<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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, 1,725,508 shares issued and
outstanding as of November 10, 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
FINANCIAL INFORMATION
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,635,063 $ 3,319,054
Federal funds sold 16,660,000 1,310,000
Interest bearing deposits in other banks 737,349 1,080,469
Securities available for sale 3,241,782 2,784,066
Mortgage loans held for sale 83,477,931 49,398,871
Loans 40,541,948 36,650,206
Less allowance for loan losses (651,090) (514,634)
------------ ------------
Loans, net 39,890,858 36,135,572
Premises and equipment, net 2,874,447 2,279,394
Other real estate owned 243,249 151,909
Purchased mortgage servicing rights 3,698,231 4,143,563
Accounts receivable-brokers and escrow agents 2,814,964 3,295,462
Other assets 1,182,925 647,220
------------ ------------
TOTAL ASSETS $156,456,799 $104,545,580
============ ============
LIABILITIES
Deposits
Noninterest -bearing demand deposits $ 15,035,314 $ 22,437,331
Interest -bearing demand 15,260,600 15,299,574
Savings 5,571,762 1,500,665
Time, $100,000 and over 14,649,917 9,859,062
Other time 33,460,064 26,584,252
------------ ------------
Total deposits 83,977,657 75,680,884
Drafts payable 18,910,066 3,163,349
Deferred taxes payable 2,100,874 1,494,465
Accrued interest and other liabilities 2,256,386 968,414
Other borrowings 36,317,754 14,308,650
------------ ------------
Total liabilities 143,562,737 95,615,762
SHAREHOLDERS' EQUITY
Common stock, par value $1.00; 2,500,000 shares authorized;
1,725,508 and 1,452,708 issued and outstanding, respectively 1,725,508 1,452,708
Surplus 8,574,948 5,822,832
Retained earnings 2,618,457 1,693,113
Less cost of 3,334 shares acquired for the treasury (36,091) (36,091)
Accumulated other comprehensive income 11,240 (2,744)
------------ ------------
Total stockholders' equity 12,894,062 8,929,818
------------ ------------
Total liabilities and stockholders' equity $156,456,799 $104,545,580
============ ============
</TABLE>
See notes to Consolidated Financial Statements.
3
<PAGE>
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans 1,039,999 939,312 3,082,342 2,498,529
Interest and fees on mortgage loans held for sale 1,776,989 1,139,377 5,008,776 2,677,881
Interest on securities:
Taxable 41,118 34,995 120,316 88,403
Nontaxable 3,838 3,888 13,775 11,514
Interest on deposits in other banks 31,921 18,098 95,729 48,965
Interest on Federal funds sold 25,491 21,378 95,301 71,665
--------- --------- --------- ---------
2,919,356 2,157,048 8,416,239 5,396,957
Interest expense
Interest on deposits 931,319 696,646 2,621,388 1,936,096
interest on other borrowings 541,060 184,694 1,356,384 342,851
--------- --------- --------- ---------
1,472,379 881,340 3,977,772 2,278,947
Net interest income 1,446,977 1,275,708 4,438,467 3,118,010
Provision for loan losses 30,000 67,800 103,000 143,120
--------- --------- --------- ---------
Net interest income after provision for loan losses 1,416,977 1,207,908 4,335,467 2,974,890
Other income
Service charges on deposit accounts 43,468 52,011 141,512 158,861
Mortgage servicing fee income 211,238 253,308 705,615 741,593
Gestation fee income 790,871 346,957 1,556,894 917,665
Gains on sale of mortgage servicing rights 2,593,157 984,711 6,119,068 1,650,248
Gains on sale of mortgage loans held for sale 426,800 232,324 1,175,339 850,508
Other 23,917 27,301 42,681 46,107
--------- --------- --------- ---------
4,089,451 1,896,612 9,741,109 4,364,982
Other expenses
Salaries and employee benefits 2,131,896 1,000,936 5,411,564 2,734,469
Net occupancy and equipment expense 195,146 99,428 514,196 274,646
Supplies, postage, and telephone 295,367 169,448 773,786 468,266
Advertising 175,591 144,024 408,171 420,772
Insurance expense 29,085 21,272 78,490 67,542
Depreciation and amortization 420,918 217,257 972,932 629,899
Legal and professional 599,180 240,577 1,454,304 586,785
Director fees 32,825 33,350 112,225 98,200
Mortgage subservicing expense 66,491 77,570 225,437 235,709
Other 268,743 149,808 697,345 351,725
--------- --------- --------- ---------
4,215,242 2,153,670 10,648,450 5,868,013
Income before income taxes 1,291,186 950,850 3,428,126 1,471,859
Applicable income taxes 541,261 381,270 1,444,109 583,768
--------- --------- --------- ---------
Net income 749,925 569,580 1,984,017 888,091
--------- --------- --------- ---------
Other comprehensive income, net of tax
Unrealized gains/(losses) on securities available
for sale arising during period 19,926 0 13,984 0
--------- --------- --------- ---------
Comprehensive income 769,851 569,580 1,998,001 888,091
========= ========= ========= =========
Basic earnings per common share $0.44 $0.40 $1.20 $0.63
Diluted earnings per common share $0.42 $0.40 $1.17 $0.63
Cash dividends per share of common stock $0.043 $0.030 $0.120 $0.090
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1998 1997
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income 1,984,017 888,091
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan loss 103,000 143,120
Depreciation and amortization 972,932 629,899
Provision for deferred taxes 606,409 581,872
Gains on sales of mortgage servicing rights (6,119,068) (1,650,248)
Increase in mortgage loans held for sale (34,079,050) (21,816,651)
Increase in interest receivable (358,180) (188,259)
Decrease in accounts receivable 480,498 48,956
Increase in drafts payable 15,746,717 11,596,116
Increase (decrease) in interest payable (38,289) 4,066
Increase in other assets and liabilities, net 1,148,736 (112,785)
----------- ----------
Net cash used in operating activities (19,552,278) (9,875,823)
INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits
in other banks 343,120 (487,606)
Proceeds from sale of securities available for sale 512,500 1,029,442
Acquisition of securities available for sale (956,232) (2,115,661)
Proceeds from maturities of securities held to maturity -- 47,610
Acquisition of purchased mortgage servicing rights (10,007,462) (5,036,755)
Proceeds from sales of purchased mortgage
servicing rights 15,897,352 6,216,069
Increase in Federal funds sold, net (15,350,000) (140,000)
Net increase in loans (3,949,626) (6,462,805)
Purchase of premises and equipment (893,485) (183,182)
----------- ----------
Net cash provided by (used in) investing activities (14,403,833) (7,132,888)
FINANCING ACTIVITIES
Net increase in deposits 8,296,773 7,322,320
Net increase in other borrowings 22,009,104 9,846,997
Proceeds form the issuance of common stock 2,139,762 --
Proceeds from exercise of stock options 22,400 15,000
Dividends paid (195,919) (126,371)
----------- ----------
Net cash provided by financing activities 32,272,120 17,057,946
Net increase in cash and cash equivalents (1,683,991) 49,235
Cash and cash equivalents at beginning of year 3,319,054 3,011,864
----------- ----------
Cash and cash equivalents at end of year 1,635,063 3,061,099
=========== ==========
Supplemental Disclosure of Cash Flow Information
Cash paid during period for interest 4,016,061 2,274,881
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September
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
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 September 30, 1998, the Company had purchased loans for which it
provides servicing with principal balances totaling $443.5 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 at
January 1, 1998 are outlined in the table below. Net deferred income tax
liabilities of $2,100,874 and $1,494,465 at September 30, 1998 and December 31,
1997, respectively, are included in other liabilities.
6
<PAGE>
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):
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998
-----------------------------------------
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ---------
<S> <C> <C> <C>
Basic EPS $ 749,925 1,725,508 $ .44
=====
Effect of Dilutive Securities
Stock Options -- 55,928
---------- ---------
Diluted EPS $ 749,925 1,781,436 $ .42
========== ========= =====
Nine Months Ended September 30, 1998
-----------------------------------------
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ---------
<S> <C> <C> <C>
Basic EPS $1,984,017 1,654,636 $1.20
Effect of Dilutive Securities =====
Stock Options -- 42,939
---------- ---------
Diluted EPS $1,984,017 1,697,575 $1.17
========== ========= =====
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1997
----------------------------------------
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
<S> <C> <C> <C>
Basic EPS $569,580 1,412,708 $.40
Effect of Dilutive Securities ====
Stock Options -- --
-------- ---------
Diluted EPS $569,580 1,412,708 $.40
-------- --------- ====
Nine Months Ended September 30, 1997
----------------------------------------
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ----------------- ---------
Basic EPS $888,091 1,409,924 $.63
Effect of Dilutive Securities ====
Stock Options -- --
-------- ---------
Diluted EPS $888,091 1,409,924 $.63
-------- --------- ====
</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 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 September 30, 1998 was
$749,925 compared to net income of $569,580 for the quarter ended September 30,
1997. Net income for the first nine months of 1998 of $1,984,017 compares to
$888,091 for the first nine months of 1997. The increase in net income from the
first nine months of 1997 to the first nine months of 1998 was primarily the
result of higher level of mortgage production.
Balance Sheets
- --------------
The Company's assets increased 50% during the first nine months of 1998
from $104.5 million as of December 31, 1997 to $156.5 million as of September
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 $15.7
million increase in drafts payable and a $22 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 nine 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 $144.7 million or 92.5% of total assets
at September 30, 1998. This represents a 59% 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 $34.2 million or 69%
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 nine months ended September 30, 1998 of $72.2
million constituted 61.5% of average earning assets and 56.1% of average total
assets. Average mortgage loans held for sale for the nine months ended
September 30, 1997 of $32.4 million constituted 47.2% of average interest-
earning assets and 40.5% of average total assets.
During the first nine months of 1998, average commercial banking loans were
$38.3 million and constituted 32.6% of average earning assets and 29.7% of
average total assets. For the first nine months of 1997, average commercial
banking loans were $31.4 million and constituted 45.7% of average earning assets
and 39.3% 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 $651,090 or 1.60% of total commercial banking loans at September 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 nine months of 1998 was
the result of the provision for loan loss of $103,000 in addition to a recovery
of $62,612. 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 September 30, 1998, the Bank had no loans accounted for on a
non-accrual basis, $46,344 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 $243,249 with
non-performing loans results in non-performing assets of $243,249 at September
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. Of the $1.6 million loans identified by management as potential problem
loans at September 30, 1998, $1.0 million relates to one borrower.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
-------------------------------------------------
<S> <C> <C>
Non-performing loans (1) $ -- $ --
Foreclosed properties 243,249 151,909
---------- ----------
Total non-performing assets 243,249 151,909
========== ==========
Loans 90 days or more past due on accrual status $ 46,344 $ 61,421
Potential problem loans (2) 1,590,109 672,460
Potential problem loans/total loans 3.92% 1.83%
Non-performing assets/total loans
and foreclosed properties 0.60% 0.41%
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Non-performing assets and loans 90 days
or more past due on accrual status/
total loans and foreclosed properties .71% .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 $4.0 million at September
30, 1998 compared to $3.9 million at December 31, 1997. Federal funds sold
totaled $16.7 million at September 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. In the third
quarter, CMS begun the process of opening an office in Chicago, Illinois. At
November 10, 1998, CMS had executed a lease for office space in Illinois and
hired a staff of nine.
The Bank's acquisition of loans are funded through various sources,
including the Bank's regular funding sources, an $26.5 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 nine months of 1998, the Mortgage Division acquired $1.2
billion of mortgage loans, of which $1.1 billion (97%) were resold in the
secondary market. Mortgage loans of $83.5 million were carried as held for sale
on the balance sheet at September 30, 1998 as sale of the loans was pending.
During the first nine months of 1997, the Mortgage Division acquired $504.4
million of mortgage loans.
At September 30, 1998, capitalized costs of $3.7 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 September 30, 1998, the Company held servicing rights
with respect to loans with unpaid principal balances totaling $443.5 million
compared to $427.7 at December 31, 1997. During the first nine months of 1998,
the Company sold servicing rights with respect to $1.064 billion of mortgage
loans carried on its balance sheet at $9.9 million for a gain of $6.1 million.
During the first nine months of 1997, the Company sold servicing rights with
respect to $449.1 million of mortgage loans for a gain of $1.7 million. 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
11
<PAGE>
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.
The Bank's deposits totaled $83.9 million at September 30, 1998 compared to
$75.7 million at December 31, 1997. Deposits averaged $77.1 million for the
nine months ended September 30, 1998. Interest-bearing deposits represented 82%
of total deposits at September 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 September 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 September 30, 1998 the Bank's leverage ratio was 7.79%.
At September 30, 1998 the Company's total shareholders' equity was $12.9
million or 8.24% 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 14.05%,
with 13.38% consisting of tangible common shareholders' equity at September 30,
1998. The Company paid $195,919 of dividends during the first three quarters of
1998 or $.12 per share. The Company has declared an $.045 per share dividend
payable on November 13, 1998 to shareholders of record on October 31, 1998. The
Company completed a two for one stock split on September 30, 1998 resulting in
1.7 million shares outstanding. 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 $57.0 million for the nine months ended September 30, 1998,
representing 73.9% 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 93% of average deposits for the nine
months ended September 30, 1998. Average non-mortgage loans were 53% of average
deposits for the year 1997. Average deposits were 65.8% of average interest-
earning assets for the nine months ended September 30, 1998. Average deposits
were 78% of average interest-earning assets for the year 1997.
12
<PAGE>
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.
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 $5.3
million at September 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 September 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 September 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 $39.4 million, or 25.2% of total assets.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY GAPS
AS OF SEPTEMBER 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 $121.9 $ 6.3 $13.5 $3.0
Interest-bearing
Liabilities 65.3 25.2 14.8 --
---------------------------------------------------
Interest sensitivity
gap $ 56.6 $(18.9) $(1.3) $3.0
===================================================
</TABLE>
13
<PAGE>
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 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 September 30, 1998,
the Bank had in place purchase commitment agreements terminating between October
and December of 1998 with respect to an aggregate of approximately $137.4
million to hedge the mortgage pipeline of $227.1 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 $2.9 million for the three months ended
September 30, 1998 compared to $2.2 million for the three months ended September
30, 1997. The Company had interest income of $8.4 million for the nine months
ended September 30, 1998 compared to $5.4 million for the nine months ended
September 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 $1.2 billion
of mortgage loans during the first nine months of 1998 compared to $504.4
million during the first nine 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 $1.5 million for the three months ended
September 30, 1998 and $881,340 for the three months ended September 30, 1997.
The Company had interest expense of $4.0 million for the nine months ended
September 30, 1998 and $2.3 million for the nine months ended September 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 third quarters 1998 and 1997, interest
expense accounted for 25% and 28% of total expenses, respectively. For the
first nine months of 1998 and 1997, interest expense accounted for 27% and 28%
of total expenses, respectively.
14
<PAGE>
Net interest income for the third quarter 1998 was $1.4 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 third quarter 1998 was 6.1%. Interest spread, which
represents the difference between average yields on interest-earning assets and
average rates paid on interest-bearing liabilities, was 5.6%. Net interest
income, interest margin and net interest spread for the third quarter 1997 were
$1.3 million, 6.4%, and 5.9%, respectively. The increase in net interest income
is 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 $103,000 in
the first nine months of 1998. The Company made provisions to the allowance for
loan losses in the amount of $143,120 in the first nine months of 1997. During
the first nine months of 1998, the Bank had net recoveries of $33,456 recorded
to the allowance for loan losses. During the first nine months of 1997, the
Bank had charge-off, net of recoveries $3,554.
Other income was $4.1 million in the third quarter 1998 compared to $1.9
million in the third quarter 1997. Other income totaled $9.7 million for the
first nine months of 1998 compared to $4.4 million for the first nine 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 nine months of 1998, the
Company sold servicing rights with respect to $1.1 billion of mortgage loans for
a gain of $6.1 million. During the first nine months of 1997, the Company sold
servicing rights with respect to $449.1 million of mortgage loans for a gain of
$1.6 million. 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 $4.2 million in the third quarter 1998
from $2.2 million in the third quarter 1997. Other operating expenses totaled
$10.6 million in the first nine months of 1998 compared to $5.9 million in the
first nine 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 $749,925 or $.44 per share for the third quarter
1998. Net income for the nine months ended September 30, 1998 totaled
$1,984,017 or $1.20 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 nine 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
15
<PAGE>
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.
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: November 10, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,635
<INT-BEARING-DEPOSITS> 737
<FED-FUNDS-SOLD> 16,660
<TRADING-ASSETS> 83,478
<INVESTMENTS-HELD-FOR-SALE> 3,242
<INVESTMENTS-CARRYING> 3,242
<INVESTMENTS-MARKET> 3,242
<LOANS> 40,542
<ALLOWANCE> 651
<TOTAL-ASSETS> 156,457
<DEPOSITS> 83,978
<SHORT-TERM> 36,318
<LIABILITIES-OTHER> 23,266
<LONG-TERM> 0
0
0
<COMMON> 1,726
<OTHER-SE> 11,168
<TOTAL-LIABILITIES-AND-EQUITY> 156,457
<INTEREST-LOAN> 3,082
<INTEREST-INVEST> 120
<INTEREST-OTHER> 14
<INTEREST-TOTAL> 8,416
<INTEREST-DEPOSIT> 2,621
<INTEREST-EXPENSE> 3,978
<INTEREST-INCOME-NET> 4,438
<LOAN-LOSSES> 103
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,788
<INCOME-PRETAX> 3,428,126
<INCOME-PRE-EXTRAORDINARY> 3,428,126
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,984,017
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1,17
<YIELD-ACTUAL> 9.62
<LOANS-NON> 0
<LOANS-PAST> 46
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,590
<ALLOWANCE-OPEN> 515
<CHARGE-OFFS> 29
<RECOVERIES> 62
<ALLOWANCE-CLOSE> 651
<ALLOWANCE-DOMESTIC> 582
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 69
</TABLE>
