<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 June 30, 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, 862,754 shares issued and
outstanding as of August 12, 1998. 3,334 shares are held as treasury stock.
Exhibit Index located on page 19.
<PAGE>
CRESCENT BANKING COMPANY
INDEX
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 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
2
<PAGE>
PART I - FINANCIAL INFORMATION
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
-------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,032,432 $ 3,319,054
Federal funds sold 7,530,000 1,310,000
Interest bearing deposits in other banks 899,125 1,080,469
Securities available for sale 2,831,768 2,784,066
Mortgage loans held for sale 98,826,761 49,398,871
Loans 37,438,242 36,650,206
Less allowance for loan losses (586,651) (514,634)
------------- -------------
Loans, net 36,851,591 36,135,572
Premises and equipment, net 2,789,048 2,279,394
Other real estate owned 151,909 151,909
Purchased mortgage servicing rights 3,159,963 4,143,563
Accounts receivable-brokers and escrow agents 1,939,151 3,295,462
Other assets 1,024,967 647,220
------------- -------------
TOTAL ASSETS $159,036,715 $104,545,580
============ ============
LIABILITIES
Deposits
Noninterest -bearing demand deposits $ 13,830,721 $ 22,437,331
Interest -bearing demand 17,781,137 15,299,574
Savings 1,746,870 1,500,665
Time, $100,000 and over 8,737,337 9,859,062
Other time 36,939,427 26,584,252
------------- -------------
Total deposits 79,035,492 75,680,884
Drafts payable 27,306,913 3,163,349
Deferred taxes payable 1,716,778 1,494,465
Accrued interest and other liabilities 1,998,891 968,414
Other borrowings 36,784,760 14,308,650
------------- -------------
Total liabilities 146,842,834 95,615,762
SHAREHOLDERS' EQUITY
Common stock, par value $1.00; 2,500,000 shares authorized;
862,754 and 726,354 issued and outstanding, respectively 862,754 726,354
Surplus 8,571,567 6,549,186
Retained earnings 2,804,337 1,693,113
Less cost of 3,334 shares acquired for the treasury (36,091) (36,091)
Accumulated other comprehensive income (8,686) (2,744)
------------- -------------
Total stockholders' equity 12,193,881 8,929,818
------------- -------------
Total liabilities and stockholders' equity $159,036,715 $104,545,580
============ ============
</TABLE>
See notes to Consolidated Financial Statements.
3
<PAGE>
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1998 1997 1998 1997
-------------------------- ------------------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans 1,036,414 805,757 2,042,343 1,559,217
Interest and fees on mortgage loans held for sale 2,042,009 845,142 3,586,851 1,538,504
Interest on securities:
Taxable 40,145 18,549 79,198 43,032
Nontaxable 3,838 14,164 9,937 18,002
Interest on deposits in other banks 39,998 18,603 63,808 30,867
Interest on Federal funds sold 41,389 22,576 69,810 50,287
----------------------- -----------------------
3,203,793 1,724,791 5,851,947 3,239,909
Interest expense
Interest on deposits 892,840 636,946 1,690,069 1,239,450
interest on other borrowings 539,975 71,949 815,324 158,157
----------------------- -----------------------
1,432,815 708,895 2,505,393 1,397,607
Net interest income 1,770,978 1,015,896 3,346,554 1,842,302
Provision for loan losses 30,000 36,920 73,000 75,320
----------------------- -----------------------
Net interest income after provision for loan losses 1,740,978 978,976 3,273,554 1,766,982
Other income
Service charges on deposit accounts 54,015 54,318 98,044 106,850
Mortgage servicing fee income 239,825 245,204 494,377 488,285
Gestation fee income 475,885 299,630 766,023 570,708
Gains on sale of mortgage servicing rights 1,817,680 286,622 3,525,911 665,537
Gains on sale of mortgage loans held for sale 345,801 256,283 748,539 618,184
Other 3,583 9,114 18,764 18,806
----------------------- -----------------------
2,936,789 1,151,171 5,651,658 2,468,370
Other expenses
Salaries and employee benefits 1,774,715 901,066 3,279,668 1,733,533
Net occupancy and equipment expense 194,281 88,441 319,050 175,218
Supplies, postage, and telephone 252,533 197,186 478,419 298,818
Advertising 120,101 170,969 232,580 276,748
Insurance expense 31,578 28,460 49,405 46,270
Depreciation and amortization 317,302 221,762 552,014 412,642
Legal and professional 538,881 198,288 855,124 346,208
Director fees 37,650 32,850 79,400 64,850
Mortgage subservicing expense 84,347 81,362 158,946 158,139
Other 470,192 (14,802) 783,666 201,917
----------------------- -----------------------
3,821,580 1,905,582 6,788,272 3,714,343
Income before income taxes 856,187 224,565 2,136,940 521,009
Applicable income taxes 381,451 83,852 902,848 202,498
----------------------- -----------------------
Net income $474,736 $140,713 $1,234,092 $318,511
----------------------- -----------------------
Other comprehensive income, net of tax
Unrealized gains/(losses) on securities available
for sale arising during period 8,667 -- (5,942) --
----------------------- -----------------------
Comprehensive income 483,403 140,713 1,228,150 318,511
======================= =======================
Basic earnings per common share $0.55 $0.20 $1.52 $0.45
Diluted earnings per common share $0.55 $0.20 $1.50 $0.45
Cash dividends per share of common stock $0.080 $0.060 $0.155 $0.120
See Notes to Consolidated Financial Statements
</TABLE>
4
<PAGE>
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For the six months ended
June 30,
1998 1997
----------------------------
<S> <C> <C>
Operating Activities
Net Income 1,234,092 318,511
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan loss 73,000 75,320
Depreciation and amortization 552,014 412,642
Provision for deferred taxes 222,313 94,045
Gains on sales of mortgage servicing rights (3,525,911) (665,537)
Increase in mortgage loans held for sale (49,427,890) (4,945,923)
Increase in interest receivable (261,380) (46,070)
Decrease in accounts receivable 1,356,311 289,996
Increase (decrease) in drafts payable 24,143,564 5,089,349
Increase (decrease) in interest payable 131,280 10,180
Increase in other assets and liabilities, net 782,830 (448,182)
----------------------------
Net cash used in operating activities (24,719,777) 184,331
Investing Activities
Net (increase) decrease in interest-bearing deposits
in other banks 181,344 61,969
Proceeds from sale of securities available for sale (569,202) 191,500
Acquisition of securities available for sale 515,558 (990,847)
Proceeds from maturities of securities held to maturity -- 45,427
Acquisition of purchased mortgage servicing rights (5,355,181) (2,770,173)
Proceeds from sales of purchased mortgage
servicing rights 9,514,292 2,819,283
Decrease in Federal funds sold, net (6,220,000) 570,000
Net increase in loans (789,019) (3,933,464)
Purchase of premises and equipment (711,268) (128,011)
----------------------------
Net cash provided by (used in) investing activities (3,433,476) (4,134,316)
Financing Activities
Net increase in deposits 3,354,608 1,208,431
Net increase in other borrowings 22,476,110 2,235,976
Proceeds form the issuance of common stock 2,136,381
Proceeds from exercise of stock options 22,400 15,000
Dividends paid (122,868) (80,675)
----------------------------
Net cash provided by financing activities 27,866,631 3,378,732
Net increase in cash and cash equivalents (286,622) (571,253)
Cash and cash equivalents at beginning of year 3,319,054 3,011,864
----------------------------
Cash and cash equivalents at end of year $3,032,432 2,440,611
============================
Supplemental Disclosure of Cash Flow Information
Cash paid during period for interest 2,374,113 1,387,427
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30,
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 June 30, 1998, the Company had purchased loans for which it
provides servicing with principal balances totaling $382.8 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 $1,998,891 and $1,494,465 at June 30, 1998 and December 31,
1997, respectively, are included in other liabilities.
<TABLE>
<CAPTION>
<S> <C>
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)
===========
</TABLE>
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):
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
---------------------------------------
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ---------
<S> <C> <C> <C>
Basic EPS $ 474,736 861,554 $ .55
=========
Effect of Dilutive Securities
Stock Options -- 18,959
------------ -------
Diluted EPS $ 474,736 880,513 $ .54
========================================
<PAGE>
Six Months Ended June 30, 1998
----------------------------------------
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ---------------- ---------
Basic EPS $1,234,092 809,245 $1.52
=========
Effect of Dilutive Securities
Stock Options -- 12,584
------------ -------
Diluted EPS $1,234,092 821,829 $1.50
=========================================
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1997
-----------------------------------------
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ----------------- ---------
<S> <C> <C> <C>
Basic EPS $140,713 705,068 $.20
========
Effect of Dilutive Securities
Stock Options -- --
---------- ----------------
Diluted EPS $140,713 705,068 $.20
=========================================
Six Months Ended June 30, 1997
-----------------------------------------
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ----------------- ---------
Basic EPS $318,511 704,962 $.45
========
Effect of Dilutive Securities
Stock Options -- --
---------- ----------------
Diluted EPS $318,511 704,962 $.45
=========================================
</TABLE>
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 Securitites 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 June 30, 1998 was $474,736
compared to net income of $140,713 for the quarter ended June 30, 1997. Net
income for the first six months of 1998 of $1,234,092 compares to $318,511 for
the first six months of 1997. The increase in net income from the first six
months of 1997 to the first six months of 1998 was primarily the result of
higher level of mortgage production.
Balance Sheets
- --------------
The Company's assets increased 52% during the first six months of 1998 from
$104.5 million as of December 31, 1997 to $159.0 million as of June 30, 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 $24 million
increase in drafts payable and a $22.4 million increase in other borrowings.
The increase in mortgage banking production and related mortgage loans held for
sale 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 six months of 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 $147.5 million or 92.8% of total assets
at June 30, 1998. This represents a 63% 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 $49.4 million or 100% increase of
mortgage loans held for sale. The increase was primarily funded through an
increase in other borrowings and drafts payable. Average mortgage loans held
for sale for the six months ended June 30, 1998 of $60.7 million constituted
57.5% of average earning assets and 51.6% of average total assets. Average
mortgage loans held for sale for the six months ended June 30, 1997 of $28.5
million constituted 44.9% of average interest-earning assets and 38.4% of
average total assets.
During the first six months of 1998, average commercial banking loans were
$37.5 million and constituted 35.5% of average earning assets and 31.9% of
average total assets. For the first six months of 1997, average commercial
banking loans were $30.4 million and constituted 47.9% of average earning assets
and 41.0% 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 $586,651 or 1.57% of total commercial banking loans at June 30, 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 six months of 1998 was
the result of the provision for loan loss of $73,000. 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 June 30, 1998, the Bank had $86,343 loans accounted for on a
non-accrual basis, $232,995 contractually past due more than 90 days and no
loans considered to be troubled debt restructurings. In July 1998, the Bank
foreclosed on three properties. One property represented the non-accrual
balance of $86,343 and while the other two properties, totaling $164,284, were
more than 90 days past due. 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 $238,252 at June 30,
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>
June 30, 1998 December 31, 1997
------------------------------------
<S> <C> <C>
Non-performing loans (1) $ 86,343 $ --
Foreclosed properties 151,909 151,909
-------- --------
Total non-performing assets 238,252 151,909
======== ========
Loans 90 days or more past due on accrual status $232,995 $ 61,421
Potential problem loans (2) 584,754 672,460
Potential problem loans/total loans 1.56% 1.83%
Non-performing assets/total loans
and foreclosed properties 0.62% 0.41%
Non-performing assets and loans 90 days
or more past due on accrual status/
total loans and foreclosed properties 1.22% .58%
</TABLE>
10
<PAGE>
- ----------
(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 $3.7 million at June 30,
1998 compared to $3.9 million at December 31, 1997. Federal funds sold totaled
$7.5 million at June 30, 1998 compared to $1.3 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. CMS intends to
open an office in Chicago, Illinois by the end of 1998.
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 $45 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 $47 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 six months of 1998, the Mortgage Division acquired $695.7
million of mortgage loans, of which $646.3 million (92.9%) were resold in the
secondary market. Mortgage loans of $98.8 million were carried as held for sale
on the balance sheet as sale of the loans was pending. During the first six
months of 1997, the Mortgage Division acquired $271.6 million of mortgage loans.
At June 30, 1998, capitalized costs of $3.2 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 June 30, 1998, the Company held servicing rights with
respect to loans with unpaid principal balances totaling $382.8 million compared
to $427.7 at December 31, 1997. During the first six months of 1998, the
Company sold servicing rights with respect to $691.8 million of mortgage loans
carried on its balance sheet at $6.2 million for a gain of $3.5 million. During
the first six months of 1997, the Company sold servicing rights with respect to
$214.3 million of mortgage loans for a gain of $665,537. 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
11
<PAGE>
of the cost to acquire the servicing rights, nor can there be any assurance as
to the expected life of the servicing portfolio.
The Bank's deposits totaled $79.0 million at June 30, 1998 compared to $75.7
million at December 31, 1997. Deposits averaged $76.2 million for the six
months ended June 30, 1998. Interest-bearing deposits represented 83% of total
deposits at June 30, 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 70% of total interest-bearing deposits at June
30, 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 June 30, 1998 the Bank's leverage ratio was 8.17%.
At June 30, 1998 the Company's total shareholders' equity was $12.2 million or
7.67% 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 13.3%, with 12.69%
consisting of tangible common shareholders' equity at June 30, 1998. The
Company paid $122,868 of dividends during the first two quarters of 1998 or
$.155 per share. The Company has declared an $.085 per share dividend payable
on August 14, 1998 to shareholders of record on July 31, 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 $38.9 million for the six months ended June 30, 1998, representing
51.0% 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 six months ended June
30, 1998. Average non-mortgage loans were 53% of average deposits for the year
1997. Average deposits were 72% of average interest-earning assets for the six
months ended June 30, 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
12
<PAGE>
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.
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 $8.2
million at June 30, 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 June 30, 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 June 30, 1998, the Bank was within its
policy guidelines of rate-sensitive assets to rate-sensitive liabilities of 80 -
140% 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 $45.5 million, or 28.6% of total assets.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY GAPS
AS OF JUNE 30, 1998
AMOUNTS REPRICING IN
------------------------------------------------------------------
0-90 DAYS 91-365 DAYS 1-5 YEARS OVER 5 YEARS
----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
(MILLIONS OF DOLLARS)
Interest-earning
assets $126.1 $ 6.4 $12.7 $2.3
Interest-bearing
Liabilities 66.3 23.0 12.7 --
------------------------------------------------------------------
Interest sensitivity
gap $ 59.8 $(16.6) $ -- $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
13
<PAGE>
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 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 June 30, 1998, the
Bank had in place purchase commitment agreements terminating between July and
October of 1998 with respect to an aggregate of approximately $119.55 million to
hedge the mortgage pipeline of $178.4 for which the Company had an interest rate
risk. On June 1, 1998, the Financial Accounting Standards Board approved the
exposure draft "Accounting for Derivative and Similar Financial Instrument and
for Hedging Activities." The pronouncement will require the forward commitments
to be recorded as an asset or liability with the changes in fair value recorded
in the equity on the balance sheet or 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 $3.2 million for the three months ended
June 30, 1998 compared to $1.7 million for the three months ended June 30, 1997.
The Company had interest income of $5.9 million for the six months ended June
30, 1998 compared to $3.2 million for the six months ended June 30, 1997. The
84% 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 $695.7 million of mortgage
loans during the first six months of 1998 compared to $271.6 million during the
first six months of 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 $1.4 million for the three months ended
June 30, 1998 and $708,895 for the three months ended June 30, 1997. The
Company had interest expense of $2.5 million for the six months ended June 30,
1998 and $1.4 million for the six months ended June 30, 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 second quarters 1998 and 1997, interest expense accounted
for 27% and 26% of total expenses, respectively. For the first six months of
1998 and 1997, interest expense accounted for 27% in both periods.
Net interest income for the second quarter 1998 was $1.8 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 the second quarter 1998 was 6.0%. Interest spread, which
represents the difference between average yields on interest-earning assets and
average rates paid on interest-bearing liabilities, was 5.5%. Net interest
income, interest margin and net interest spread for the second quarter 1997 were
$1.0 million,
14
<PAGE>
5.6%, and 5.5%, 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 $73,000 in
the first six months of 1998. The Company made provisions to the allowance for
loan losses in the amount of $75,320 in the first six months of 1997. During
the first six months of 1998, the Bank charged-off, net of recoveries, $983 of
loans to the allowance for loan losses. During the first six months of 1997,
the Bank had charge-off, net of recoveries $2,326.
Other income was $2.9 million in the second quarter 1998 compared to $1.2
million in the second quarter 1997. Other income totaled $5.7 million for the
first six months of 1998 compared to $2.5 million for the first six months of
1997. The increase in other income was related to the increase of gains on the
sale of mortgage servicing rights. During the first six months of 1998, the
Company sold servicing rights with respect to $691.8 million of mortgage loans
for a gain of $3.5 million. During the first six months of 1997, the Company
sold servicing rights with respect to $214.3 million of mortgage loans for a
gain of $665,537. 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 $3.8 million in the second quarter 1998
from $1.9 million in the second quarter 1997. Other operating expenses totaled
$6.8 million in the first six months of 1998 compared to $3.7 million in the
first six months of 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 $474,736 or $.55 per share for the second
quarter 1998. Net income for the six months ended June 30, 1998 totaled
$1,234,092 or $1.52 per share. The increase in net income 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 the first six months of 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.
15
<PAGE>
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.
The Company is presently taking steps to identify and avoid potential
adverse effects of the Year 2000 Problem on its systems and to minimize the
effects of such problems on the Company's operations. The Company's Year 2000
Committee, which is comprised of data processing personnel and a cross section
of the Company's various departments including certain members of the Company's
senior management (the "Committee"), assesses and tests the Company's computer
systems to determine whether such systems are Year 2000 compliant. After
identifying certain items as "mission critical," the Committee then works to
develop a testing and contingency plan to ensure that these items will continue
to operate properly following the Year 2000 date change. Based upon the
findings and progress of the Committee, management is hopeful that all of the
Company's computer systems will become Year 2000 compliant in a timely manner
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.
16
<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 - Not Applicable
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.
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: August 12, 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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,032
<INT-BEARING-DEPOSITS> 899
<FED-FUNDS-SOLD> 7,530
<TRADING-ASSETS> 98,827
<INVESTMENTS-HELD-FOR-SALE> 2,832
<INVESTMENTS-CARRYING> 2,832
<INVESTMENTS-MARKET> 2,832
<LOANS> 37,438
<ALLOWANCE> 587
<TOTAL-ASSETS> 159,037
<DEPOSITS> 79,035
<SHORT-TERM> 36,785
<LIABILITIES-OTHER> 0
<LONG-TERM> 31,023
0
0
<COMMON> 863
<OTHER-SE> (33,401)
<TOTAL-LIABILITIES-AND-EQUITY> 159,037
<INTEREST-LOAN> 2,042
<INTEREST-INVEST> 79
<INTEREST-OTHER> 10
<INTEREST-TOTAL> 5,852
<INTEREST-DEPOSIT> 1,690
<INTEREST-EXPENSE> 2,505
<INTEREST-INCOME-NET> 3,347
<LOAN-LOSSES> 73
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,788
<INCOME-PRETAX> 2,136,940
<INCOME-PRE-EXTRAORDINARY> 2,136,940
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,234,092
<EPS-PRIMARY> 1.52
<EPS-DILUTED> 1.50
<YIELD-ACTUAL> 8.89
<LOANS-NON> 86
<LOANS-PAST> 233
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 585
<ALLOWANCE-OPEN> 515
<CHARGE-OFFS> 1
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 587
<ALLOWANCE-DOMESTIC> 515
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 72
</TABLE>
