the potential for loss, in addition to the
non-performing loans and foreclosed properties. Potential problem loans
represents loans that are presently performing, but where management has doubts
concerning the ability of the respective borrowers to meet contractual repayment
terms.
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------------------------------------------------
<S> <C> <C>
Non-performing loans (1) $129,496 $ --
Foreclosed properties 151,909 151,909
------- -------
Total non-performing assets 281,405 151,909
======= =======
Loans 90 days or more past due on accrual status $ 11,941 $ 61,421
Potential problem loans (2) 923,643 672,460
Potential problem loans/total loans 2.48% 1.83%
Non-performing assets/total loans
and foreclosed properties 0.75% 0.41%
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C>
Non-performing assets and loans 90 days
or more past due on accrual status/
total loans and foreclosed properties .78% .58%
</TABLE>
- ------------------------------------
(1) Defined as non-accrual loans and renegotiated loans.
(2) Loans identified by management as potential problem loans (classified and
criticized loans) but still accounted for on an accrual basis.
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 funds
not needed to make loans, while providing liquidity to fund increases in loan
demand or to offset fluctuations in deposits. Thus, investment securities are
used to manage the Bank's exposure to interest rate risk. Investment securities
and interest-bearing deposits with other banks totaled $3.5 million at March 31,
1998 compared to $3.9 million at December 31, 1997. Federal funds sold totaled
$12.8 million at March 31, 1998 compared to $1.1 million at December 31, 1997.
The increase in federal funds sold was a result of the timing of the delivery of
mortgage loans held for sale.
The Company's Mortgage Division (the "Mortgage Division") acquires mortgage
loans from small retail-oriented originators through its operations of Crescent
Mortgage Services, Inc ("CMS") and the mortgage division of Crescent Bank and
Trust Company (the "Bank"). The Bank acquires conventional loans in the
Southeast United States while CMS acquires conventional loans in the Northeast
United States and FHA/VA loans in the Southeast United States. The Bank's
acquisition of loans are funded through various sources, including the Bank's
regular funding sources, an $18.0 million warehouse line of credit from the
Federal Home Loan Bank of Atlanta and a $40 million gestation repurchase
agreement with Paine Webber Incorporated. Under the repurchase agreement, the
Bank sells mortgage loans and simultaneously assigns the related forward sale
commitments to Paine Webber Incorporated. CMS utilizes various warehouse lines
totaling $45 million. Substantially all of the Company's mortgage loans are
currently being resold in the secondary market to Federal Home Loan Mortgage
Corporation ("Freddie Mac"), Federal National Mortgage Association ("Fannie
Mae") and private investors after being "warehoused" for 10 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 Company retains the servicing rights on mortgage loans
that it resells, it collects annual servicing fees while the loan is
outstanding. The Company periodically sells a portion of its retained servicing
rights in bulk form. The annual servicing fees and gains on the sale of
servicing rights is an integral part of the Company's mortgage banking operation
and its contribution to net income. The Company currently pays a third party
subcontractor to perform servicing functions with respect to its loans sold with
retained servicing.
During the first three months of 1998, the Mortgage Division acquired
$323.7 million of mortgage loans, of which $300.6 million (92.8%) were resold in
the secondary market. The remaining $72.5 million were carried as mortgage loans
held for sale on the balance sheet as sale of the loans was pending. During the
first three months of 1997, the Mortgage Division acquired $119.1 million of
mortgage loans.
At March 31, 1998, capitalized costs of $3.1 million related to the
purchase of mortgage servicing rights were carried on the balance sheet as
purchased mortgage servicing rights. At December 31, 1997, the Company carried
$4.1 million of purchased mortgage servicing rights on its balance sheet. The
Company is amortizing the purchased mortgage servicing rights over an
accelerated period. At March 31, 1998, the Company held servicing rights with
respect to loans with unpaid principal balances totaling $383.4 million compared
to $427.7 at December 31, 1997. During the first three months of 1998, the
Company sold servicing rights with respect to $354.3 million of mortgage loans
carried on its balance sheet at $3.3 million for a gain of $1.7 million. During
the first three months of 1997, the Company sold servicing rights with respect
to $154.5 million of mortgage loans for a gain of $378,915. The market value of
the servicing portfolio is contingent upon many factors including the interest
rate environment, the estimated life of the servicing portfolio, the loan
quality of the servicing portfolio and the 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.
11
<PAGE>
The Bank's deposits totaled $75.5 million at March 31, 1998 compared to
$75.7 million at December 31, 1997. Deposits averaged $78.4 million for the
three months ended March 31, 1998. Interest-bearing deposits represented 83% of
total deposits at March 31, 1998 compared to 70% at December 31, 1997. The
increase of interest-bearing deposits as a percent of total deposits was the
result of an unusual high fluctuation of non-interest bearing deposits at
December 31, 1997. Certificates of deposit composed 69% of total interest-
bearing deposits at March 31, 1998 compared to 68% at December 31, 1997. The
composition of these deposits is indicative of the interest rate-conscious
market in which the Bank operates. There is no assurance that the Bank can
maintain or increase its market share of deposits in its highly competitive
service area.
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. The guidelines currently require a minimum of
8.0% of total capital to risk-adjusted assets. One half of the required capital
must consist of Tier 1 Capital, which includes tangible common shareholders'
equity and qualifying perpetual preferred stock. 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 Board of Governors of the Federal Reserve System
(the "Federal Reserve") will continue to consider a "Tangible Tier 1 Leverage
Ratio" (deducting all intangibles) in evaluating proposals for expansion or new
activity. The Federal Reserve 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 either of them. The Bank had agreed with the
Georgia Department of Banking and Finance to maintain a leverage ratio of 8.0%.
At March 31, 1998 the Bank's leverage ratio was 8.46%.
At March 31, 1998 the Company's total shareholders' equity was $11.8
million or 8.54% of total assets, compared to $8.9 million or 8.52% of total
assets at December 31, 1997. Total capital to risk-adjusted assets was 13.89%,
with 13.26% consisting of tangible common shareholders' equity at March 31,
1998. The Company paid $54,227 of dividends during the first quarter of 1998 or
$.075 per share. The Company has declared an $.08 per share dividend payable on
May 15, 1998 to shareholders of record on April 30, 1998. On March 11, 1998, the
Company completed a stock offering for 135,000 shares of common stock at an
issue price of $16.25 per share.
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 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 (cash and amounts due from banks, interest-bearing
deposits in other banks, federal funds sold, mortgage loans held for sale net of
borrowings and drafts payable, investment securities and securities held for
sale) totaled $37.2 million for the three months ended March 31, 1998,
representing 47.4% of average deposits. Average liquid assets totaled $35.9
million during 1997, representing 59% of average deposits. The increase in
average liquid assets was the result of the increase in mortgage loans held for
sale. Average non-mortgage loans were 49% of average deposits for the three
months ended March 31, 1998. Average non-mortgage loans were 53% of average
deposits for the year 1997. Average deposits were 79% of average interest-
earning assets for the three months ended March 31, 1998. Average deposits were
78% of average interest-earning assets for the year 1997.
The Bank actively manages the levels, types and maturities of interest-
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 borrowing sources related to the mortgage operations, the Bank
also maintains a federal funds line of credit totaling $4.6 million. Management
believes its liquidity sources are adequate to meet its operating needs.
12
<PAGE>
Net interest income can fluctuate with significant interest rate movements.
To lessen the impact of these margin swings, the balance sheet should be
structured so that reproaching opportunities exist for both assets and
liabilities in roughly equivalent amounts at approximately the same time
intervals. Imbalances in these reproaching opportunities, at any point in time,
constitute interest rate sensitivity.
Interest rate sensitivity refers to the responsiveness of interest-bearing
assets and 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 as
the exposure period is lengthened to minimize the overall interest rate risk 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 much more interest-sensitive than savings deposits. In
addition, brokered deposits, institutional deposits placed by independent
brokers, are more interest sensitive. The Bank had brokered deposits of $10.9
million at March 31, 1998 compared to $6.4 million at December 31, 1997. The
Bank utilizes the brokered deposits to fund its mortgage loans held for sale and
therefore match those maturities as closely as possible.
The following table shows the interest sensitivity gaps for four different
time intervals as of March 31, 1998. The Bank was in an asset-sensitive
position for the cumulative three-month, one-year and five-year intervals. This
means that during the five-year period, if interest rates decline, the net
interest margin will decline. Conversely, if interest rates increase over this
period, the net interest margin will improve. At March 31, 1998, the Bank was
within its policy guidelines of rate-sensitive assets to rate-sensitive
liabilities of 80 - 120% at the one-year interval. Since all interest rates and
yields do not adjust at the same velocity, this is only a general indicator of
rate sensitivity.
The total excess of interest-bearing assets over interest-bearing
liabilities, based on a five-year time period, was $38.2 million, or 27.6% of
total assets.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Gaps
As of March 31, 1998
Amounts Repricing In
--------------------------------------------------------------------
0-90 Days 91-365 Days 1-5 Years Over 5 Years
--------- ----------- --------- ------------
(Millions of Dollars)
<S> <C> <C> <C> <C>
Interest-earning
assets $105.1 $6.5 $12.3 $2.3
Interest-bearing
liabilities 54.2 23.2 10.6 --
---------------------------------------------------------------------
Interest sensitivity
gap $50.9 $(16.7) $1.7 $2.3
=====================================================================
</TABLE>
The Mortgage Division 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 of such loans 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, through
"pairing off" the commitment, or purchasing loans through the secondary market.
Under certain conditions the Company achieves best execution by
13
<PAGE>
pairing off the commitment to sell closed loans and fulfilling that commitment
with loans purchased by the Company through the secondary market. The Company
considers the cost of the hedge to be part of the cost of the Company's
servicing rights, and therefore the hedge is accounted for as part of the cost
of the Company's servicing portfolio. As a result, any gain or loss on the hedge
reduces or increases, as appropriate, the cost basis of the servicing portfolio.
While other hedging techniques may be used, speculation is not allowed
under the Mortgage Division's secondary marketing policy. As of March 31, 1998,
the Bank had in place purchase commitment agreements terminating between April
and July of 1998 with respect to an aggregate of approximately $99.9 million to
hedge the mortgage pipeline of $152.6 for which the Bank had an interest rate
risk. At March 31, 1998, the Financial Accounting Standards Board had issued an
exposure draft "Accounting for Derivative and Similar Financial Instrument and
for Hedging Activities." The pronouncement would require the forward commitments
to be recorded as an asset or liability with the changes in fair value recorded
in the income statement. Management has not yet determined the impact of this
pronouncement on its financial statements.
Management continually tries to minimize the interest rate sensitivity gap.
Attempting to minimize the gap is a continual challenge in a changing interest
rate environment and one of the objectives of the Bank's asset/liability
management strategy.
Results of Operations
- ---------------------
A source of revenue for the Bank is net interest income, which is the
difference between income received 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 interest-earning asset
portfolio (which includes loans) and the availability of particular sources of
funds, such as non-interest bearing deposits.
The Company had interest income of $2.6 million for the three months ended
March 31, 1998 compared to $1.5 million three months ended March 31, 1997. The
73.3% increase in interest income is attributable to the increase in interest-
earning assets which is the result of the higher volume of mortgage loans as
well as a higher volume of fee income associated with mortgage loans which is
included in interest income. The Company had closed $323.7 million of mortgage
loans during the first quarter 1998 compared to $119.1 million during the first
quarter 1997. This increase is attributable to the startup of the Northeast
mortgage operation, which began operating in the first quarter of 1997, in
addition to the relative low level of interest rates during 1998.
The Company had interest expense of $1.1 million for the three months ended
March 31, 1998 and $668,712 for the three months ended March 31, 1997. The
increase resulted from a higher level of other borrowings. All mortgage
production through CMS is funded with a warehouse line of credit; therefore the
startup of the Northeast operation resulted in a higher average balance of other
borrowings. In the first quarters 1998 and 1997, interest expense accounted for
27% and 28% of total expenses, respectively.
Net interest income for the first quarter 1998 was $1.6 million. The key
performance measure for net interest income is the "net interest margin," or net
interest income divided by average interest-earning assets. The Company's net
interest margin during first quarter 1997 was 6.4%. Interest spread, which
represents the difference between average yields on interest-earning assets and
average rates paid on interest-bearing liabilities, was 5.8%. Net interest
income, interest margin and net interest spread for the first quarter 1997 were
$826,406, 5.5%, and 5.4%, respectively. The increase in net interest income,
interest margin, and interest spread is related to the volume of Commercial bank
loans and fee income related to a higher volume of mortgage loans closed. Loan
fee income, such as processing fees associated with the purchase of mortgage
loans, is included as interest income as the mortgage loans are sold.
The Company made a provision to the allowance for loan losses of $43,000 in
the first quarter 1998. The Company made provisions to the allowance for loan
losses in the amount of $38,400 in first quarter 1997. During the
14
<PAGE>
first quarter of 1998, the Bank charged-off, net of recoveries, $379 of loans to
the allowance for loan losses. During the first quarter 1997, the Bank had no
charge-offs.
Other income was $2.7 million in the first quarter 1998 compared to $1.3
million in the first quarter 1997. The increase in other income was related to
the increase of gains on the sale of mortgage servicing rights. During the first
three months of 1998, the Company sold servicing rights with respect to $354.3
million of mortgage loans for a gain of $1.7 million. During the first three
months of 1997, the Company sold servicing rights with respect to $154.5 million
of mortgage loans for a gain of $378,915. The higher level of gains on the sale
of mortgage servicing rights was primarily the result of the Company's expansion
into the Northeast United States as well as relative low historical mortgage
interest rates. The Company currently plans to sell, on a quarterly basis, a
portion of the servicing rights retained during 1998, although there can be no
assurance as to the volume of the Bank's loan acquisition or that a premium will
be recognized on the sales. Gestation fee income is generated from the sale of
mortgage loans to securities brokers through a gestation repurchase agreement.
Under the agreement, the Company sells mortgage loans and simultaneously assigns
the related forward sale commitments to a securities broker. The Company
continues to receive fee income from the securities broker until the loan is
delivered into the forward commitment.
Other operating expenses increased to $3.0 million in the first quarter
1998 from $1.8 million in the first quarter 1997. The increase in other
operating expenses was related to the expansion of the mortgage operation to the
Northeast United States, the startup of the mortgage FHA/VA operation, as well
as the higher level of mortgage production. The increase in other operating
expenses were primarily due to increases in salaries and benefits and third
party mortgage outsourcing expense.
The Company had net income of $759,356 for the first quarter 1998, which
was primarily related to the continued improvement in net interest income,
mortgage banking operations and the related gains on the sale of servicing
rights. Income tax as a percentage of pretax net income was 40% for both the
first quarters 1998 and 1997.
Effects of Inflation
- --------------------
Inflation generally increases the cost of funds and operating overhead, and
to the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction, or to the same
extent, as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation results in
financial institutions' increased cost of goods and services purchased, the cost
of salaries and benefits, occupancy expense, and similar items. Inflation and
related increases in interest rates generally decrease the market value of
investments and loans held and may adversely affect liquidity, earnings, and
shareholders' equity. Mortgage originations and refinancings tend to slow as
interest rates increase, and likely will reduce the Company's earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market.
Capability of the Company's Data Processing Software to Accommodate the Year
- ----------------------------------------------------------------------------
2000
- ----
The Company and its subsidiaries rely upon computers for the daily conduct
of their business and for data processing generally. There is concern among
industry experts that commencing on January 1, 2000, computers will be unable to
"read" the New Year and that there may be widespread computer malfunctions.
Management of the Company has assessed the electronic systems, programs,
applications, and other electronic components used in the operations of the
Company and believes that the Company's hardware and software has been
programmed to be able to accurately recognize the year 2000, and that
significant additional costs will not be incurred in connection with the year
2000 issue, although there can be no assurances in this regard.
15
<PAGE>
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
The Annual Meeting of Shareholders of the Company was held on April 17,
1997 at which the following matters were brought before and voted upon by the
shareholders.
1) The election of the following person to the Board of Directors to
serve for a term expiring on the date of the 2001 Annual Meeting
of Shareholders:
Name For Withhold Authority
---- --- ------------------
Charles Fendley 645,180 700
A. James Elliott 645,180 700
There were no broker non-votes with respect to the election of
directors.
2) Amend and Restate the Crescent Banking Company 1995 Stock Option
Plan for Outside Directors:
For Against Abstained
--- ------- ---------
621,729 24,051 100
The following members of the Board of Directors were not up for re-
election at the 1998 Annual Meeting, their terms expiring on the dates
of 1999 and 2000 Annual Meetings of Shareholders, respectively: Arthur
Howell, Ed Rast, Harry C. Howard and Michael W. Lowe.
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
16
<PAGE>
S-4.
10.4 Employment Agreement between the Bank and Mr. Robert C. KenKnight
dated as of May 1, 1997 (incorporated by reference to Exhibit 10.4
to the December 31, 1997 Form 10K-SB).
27. Financial Data Schedule
(b) Reports on Form 8-K - None
17
<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: May 14, 1998 /s/ J. Donald Boggus, Jr.
----------------- ------------------------------
J. Donald Boggus, Jr.
President, Chief Executive Officer and
Chief Financial Officer
18
<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.
10.4 Employment Agreement between the Bank and Mr. Robert C.
KenKnight dated as of May 1, 1997 (Incorporated by
reference from exhibit 10.4 to the December 31, 1997
form 10K-SB).
27. Financial Data Schedule.
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000883476
<NAME> CRESCENT BANKING COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,288
<INT-BEARING-DEPOSITS> 745
<FED-FUNDS-SOLD> 12,780
<TRADING-ASSETS> 72,548
<INVESTMENTS-HELD-FOR-SALE> 2,796
<INVESTMENTS-CARRYING> 2,796
<INVESTMENTS-MARKET> 2,796
<LOANS> 37,288
<ALLOWANCE> 557
<TOTAL-ASSETS> 138,216
<DEPOSITS> 75,511
<SHORT-TERM> 25,189
<LIABILITIES-OTHER> 25,757
<LONG-TERM> 0
0
0
<COMMON> 861
<OTHER-SE> 10,897
<TOTAL-LIABILITIES-AND-EQUITY> 138,216
<INTEREST-LOAN> 1,006
<INTEREST-INVEST> 45
<INTEREST-OTHER> 52
<INTEREST-TOTAL> 2,648
<INTEREST-DEPOSIT> 797
<INTEREST-EXPENSE> 1,073
<INTEREST-INCOME-NET> 1,576
<LOAN-LOSSES> 43
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,967
<INCOME-PRETAX> 1,280,753
<INCOME-PRE-EXTRAORDINARY> 1,280,753
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 759,356
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 0.99
<YIELD-ACTUAL> 10.45
<LOANS-NON> 0
<LOANS-PAST> 12
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 924
<ALLOWANCE-OPEN> 515
<CHARGE-OFFS> 1
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 557
<ALLOWANCE-DOMESTIC> 507
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 50
</TABLE>
