<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 12, 1998
REGISTRATION NO. 333-______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_________________
CRESCENT BANKING COMPANY
(Name of small business issuer in its charter)
GEORGIA 6711 58-1968323
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation) Classification Code Number) Identification No.)
251 HIGHWAY 515
JASPER, GEORGIA 30143
(706) 692-2424
(Address and telephone number of principal executive offices)
J. DONALD BOGGUS, JR., PRESIDENT
CRESCENT BANKING COMPANY
251 HIGHWAY 515
JASPER, GEORGIA 30143
(706) 692-2424
(Name, address and telephone number of agent for service)
COPIES TO:
RALPH F. MACDONALD, III
ALSTON & BIRD LLP
ONE ATLANTIC CENTER
1201 WEST PEACHTREE STREET
ATLANTA, GEORGIA 30309-3424
(404) 881-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED (1) SHARE (1) PRICE (1) FEE
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Common Stock 135,000 Shares $15.50 $2,092,500 $618.00
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(e).
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION,
DATED JANUARY 12, 1998
CRESCENT BANKING COMPANY
135,000 SHARES OF COMMON STOCK
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Crescent Banking Company, a Georgia corporation (the "Company"), hereby offers
135,000 shares (the "Shares") of common stock, $1.00 par value per share
("Common Stock"). From ______________, 1998 until 5:00 P.M. Eastern Time, on
______________, 1998 (the "Initial Offering Period"), shareholders of record of
the Company's Common Stock, including any directors or officers of the Company
who are shareholders (each, a "Shareholder"), as of the close of business on
_____________, 1998 (the "Record Date") will have the opportunity to subscribe
for Shares at a purchase price of $_______ per Share. During the Initial
Offering Period, each Shareholder will be entitled to purchase a number of
Shares equal to the product of (i) _____ and (ii) the number of shares of Common
Stock owned by such Shareholder as of the Record Date. Subscriptions are not
limited to such pro rata amounts. As to any oversubscriptions, the Company
intends, for five business days following the expiration of the Initial Offering
Period, to accept or reject such oversubscriptions, with acceptance on a pro
rata basis based on the number of Shares owned by each Shareholder as of the
Record Date, with any fractional Shares rounded down to the nearest whole number
of Shares. Thereafter, any remaining Shares may be sold to anyone, but it is
presently expected that the directors and officers of the Company will purchase
the remaining Shares, if any, and that Mr. Michael Lowe, a director of the
Company, will purchase substantially all of the remaining unsold Shares, subject
to obtaining any necessary regulatory approvals. The termination date of the
Initial Offering Period may be extended in the discretion of the Company for
periods of 30 days. There is no minimum offering. All Shares subject to
accepted subscriptions will be sold, but no assurance is given as to whether all
Shares subject to this Offering will be sold. See "The Offering."
--------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN EVALUATING AN INVESTMENT IN THE
COMMON STOCK.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSIT ACCOUNTS
AND ARE NOT GUARANTEED OR INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<S> <C> <C> <C>
Price to Public Fees and Commissions (1) Proceeds to Company (2)
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Per Share.... $ _____ $
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Total (3).... $ _____ $
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(1) Offers and sales of the Common Stock will be made on behalf of the Company
by certain of its executive officers in reliance on Commission Rule 3a4-1
under the Securities Exchange Act of 1934. Such officers will receive no
special compensation, commissions or other remuneration for such activities,
but may be reimbursed for reasonable expenses, if any, incurred in
connection therewith. See "The Offering"
(2) Before deducting expenses of the Offering, estimated to be $45,618, all of
which will be paid by the Company.
(3) Assumes the sale of all Shares of Common Stock offered hereby.
The Company reserves the right, in its sole discretion, to reject any
subscription in whole or part, to allocate Common Stock among subscribers, and
to withdraw, cancel or modify the Offering without notice. Subscriptions are
not binding obligations of the Company until accepted by the Company in writing.
In determining which subscriptions and oversubscriptions to accept, in whole or
part, the Company may take into account various factors, including a
subscriber's potential to do business with, or refer customers to, the Company
and the order in which the subscriptions were received.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
JANUARY__, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations thereunder, and in accordance therewith files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information may be
inspected and copied at the principal office of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the
Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York, New
York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a
site on the World Wide Web at http://www.sec.gov that contains reports, proxy
statements and other information filed electronically with the Commission
through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") System.
The Company has filed with the Commission a Registration Statement on
Form SB-2 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act") with respect to the Shares of Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in schedules and exhibits to the
Registration Statement, as permitted by the rules and regulations of the
Commission. Statements contained in this Prospectus concerning the provisions
of certain documents filed with the Commission are not necessarily complete, and
each such statement is qualified in its entirety by such reference. No person
is authorized to give any information or make any representation not contained
in this Prospectus, and if given or made, such information or representation
should not be relied upon as having been authorized.
NOTICE TO FLORIDA RESIDENTS
If sales are made to five or more persons in the State of Florida, any
sale in Florida made pursuant to Section 517.061(11)(a) of the Florida
Securities and Investor Protection Act is voidable by the purchaser in such sale
within three days after the first tender of consideration is made by such
purchaser to the Company or an agent of the Company.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Prospectus may constitute forward-looking statements for the
purposes of the Securities Act and the Exchange Act 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. Such forward-looking statements are made
based on management's belief as well as assumptions made by, and information
currently available to, management. 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 the
Company's growth and whether such growth is sustainable in future economic
circumstances; governmental monetary and fiscal policies, as well as legislative
and regulatory changes; the risks of changes in interest rates on the level and
composition of deposits, loan demand, the values of loan collateral and
securities, and the volume of mortgage originations; the effects of competition
from 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/or the Internet; and the failure of
assumptions underlying the establishment of the allowance for loan losses,
including the value of collateral underlying delinquent loans and other factors.
The Company cautions that such factors are not exclusive. All written or oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by these cautionary statements.
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<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more
detailed information and the Financial Statements and Supplementary Data,
appearing elsewhere in this Prospectus.
THE COMPANY
The Company is a Georgia corporation that is registered as a bank
holding company with the Board of Governors of the Federal Reserve System (the
"Federal Reserve") under the Federal Bank Holding Company Act of 1956, as
amended (the "BHC Act"), and with the Georgia Department of Banking and Finance
(the "Georgia Department") under the Financial Institutions Code of Georgia.
The Company was incorporated on November 19, 1991, to facilitate a
reorganization (the "Reorganization") pursuant to which the Company became the
parent holding company of Crescent Bank and Trust Company (the "Bank"). The
Reorganization was completed on May 1, 1992. The Company also owns 100% of
Crescent Mortgage Services, Inc. ("CMS," and, together with the Bank, the
"Subsidiaries"), which offers wholesale mortgage banking services in the New
England states and provides servicing for residential mortgage loans. As of
September 30, 1997, the Company had total consolidated assets of approximately
$105.3 million, total deposits of approximately $63.1 million and consolidated
shareholders' equity of approximately $8.5 million.
The Bank is a Georgia banking corporation that has been engaged in the
general commercial banking business since it opened for business in August 1989.
The Bank began wholesale mortgage banking operations in February 1993. The Bank
is a member of the Federal Deposit Insurance Corporation ("FDIC") and its
deposits are insured by the FDIC's Bank Insurance Fund ("BIF"). The Bank is
also a member of the Federal Home Loan Bank of Atlanta ("FHLB-Atlanta").
Through the Bank, the Company provides a broad range of banking and financial
services in the areas surrounding Jasper, Georgia, and wholesale mortgage
banking services to correspondents located in the Atlanta, Georgia metropolitan
area and throughout the Southeast United States.
CMS was incorporated as a separate subsidiary of the Company on
October 11, 1994, to engage in the servicing of mortgage loans. CMS is an
approved servicer of mortgage loans sold to the Federal Home Loan Mortgage
Corporation ("Freddie Mac"), Federal National Mortgage Association ("Fannie
Mae") and private investors. In December 1996, CMS opened a wholesale mortgage
banking operation in the Northeast United States.
The principal executive offices of the Company, the Bank and CMS are
located at 251 Highway 515, Jasper, Georgia 30143. The Company's telephone
number is (706) 692-2424.
THE OFFERING
Securities Offered............................... 135,000 Shares of Common Stock
Common Stock Outstanding as of the Record Date... 726,354 shares
Common Stock Outstanding after the Offering...... 861,354 shares/(l)/
- ----------
(1) Assumes the sale of all of the 135,000 Shares of Common Stock offered
hereby, although there is no assurance that all Shares offered will be sold.
See "Risk Factors -- No Underwriting/No Minimum Number of Shares Required to Be
Sold."
Use of Proceeds......... To support the entry by CMS into making and servicing
Federal Housing Administration ("FHA") mortgage loans,
to increase capital to support future growth and for
general corporate purposes. See "Use of Proceeds."
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<PAGE>
Structure of Offering... A total of 135,000 Shares of Common Stock will be
offered to Shareholders of the Company as of the Record
Date. During the Initial Offering Period, Shareholders
will have the opportunity to subscribe for Shares at a
purchase price of $_______ per share. Each Shareholder
will be entitled to purchase a number of Shares equal
to the product of (i) _____ and (ii) the number of
shares of Common Stock owned by such Shareholder as of
the Record Date. Subscriptions are not limited to such
pro rata amounts. As to any oversubscriptions, the
Company intends, for five business days following the
expiration of the Initial Offering Period, to accept or
reject such oversubscriptions, with acceptance on a pro
rata basis based on the number of Shares owned by each
Shareholder as of the Record Date, with any fractional
Shares rounded down to the nearest whole number of
Shares. Thereafter, any remaining Shares may be sold
to anyone, but it is presently expected that the
directors and officers of the Company will purchase the
remaining Shares, if any, and that Mr. Michael Lowe, a
director of the Company, will purchase substantially
all of the remaining unsold Shares, subject to
obtaining any necessary regulatory approvals. The
termination date of the Initial Offering Period may be
extended in the discretion of the Company for periods
of 30 days. There is no minimum offering. All Shares
subject to accepted subscriptions will be sold, but no
assurance is given as to whether all Shares subject to
this Offering will be sold. See "The Offering."
RISK FACTORS
An investment in the Common Stock involves certain risks. Investors
should carefully evaluate these risks before making an investment decision. See
"Risk Factors."
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<PAGE>
CRESCENT BANKING COMPANY
SUMMARY FINANCIAL DATA
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NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
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1997 1996 1996 1995
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<S> <C> <C> <C> <C>
(UNAUDITED)
(Dollars in thousands, except per share data)
EARNINGS
Total interest income $ 5,397 $ 3,870 $ 5,334 $ 4,141
Total interest expense 2,879 1,542 2,162 1,536
Net interest income 3,118 2,328 3,172 2,605
Provision for loan losses 143 -- -- 497
Non-interest income 4,365 2,988 4,009 3,399
Non-interest expense 5,868 4,568 6,205 5,359
Net income 888 425 583 89
PER SHARE DATA
Net income $ 1.26 $ 0.60 $ 0.83 $ 0.13
Shareholders' equity (Book value) 11.96 10.71 10.89 10.11
Cash dividends .18 -- 0.050 0.250
Weighted average number of shares
outstanding 705,431 704,854 701,520 703,037
SELECTED AVERAGE BALANCES
Assets $ 79,979 $ 59,948 $ 62,454 $ 51,038
Loans (net of unearned income) 31,771 25,711 26,048 18,509
Deposits 59,164 46,747 47,085 38,145
Shareholders' equity 7,965 7,364 7,370 7,076
SELECTED PERIOD-END BALANCES
Assets $105,319 $ 67,813 $ 74,652 $ 57,384
Loans (net of unearned income) 35,535 26,911 28,165 23,635
Allowance for loan losses 475 401 336 566
Deposits 63,068 49,514 55,746 40,498
Other borrowings 17,244 1,650 7,397 --
Shareholders' equity 8,451 7,551 7,674 7,126
SELECTED RATIOS
Return on average total assets 1.11% .84% .93% .17%
Return on average equity 14.90 7.75 7.92 1.26
Average earning assets to average
total assets 86.60 82.70 84.00 79.00
Average loans to average deposits 53.00 55.00 55.30 48.50
Average equity to average total assets 9.96 10.50 11.80 13.86
Net interest margin 6.10 6.20 6.04 6.45
Net charge offs to average loans .01 .61 .89 1.11
Non-performing assets to period end
loans .01 1.02 3.14 2.33
Allowance for loan losses to net loans
(period-end) 1.34 1.49 1.18 2.34
Tier 1 leverage ratio 8.83 12.14 10.67 11.45
Risk-based capital
Tier 1 capital 11.69 14.60 13.78 14.90
Total capital 12.34 15.40 14.40 16.20
</TABLE>
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<PAGE>
RISK FACTORS
An investment in the Shares offered hereby involves various risks and should
be made only after careful consideration of the following considerations, among
others.
OFFERING PRICE
The price of the Common Stock offered hereby has been determined solely by the
Company's Board of Directors, without negotiation or independent valuation, and
may bear no relationship to the market price of the Common Stock after the
Offering. In fixing the price, the Board considered, among other things, the
Company's shareholders' equity (book value), earnings, and prospects, and the
offering prices of other bank holding company shares. There is no assurance
that purchasers will be able to sell their Common Stock at the same or a higher
price than that paid for the Shares. See "Summary" and "The Offering --
Determination of the Offering Price."
NO ESTABLISHED TRADING MARKET
No active trading market exists for the Common Stock, and the Company has no
reason to believe that a more active trading market will develop in the
foreseeable future. There are no present plans for the Common Stock to be
listed or qualified for trading on any securities exchange or in the Nasdaq
markets. Two independent broker-dealers make a market in the Common Stock.
Officers and directors of the Company and the Bank are expected to purchase any
remaining shares that are not subscribed for by Shareholders. The ability of a
Shareholder to sell shares of Common Stock and the price at which the Common
Stock may be sold could be affected by fluctuations in the securities markets,
and bank stocks generally, in response to variations in interest rates, periodic
operating results and other factors. In addition, the stock market in recent
years has experienced price and volume fluctuations that often have been
unrelated or disproportionate to the operating performance of specific
companies. These broad fluctuations may adversely affect the price of the
Common Stock. See "The Offering" and "Market Information and Dividends."
DIVIDEND POLICY
The Company has paid dividends on its Common Stock since the fourth quarter
1996, and the Company anticipates continuing its dividend policy in the
foreseeable future. The Company anticipates retaining a substantial percentage
of its earnings to pay interest on, and principal of, the Company's
indebtedness, and to finance the Company's growth. The declaration and payment
of dividends on the common stock of the Bank are limited by law and regulation.
The Company paid no cash dividends prior to 1994 and a dividend of $.375 per
share in 1994. In 1995, the dividend was reduced to $.25 per share following
the realization of certain loan losses attributable to prior management, and no
dividends were paid until the fourth quarter 1996. The Company is expected to
remain dependent upon the adequacy of the Bank's earnings and capital position
for funds, through dividends, sufficient to pay the principal of, and interest
on, the Company's indebtedness and other obligations, as well as dividends on
the Company's Common Stock. Regulatory restrictions, including the obligation
to maintain sufficient capital in the Bank and general restrictions on dividends
applicable to national and state member banks, limit the amount available for
payment of dividends on the Bank's common stock. Federal Reserve policy
currently also limits the amount available for payment of dividends on the
Company's Common Stock without prior Federal Reserve approval if the ratio of
the Company's debt to equity exceeds 30%. The Federal Reserve may, upon
application, waive such restrictions. The declaration and payment of such
dividends are also dependent upon, among other factors, the prior payment of
interest on, and principal of, the Bank's deposits and other indebtedness, the
maintenance of adequate capital in the Bank and the Company, and the prior
payment of interest on, and principal of, the Company's indebtedness, and other
expenses. See "Market Information and Dividends" and "Supervision and
Regulation."
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<PAGE>
DILUTION OF PERCENTAGE OWNERSHIP
A current holder of Common Stock will suffer dilution in his or her percentage
interest in the aggregate outstanding shares of Common Stock to the extent that
such holder does not purchase the total number of Shares to which he is entitled
on a pro rata basis.
OPERATING HISTORY
The Company and its Subsidiaries have experienced rapid growth throughout
their relatively short operating histories. The Bank and the Company were
incorporated in 1989 and 1991, respectively, and CMS was incorporated in 1994.
The rapid growth of the Company, the Bank and CMS has placed, and will continue
to place, demands on their management and other resources and there is no
assurance that these demands can be successfully met.
ECONOMIC CONDITIONS
The financial condition and performance of the Company are affected by the
economic conditions in their respective markets. The Bank's market currently
consists of Jasper, Georgia and surrounding areas. The Bank's market is
primarily retail-oriented and the operations of the Bank are dependent upon
local individuals and small to medium sized businesses located within its market
area.
The market area of CMS is geographically broader and consists of the Southeast
and Northeast United States. CMS' operations rely largely on small to medium
sized mortgage brokers and mortgage bankers in such areas. There can be no
assurance that the current economic performance in the market areas of the Bank
and CMS will be sustained, and any significant downturn in the local economies
of these market areas will likely affect loan demand in the market area and the
value of collateral which secures such loans. See "Business -- Market Area."
EFFECTS OF INFLATION, CHANGING PRICES AND INTEREST RATES
Inflation generally increases the costs 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 effect 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 are
accompanied by increases in interest rates. In addition, inflation increases
financial institutions' 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, mortgages and mortgage servicing rights and loans held, and may
adversely affect liquidity, earnings, and shareholders' equity. Mortgage
originations and refinancings tend to slow as interest rates increase, and
inflation would likely reduce the valuation of earnings from such activities and
the income from the sale of residential mortgage loans in the secondary market.
A substantial and sustained increase in interest rates could adversely affect
the Company's ability to originate and purchase loans. A significant decline in
interest rates could increase the level of loan prepayments and result in the
Company writing down the value of its mortgage servicing rights, thereby
adversely affecting earnings. The Company attempts to reduce potential interest
rate risks through various "hedging" techniques, including forward contracts to
purchase loans from the Company in the secondary market and options to deliver
to the secondary market a mortgage-backed security. The nature and quantity of
hedging transactions are determined by the Company's management based on various
factors, including market conditions and the expected volume of mortgage loan
originations and purchases. No assurance can be given that such hedging
transactions will offset the risks of changes in interest rates, and it is
possible that there will be periods during which the Company could incur losses
after accounting for its hedging activities.
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<PAGE>
DEPENDENCE ON KEY PERSONNEL
The success of the Company is, and is expected to remain, highly dependent on
the executive officers of the Company, the Bank and CMS, especially Messrs. J.
Donald Boggus, Jr. and Robert C. KenKnight. The rapid growth of the Company and
its Subsidiaries will continue to place significant demands on their management,
and the loss of any such persons' services could have an adverse effect upon the
Company.
COMPETITION
The commercial and mortgage banking businesses are highly competitive. The
Bank and CMS compete with a variety of financial institutions, many of which
have substantially greater resources and lending limits, more diversified
markets and larger branch networks than the Company, and are able to offer
similar and additional services. Interstate bank mergers that were permitted in
Georgia beginning June 1, 1997, and expansion by banks into non-banking
activities, whether de novo, by acquisition or otherwise, that was facilitated
as of April 21, 1997 by certain legislative enactments have further increased
the competition among financial institutions by allowing greater flexibility.
See "Business -- Competition" and "Supervision and Regulation."
MORTGAGE BANKING BUSINESS
The Company's mortgage banking operations, carried out through CMS and the
Bank's Mortgage Division, depend upon a warehouse line of credit from the FHLB-
Atlanta, and other financing sources, to fund the origination and holding of
mortgage loans pending resale and securitization.
Economic slowdowns or recessions in the Company's market areas may be
accompanied by reduced demand for consumer credit and declining real estate
values in such areas, which may result in an increased possibility of loss in
the event of default. Any sustained period of decreased economic activity and
increased delinquencies, foreclosures or losses could adversely affect the
Company's growth and results of operations, especially the mortgage banking
business.
The Company depends largely on independent mortgage brokers, financial
institutions and mortgage bankers to originate and purchase mortgage loans. The
Company's future results may become more exposed to fluctuations in the volume
and cost of its wholesale loans resulting from competition from other
originators and purchasers of such loans, market conditions and other factors.
The Company currently contracts for the servicing of certain loans it
originates, purchases and holds for sale. As with any external service
provider, the Company is subject to risks associated with inadequate or untimely
service. Many of the Company's borrowers require notices and reminders to keep
their loans current and to prevent delinquencies and foreclosures. A
substantial increase in the Company's delinquency rate or foreclosure rate could
adversely affect its ability to access profitably the capital markets for its
financing needs, including future securitizations.
SUPERVISION AND REGULATION
The success of the Company and its Subsidiaries depends not only upon
competitive factors but also on state and federal regulations affecting banks,
mortgage companies and mortgage banks, savings and loan associations, and bank
and savings and loan holding companies generally. The Company and its
Subsidiaries operate in a highly regulated environment and are subject to
supervision by several governmental regulatory agencies, including the Federal
Reserve, the FDIC, the Georgia Department and the Commission. On September 29,
1994, the President signed the Reigle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Reigle-Neal Act"), which, among other things, has
permitted nationwide interstate banking and branching subject to certain
restrictions. The Reigle-Neal Act may result in greater competition for the
Bank. Regulation of the financial institutions industry is undergoing continued
changes, and the ultimate impact of such changes cannot be predicted. Recently,
Congress and the federal bank regulatory agencies have proposed and promulgated
laws and regulations that will significantly alter the financial services
industry, including the powers and activities of financial institutions, the
types of entities that may own banks and bank holding companies, and the
supervisory
-8-
<PAGE>
authority and jurisdiction of the various federal bank regulatory agencies.
Regulations now affecting the Company and its Subsidiaries may be modified at
any time. There can be no assurance that any such legislation or regulations
will not adversely affect the business of the Company and its Subsidiaries. See
"Supervision and Regulation."
ANTI-TAKEOVER CONSIDERATIONS/CONTROLLING SHAREHOLDERS
The Company's Articles of Incorporation (the "Articles") and Bylaws, and the
Georgia Business Corporation Code (the "GBCC"), contain certain provisions that
could have the effect of discouraging a party from attempting to acquire or
acquiring control of the Company without the approval of the Company's Board of
Directors. As of December 31, 1997, the directors and officers of the Company
and its Subsidiaries beneficially owned 230,756 shares (31.77%). The Company's
and Bank's directors and officers are expected to purchase their pro rata number
of Shares in the Offering, as well as any remaining Shares that are not
initially subscribed for by other Shareholders. As a result of this director
and officer ownership, the ability of other Shareholders, individually or as a
group, to effectively exercise control over the election of directors of the
Company and thereby exercise control over the supervision of the management or
the business of the Company and the Bank is limited. See "Management" and
"Description of Company Capital Stock."
NO UNDERWRITING/NO MINIMUM NUMBER OF SHARES REQUIRED TO BE SOLD
The Common Stock is being offered directly by the Company and is not subject
to any underwriting agreements assuring the sale of any of the Common Stock
offered. No minimum number of Shares is required to be sold, and no assurance
is given that any particular number of Shares will be sold. In the event all of
the Shares offered are not sold in the Offering, the proceeds available to the
Company will be reduced. See "The Offering" and "Market Information and
Dividends."
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements concerning the
Company's existing and contemplated operations, economic performance and
financial condition. These statements are based upon a number of assumptions
and estimates which are inherently subject to uncertainties and contingencies,
many of which are beyond the control of the Company, including the Company's
growth and ability to sustain such growth, future economic conditions,
governmental monetary and fiscal policies, as well as legislative and regulatory
changes, the effect of interest rates on levels and composition of deposits,
loan demand, and the values of loan collateral and securities, competition from
other financial institutions operating in the Company's market area and
elsewhere, including such competitors offering banking products and services by
mail, telephone, and computer and/or the internet, and the failure of
assumptions underlying the establishment of the allowance for loan losses,
including the value of collateral underlying delinquent loans and other factors.
see "Special Cautionary Notice Regarding Forward-Looking Statements."
THE OFFERING
GENERAL
The Company is offering 135,000 Shares of Common Stock in accordance with the
terms set forth below.
From __________, 1998, until 5:00 P.M. Eastern Time on _____________, 1998
Shares of Common Stock will be offered only to Shareholders of record of the
Company at the close of business on the Record Date. During the Initial
Offering Period, each Shareholder will be entitled to purchase a whole number of
Shares equal to the product of (i) and (ii) the number of shares of Common
Stock owned by such Shareholder as of the Record Date, with any fractional
Shares rounded down to the nearest whole number of Shares. A Shareholder
desiring to subscribe for shares in the Offering must deliver to the Company
before 5:00 p.m. Eastern Time on ______________, 1998, a completed Subscription
Agreement and check. See "-- How to Subscribe."
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<PAGE>
Subscriptions for Shares are not limited to pro rata amounts, and each
Shareholder may subscribe for a number of Shares in excess of the pro rata
amount to which he is entitled. The Company intends, beginning on the fifth
business day following the expiration of the Initial Offering Period, to accept
or reject oversubscriptions, with acceptances made on a pro rata basis based on
the number of Shares owned by each Shareholder as of the Record Date.
Thereafter, any remaining Shares may be sold to anyone, but it is presently
expected that the directors and officers of the Company will purchase the
remaining shares, if any, and that Mr. Michael Lowe, a director of the Company,
will purchase substantially all of the remaining Shares, subject to obtaining
any necessary regulatory approvals. The termination date of the Initial
Offering Period may be extended in the discretion of the Company for periods of
30 days.
The Company reserves the right, in its sole discretion, to reject any
subscription in whole or part, to allocate Shares among subscribers, and to
withdraw, cancel or modify the Offering without notice. Subscriptions are not
binding obligations of the Company until accepted by the Company in writing. In
determining which subscriptions and oversubscriptions to accept, in whole or
part, the Company may take into account various factors, including a
subscriber's potential to do business with, or refer customers to, the Company
and the order in which the subscriptions were received.
HOW TO SUBSCRIBE
Each person who desires to purchase Common Stock should:
1. Complete, date, and execute the Subscription Agreement, including the
Form W-9, accompanying this Prospectus;
2. Make a check payable to "Crescent Banking Company" in the amount of
$_____ for each Share subscribed for in the Offering;
3. Return the completed Subscription Agreement and check to the Company
in the return envelope enclosed with the Prospectus, or mail or
deliver the Subscription Agreement and check to:
Crescent Banking Company
251 Highway 515
Jasper, Georgia 30143
Attention: J. Donald Boggus, Jr.
4. Subscription Agreements and checks for the purchase of Common Stock
MUST be received by the Company prior to 5:00 P.M. Eastern Time on
_____________, 1998, unless this date is extended by the Company in
its sole discretion.
HANDLING OF SUBSCRIPTIONS
Subscriptions are binding upon the Company only if and to the extent
accepted by the Company in writing. The Company will decide which subscriptions
to accept within fourteen days of receipt of the completed Subscription
Agreement and check. In the event the Company rejects all or a portion of any
subscription, the Company will promptly refund by mail to the subscriber all or
the appropriate portion of the amount remitted with the subscription, without
interest. Upon rejection of a subscription or the termination or expiration of
this Offering, the Company and its directors, officers, employees, agents,
representatives, and affiliates will have no further liability to the
subscribers whose subscriptions are being rejected once all appropriate refunds
have been mailed to the address shown in the Subscription Agreement.
The Company will confirm all sales of Common Stock. Certificates
representing Shares of Common Stock duly subscribed and fully paid will be
issued by the Company's registrar and transfer agent promptly after the
Company's acceptance of the subscriptions and the issuance of a confirmation
therefor.
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<PAGE>
USE OF PROCEEDS
The net proceeds of the Company from the sale of all Shares offered hereby
are estimated to be approximately $2,046,882. The Company intends to use the
net proceeds to support the entry by CMS into making and servicing FHA mortgage
loans, to increase capital to support future growth, and for general corporate
purposes. Following the Offering, the Company's consolidated shareholders'
equity to total assets on a pro forma basis as of September 30, 1997 would be
approximately _______%. No minimum number of shares of Common Stock must be
sold in the Offering. To the extent that all 135,000 shares of Common Stock are
not sold in the Offering, the proceeds from the Offering available to the
Company will be reduced.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997, and as adjusted to show the effects of the sale of all
Shares in the Offering at the public offering price of $_________, and the
application of the net proceeds therefrom. The information set forth in the
table should be read in conjunction with the Financial Statements and
Supplementary Data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------------
ACTUAL AS ADJUSTED
--------------------- ------------------
<S> <C> <C>
(Dollars in Thousands)
SHAREHOLDERS'
EQUITY:
Common Stock 706,354
Capital Surplus 6,369,186
Retained Earnings 1,411,139
Treasury Stock (36,091)
---------- --------
Total Shareholders Equity 8,450,588
</TABLE>
MARKET INFORMATION AND DIVIDENDS
No active trading market exists for the Common Stock, and the Company has
no reason to believe that a more active trading market will develop in the
foreseeable future. There are no present plans for the Common Stock to be
listed or qualified for trading on any stock exchange or in the over-the-counter
market. There are currently two independent market makers in the Common Stock:
J. C. Bradford & Company and Sterne, Agee & Leach, Inc. As of December 31,
1997, there were approximately 600 holders of record of the Company's Common
Stock and approximately 726,354 shares of Common Stock were issued and
outstanding. Transactions in the Company's Common Stock generally are
negotiated through Sterne, Agee & Leach, Inc.
The last known selling price of the Company's Common Stock in what the
Company's management believes were arm's length transactions and based on
information available to the Company's management, was $15.00 per share on
November 26, 1997. For the 30 week period ended October 31, 1997, the price per
share of the Company's Common Stock in similar such transactions ranged from
$13.13 per share to $15.00 per share
Cash dividends on the Bank's common stock may only be declared and paid out
of its retained earnings, and dividends may not be declared at any time at which
the Bank's paid-in capital and appropriated retained earnings do not, in
combination, equal at least 20% of its capital stock account. In addition, the
Georgia Department's current rules and regulations require prior approval before
cash dividends may be declared and paid if: (i) the Bank's ratio of equity
capital to adjusted total assets is less than 6%; (ii) the aggregate amount of
dividends declared or anticipated to be declared in that calendar year exceeds
50% of the Bank's net profits, after taxes but before dividends, for the
previous calendar year; or (iii) the percentage of the Bank's loans classified
as adverse as to repayment or recovery by the Georgia Department at the most
recent regulatory examination of the Bank exceeds 80% of the Bank's equity
capital as reflected at such examination.
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<PAGE>
The Company paid no cash dividends prior to 1994 and a dividend of $.375
per share in 1994. In 1995, the dividend was reduced to $.25 per share
following the realization of certain loan losses attributable to prior
management, and no dividends were paid until the fourth quarter 1996. Future
dividends on the Common Stock will depend upon the earnings of the Company, its
financial condition, the capital adequacy of the Company and its Subsidiaries,
and their need for funds, and other relevant factors, including applicable
restrictions and governmental policies and regulations. The ability of the
Company to pay dividends is subject to statutory restrictions on cash dividends
applicable to Georgia business corporations, in particular the requirements
that, after giving effect to the dividends, the corporation be able to pay its
debts as they become due in the usual course of business and that the
corporation's assets not be less than the sum of its total liabilities.
Unless the Company is successful in its efforts to diversify or acquire
other financial institutions, it will have no substantial sources of income
other than dividends it may receive from the Bank. The Bank's ability to pay
dividends is subject to statutory and regulatory restrictions on the payment of
cash dividends applicable to banks chartered under the laws of the State of
Georgia. Certain other statutory and regulatory restrictions affect the
payment of dividends by the Bank. See "Supervision and Regulation."
BUSINESS
GENERAL
The Company is a bank holding company regulated and supervised by the
Federal Reserve and the Georgia Department. The Company became the parent
holding company of the Bank on May 1, 1992. As of September 30, 1997, the
Company and its Subsidiaries had total assets of approximately $105.3 million,
total deposits of approximately $63.1 million and shareholders' equity of
approximately $8.5 million.
The Bank is a Georgia banking corporation that has been engaged in the
general commercial banking business since it opened for business in August 1989.
The Bank began wholesale mortgage banking operations in February 1993. The Bank
is a member of the FDIC and its deposits are insured by the FDIC's BIF. The
Bank is also a member of the FHLB-Atlanta. Through the Bank, the Company
provides a broad range of banking and financial services in the areas
surrounding Jasper, Georgia, and wholesale mortgage banking services to
correspondents located in the Atlanta, Georgia metropolitan area and throughout
the Southeast United States.
CMS was incorporated as a separate subsidiary of the Company on October 11,
1994, to engage in the servicing of mortgage loans. CMS offers wholesale
mortgage banking services in the New England states and provides servicing for
residential mortgage loans. CMS is an approved servicer of mortgage loans sold
to Freddie Mac, Fannie Mae and private investors. In December 1996, CMS opened
a wholesale mortgage banking office in Manchester, New Hampshire that serves the
Northeast United States.
BUSINESS STRATEGY
The Company currently intends to expand its mortgage operations by engaging
in FHA/VA mortgage lending in 1998. In addition, the Bank plans to expand its
loan production office ("LPO") in Bartow County, Georgia to a full service Bank
branch in 1998.
COMMERCIAL BANKING OPERATIONS
The Bank's commercial banking operations are primarily retail-oriented and
aimed at individuals and small to medium sized businesses located within its
market area. The Bank considers its primary market area for commercial banking
services to be Pickens County, Bartow County and nearby areas of Dawson,
Cherokee and Gilmer Counties, Georgia, which are situated to the north of
Atlanta. While the Bank provides most traditional banking services, its
principal activities are the taking of demand and time deposits and the making
of secured and unsecured consumer loans and commercial loans to small and medium
sized businesses.
The retail nature of the Bank's commercial banking operations allows for
diversification of depositors and borrowers, and management believes the Bank is
not dependent upon a single or a few customers. No material
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<PAGE>
portion of the Bank's commercial banking loans is concentrated within a single
industry or group of related industries.
MORTGAGE BANKING OPERATIONS
The Company currently originates, sells and services mortgage loans through
the Bank's Mortgage Division and CMS. The Bank and CMS acquire mortgage loans
from small retail-oriented originators in the Southeast and Northeast United
States. Substantially all of the mortgage loans are currently being resold
after being "warehoused" for 10 to 30 days, with associated servicing rights
sold or retained, in the secondary market to Freddie Mac, Fannie Mae, and
private investors. To the extent that the Company retains the servicing rights
on mortgage loans that it resells, it collects servicing fees. Loans that are
resold with associated servicing rights released include a premium for such
servicing in the sale price paid to the Company.
Mortgage loan purchases are funded through loan sales, warehouse lines of
credit from the FHLB-Atlanta and Paine Webber Incorporated, and Bank funds.
Prior to being resold, mortgage loans generally generate net interest income due
to the Company seeking to maintain a positive spread on the rates of interest
paid to the Company on the mortgage loans as compared to the rates of interest
paid by the Company on its funding sources. Pending resale, the Company does
incur interest rate risk that affects the value of such mortgage loans. The
Company also generates ancillary income through late fees, mortgage life
insurance commissions and assumption fees, in addition to servicing fees and
gestation fee income.
The Company attempts to reduce potential interest rate risks that may be
incurred as a result of market movements between the time commitments to
purchase mortgage loans are made and the time the loans are closed, by either
having in place commitments, through the secondary market, to purchase the loans
from the Company , or by purchasing an option to deliver to the secondary market
a mortgage-backed security. Other "hedging" techniques may also be used to
minimize interest rate risk, but speculative secondary market activities are not
engaged in. The success of the Company's mortgage banking operations is highly
dependent on the efforts of Mr. Robert C. KenKnight, the Bank's Executive Vice
President for Mortgage Banking Operations, and President of CMS. See "Risk
Factors" and "Management."
The Company's mortgage banking business is not dependent on any particular
mortgage loan originators or borrowers. Such business does depend upon its
warehouse creditors to fund the origination and holding of mortgage loans
pending securitization.
SEASONALITY
While the Bank does not consider its commercial banking business to be
seasonal, the Company's mortgage banking business is somewhat seasonal, with the
volume of home financings, in particular, being lower during the winter months.
COMPETITION
The Bank's Commercial and Mortgage Divisions operate in highly competitive
markets. The Bank competes directly for deposits in its commercial banking
market with other commercial banks, savings and loan associations, credit
unions, mortgage brokers and mortgage companies, mutual funds, securities
brokers, and insurance companies, locally, regionally and nationally, certain of
which compete with offerings by mail, telephone, computer and/or the Internet.
In its commercial bank lending activities, the Bank competes with other
financial institutions as well as consumer finance companies, mortgage companies
and other lenders engaged in the business of extending credit to customers
located in its market area. Interest rates, both on loans and deposits, and
prices of services are significant competitive factors among financial
institutions generally. Office location, types and quality of services and
products, office hours, customer service, a local presence, community reputation
and continuity of personnel may be other important competitive factors, and are
emphasized by the Bank.
In addition to the Bank, three other commercial banks have offices in the
Jasper area of Pickens County, Georgia. Many of the largest banks operating in
Georgia, including some of the largest banks in the country, also
-13-
<PAGE>
have offices within the Bank's market area. Virtually every type of competitor
for business of the type served by the Bank has offices in Atlanta,
approximately 60 miles away from Jasper. These institutions have greater
resources, broader geographic markets and higher lending limits, may offer
various services that the Bank does not offer, and can better afford and make
broader use of media advertising, support services, and electronic technology
than can the Bank. To offset these competitive disadvantages, the Bank depends
on its reputation as an independent and locally-owned community bank, personal
service, greater community involvement and its ability to make credit and other
business decisions quickly and locally.
The wholesale mortgage banking business is also intensely competitive
locally, regionally and nationally. The Company competes with thrifts,
commercial banks, mortgage companies and brokers, insurance companies, and
securities firms having local, regional and national operations with respect to
the purchase, servicing and sale of mortgage loans. Many of such institutions
have substantially greater resources than the Company.
EMPLOYEES
At December 31, 1997, the Company had 65 full-time and 6 part-time
employees. The Company considers its employee relations to be good, and it has
no collective bargaining agreements with any employees.
PROPERTY
During 1996, the Bank conducted its business primarily through its main
offices located on an approximately two-acre site at 251 Highway 515, Jasper,
Pickens County, Georgia. The Bank's main offices are approximately 1.2 miles
west of downtown Jasper and 60 miles north of metropolitan Atlanta. The main
offices are housed in a two-story office building owned by the Bank which
contains approximately 9,200 square feet of finished space used for offices,
operations and storage, four teller windows and the Bank lobby. The building
also has three drive-up teller windows and an automated teller machine with a
24-hour-a-day access. The main office facility opened for business on January
29, 1990 and is in good condition. The Bank also leases approximately 3,000
square feet of office space in the Atlanta metropolitan area for its Mortgage
Division operations, and the lease term for such offices expires in August 1999.
In addition, the Bank leases approximately 268 square feet for its branch
office located in Marble Hill, Georgia with a lease expiration date of August
31, 1999. The Bank also leases 600 square feet of office space for its LPO in
Bartow County, Georgia with a lease expiration date of January 1, 1999.
The Bank also leases a site for an automated teller machine in the Big
Canoe community. The lease agreement expires on October 31, 1998. The Big
Canoe community is located in eastern Pickens and western Dawson Counties,
Georgia, approximately 15 road miles east of the Bank's main office.
CMS conducts its business primarily through its main office in Manchester,
New England, where CMS leases approximately 3,400 square feet of office space.
The lease term for the CMS New Hampshire office expires in December 1998.
The Company presently expects to renew each of its leases upon their
respective expiration dates.
RECENT DEVELOPMENTS
The Company paid its fifth consecutive quarterly dividend on November 15,
1997. This $0.07 per share dividend represented an 8% increase from the
previous quarter's dividend and was the fourth consecutive quarter for which
dividends have increased. Earnings in the third quarter 1997 totaled $569,580
or $.81 per share as compared to earnings in the third quarter 1996 of $94,183
or $.13 per share. Earnings for the first nine months of 1997 totaled $888,091
or $1.26 per share as compared to earnings in the first nine months of 1996 of
$425,177 or $.60 per share.
The Company paid no cash dividends prior to 1994 and a dividend of $.335
per share in 1994. In 1995, the dividend was reduced to $.25 per share
following the realization of certain loan losses attributable to prior
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<PAGE>
management, and no dividends were paid until the fourth quarter 1996. A
quarterly dividend of $.05 per share or $35,077 was paid in November 1996 with
respect to the Company's Common Stock. A quarterly dividend of .055 per share
or $38,584, .060 per share or $42,091, and .065 per share or $45,696 was paid in
February, May and August 1997, respectively.
Since the third quarter of 1995, the Company's book value has increased 20%
(from $9.93 to $11.96) with an overall improvement in asset quality. The
Company's loan portfolio has grown 61% since that time and the Company, through
CMS, has expanded its wholesale mortgage operations into the New England region.
As a result, the Company incurred start-up costs for the New England mortgage
operations of CMS during the first six months of 1997. CMS posted a profit of
$95,792 for the six-month period ended June 30, 1997 compared to $7,092 for the
same period of 1996, and the Company's total mortgage production for the third
quarter 1997 was $232.7 million compared $128.7 million in the third quarter of
1996.
-15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997
Summary
- -------
The Company realized a profit during the first nine months of 1997 of
$888,091 compared to $425,199 for the first nine months of 1996. The 108.8%
increase in year to date profit is the primary result of the increase in
commercial banking loans and a greater volume of mortgage loans production.
Balance Sheets
- --------------
The Company experienced a 41.1% increase in total assets in the first three
quarters of 1997 as the Bank's assets totaled $105.3 million as of September 30,
1997 compared to $74.7 million at December 31, 1996. The increase in the Bank's
assets has been primarily related to the increases in commercial banking loans
and mortgage production. The increase in mortgage production was due in large
to the start-up of the New England mortgage operation.
Earning assets at September 30, 1997 (comprised of commercial banking
loans, mortgage loans held for sale, investment securities, interest-bearing
balances in other banks and temporary investments) totaled $94.1 million or
89.4% of total assets as compared to December 31, 1996 when earning assets
totaled $63.8 million or 85.4% of total assets. The 47.5% increase in earning
assets as a percentage of total assets was the result of the increase in
commercial banking loans and mortgage loans held for sale. Mortgage loans held
for sale totaled $54.8 million at September 30, 1997 compared to $33.0 million
at December 31, 1996. The 66.1% increase in mortgage loans held for sale was
the result of the start up of the New England mortgage operation as well as an
increase in mortgage production from the Bank's Mortgage Division. Mortgage
loans held for sale averaged $32.4 million and constituted 47.2% of average
earning assets and 40.5% of average assets for the nine months ended September
30, 1997. Average commercial banking loans of $31.4 million constituted 45.7%
of average earning assets and 39.3% of average assets during the nine months
ended September 30, 1997. Total commercial banking loans increased 24.6% from
$28.5 million at December 31, 1996 to $35.5 million at September 30, 1997.
Generally, loans tend to produce higher yields than securities and other
interest-earning assets. In addition, mortgage loans held for sale generate net
interest income due to the greater rates of interest paid to the Bank on the
longer-term mortgage loans over the rates of interest paid by the Bank on its
shorter-term warehouse line of credit and regular funding sources. Therefore,
absolute volume of commercial loans and mortgage loans held for sale and such
volume as a percentage of total earning assets is an important determinant of
net interest margin.
The Bank invests its excess funds in U.S. Government and U.S. Government
agency obligations, corporate securities, federal funds sold, and interest-
bearing deposits with other banks. The Bank's investments are managed in
relation to loan demand and deposit growth, and are generally used to provide
for the investment of excess funds at minimal risk while providing liquidity to
fund increases in loan demand or to offset fluctuations in deposits. Thus,
investment securities are managed in order to minimize the Company's exposure to
interest rate risk. Interest-bearing deposits in other banks, investment
securities, and federal funds sold increased 69.6% from $2.3 million at December
31, 1996 to $3.9 million at September 30, 1997.
The allowance for loan losses represents a reserve for potential losses in
the loan portfolio. The provision for loan losses is a charge to earnings in
the current period to maintain the allowance at a level that management has
determined to be adequate. The allowance for loan losses totaled $475,078 or
1.34% of total loans at September 30, 1997, compared to $335,512 or 1.18% of
total loans at December 31, 1996. The determination of the reserve level rests
upon management's judgment about factors affecting loan quality and assumptions
about the economy. The adequacy of the allowance for loan losses is evaluated
periodically based on a review of all significant loans, with a particular
emphasis on past due and other loans that management believes require attention.
Management considers the allowance appropriate and adequate to cover possible
losses in the loan portfolio; however, management's judgment is based upon a
number of assumptions about future events which are believed to be reasonable
but which may or may not prove valid. Thus, there is no assurance that charge
offs in
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<PAGE>
future periods will not exceed the allowance for loan losses or that additional
increases in the allowance for loan losses will not be required.
As a result of management's policy of ongoing review of the loan portfolio,
loans may be considered for classification as non-accrual when it is not
reasonable to expect collection of interest under the original terms. As of
September 30, 1997, the Bank had $4,998 of loans accounted for on a non-accrual
basis, $607,274 contractually past due more than 90 days and no loans considered
to be troubled debt restructurings, as defined by Financial Accounting Standards
Board Statement No. 15 ("FASB No. 15"). As of December 31, 1996, the Bank had
$167,916 of loans accounted for on a non-accrual basis, $23,140 contractually
past due more than 90 days and no loans considered to be troubled debt
restructurings as defined by FASB No. 15.
Loans identified by management as potential problem loans (classified and
criticized) but still accounted for on an accrual basis totaled $1,379,716 and
$1,405,089 at September 30, 1997 and December 31, 1996, respectively. The
Bank's policy is to discontinue the accrual of interest on loans which are 90
days past due unless they are well-secured and in the process of collection.
Interest on these loans will be recognized only when received.
The Bank's Mortgage Division acquires mortgage loans from small retail-
oriented originators in the Southeast United States through the utilization of
an $18 million warehouse line of credit and its regular funding sources.
Substantially all of the mortgage loans are currently being resold in the
secondary market to Freddie Mac, Fannie Mae, and private investors after being
"warehoused" for ten to 30 days. Warehoused loans must meet secondary market
criteria such as amount limitations and loan to value ratios to qualify for
resales to Freddie Mac and Fannie Mae. To the extent that the Bank retains the
servicing rights on mortgage loans that it resells, it collects annual servicing
fees while the loan is outstanding. The Bank periodically sells a portion of
its retained servicing rights in bulk form. The annual servicing fees and gains
on the sale of servicing rights are an integral part of the mortgage banking
operation and its contribution to net income. The Bank also currently pays a
third party subcontractor to perform servicing functions with respect to its
loans sold with retained servicing.
CMS began its mortgage banking operations in the Northeast United States
during the first quarter of 1997. During the first five months of 1997, startup
costs relating to this operation exceeded income. Since June 1997, CMS has
reached a volume of loan production to achieve profitability on a monthly basis.
In 1998, CMS anticipates selling substantially all mortgage loans and servicing
rights generated from the Northeast operation. Funding for the Northeast is
provided through three warehouse lines of credits totaling $32 million. The
Company has commenced plans to offer a FHA mortgage product through CMS. The
Company plans to locate an office in the Atlanta area to serve the Southeastern
states.
For the nine months ended September 30, 1997, the mortgage operation of the
Company had acquired $504.4 million of mortgage loans and sold $482.6 million of
such loans in the secondary market with servicing rights retained by the
Company. The Company carried $54.8 million as mortgage loans held for sale on
the balance sheet as sales of the loans were pending. As of September 30, 1997,
capitalized cost of $4.1 million related to the purchase of the mortgage loans
and associated servicing rights was carried on the balance sheet as purchased
mortgage servicing rights. The Bank is amortizing the purchased mortgage
servicing rights over an accelerated period. The Bank sold $449.1 million of
mortgage servicing rights in the first nine months of 1997 for a gain of
$1,650,248. As of September 30, 1997, the Bank held the rights with respect to
loans with unpaid principal balances totaling $419.9 million. The market value
of the servicing portfolio is contingent upon many factors including the
interest rate environment, the estimated life of the servicing portfolio, the
loan quality of the servicing portfolio and the coupon rate of the loan
portfolio. There can be no assurance that the Bank will continue to experience
a market value of the servicing portfolio in excess of the cost to acquire the
servicing rights nor can there be any assurance as to the expected life of the
servicing portfolio.
The Bank's deposits increased $7.4 million to total $63.1 million at
September 30, 1997. The 13.3% increase in deposits resulted from normal deposit
growth. Interest-bearing deposits represented 81% of total deposits at
September 30, 1997, with certificates of deposit representing 71% of total
interest-bearing deposits, compared to December 31, 1996 when interest-bearing
deposits represented 77% of total deposits with certificates of deposit
representing 70% of total interest-bearing deposits. The increase of interest-
bearing deposits as a
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<PAGE>
percentage of total deposits was the result of an increase in interest-bearing
deposits. The composition of these deposits is indicative of the rate conscious
market in which the Bank operates.
Capital
- -------
Capital adequacy is measured by risk-based capital guidelines as well as
against leverage ratios. The risk-based capital guidelines developed by
regulatory authorities assign weighted levels of risk to asset categories to
establish capital requirements. These guidelines currently require a minimum of
8.00% of total capital to risk-adjusted assets. One-half of the required
capital must consist of tangible common shareholders' equity and qualifying
perpetual preferred stock ("Tier 1 Capital"). The leverage guidelines specify a
ratio of Tier 1 Capital to total assets of 3.0% if certain requirements are met,
including having the highest regulatory rating, or between 4.0% and 5.0%
otherwise. The guidelines also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the guidelines indicate
that the Federal Reserve 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 has agreed with the
Georgia Department to maintain a leverage ratio of 8.0%. At September 30, 1997,
the Bank's leverage ratio was 8.57%.
As of September 30, 1997 total shareholders' equity was $8.5 million or 8.1%
of total assets compared to $7.7 million or 10.3% of total assets at December
31, 1996. The decrease in the shareholders' equity to asset ratio from December
31, 1996 to September 30, 1997 was the result of a 41% increase in total assets.
In June 1997, the Company received $15,000 through the exercise of outstanding
stock options relating to 1,500 shares. As of September 30, 1997, total capital
to risk-adjusted assets was 12.3%, with 11.7% consisting of tangible common
shareholders' equity.
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 for the nine months ended September 30, 1997 (cash and
amounts due from banks, interest bearing deposits in other banks, federal funds
sold, mortgages held for sale net of borrowings and drafts payable and
investment securities) totaled $25.7 million or 43% of average deposits.
Average liquid assets totaled $24.1 million or 47% of average deposits at
December 31, 1996.
Average loans were 53% and 55% of average deposits for the nine and twelve
month periods ended September 30, 1997 and December 31, 1996, respectively.
Average deposits were 86% and 90% of average earning assets for the nine and
twelve month periods ended September 30, 1997 and December 31, 1996,
respectively.
The Bank actively manages the levels, types and maturities of earning assets
in relation to the sources available to fund current and future needs, to ensure
that adequate funding will be available at all times. In addition to the
mortgage warehouse line of credit, the Company also maintains a federal funds
line of credit totaling $4.6 million. Management believes its liquidity sources
are adequate to meet its operating needs.
Net interest income, the Bank's primary source of earnings, can fluctuate
with significant interest rate movements. To lessen the impact of these margin
swings, the balance sheet should be structured so that repricing opportunities
exist for both assets and liabilities, in roughly equivalent amounts, at
approximately the same time intervals. Imbalances in these repricing
opportunities at any point in time affect interest rate sensitivity.
-18-
<PAGE>
Interest rate sensitivity refers to the responsiveness of interest-earning
assets and interest-bearing liabilities to changes in market interest rates.
The rate-sensitive position, or gap, is the difference in the volume of rate-
sensitive assets and liabilities, at a given time interval. The general
objective of gap management is to actively manage rate-sensitive assets and
liabilities to reduce the impact of interest rate fluctuations on the net
interest margin. Management generally attempts to maintain a balance between
rate-sensitive assets and liabilities to minimize the overall interest rate
risks to the Bank.
Interest rate sensitivity varies with different types of interest-earning
assets and interest-bearing liabilities. Overnight federal funds, on which
rates are susceptible to change daily, and loans which are tied to the prime
rate differ considerably from long-term investment securities and fixed-rate
loans. Similarly, time deposits over $100,000 and certain interest-bearing
demand deposits are more interest sensitive than savings deposits.
The following table shows the interest sensitivity gaps for four different
time intervals as of September 30, 1997. The Bank was in a cumulative asset-
sensitive position for all time intervals. This means that during these periods
of asset sensitivity, if interest rates decline, the net interest margin will
decline. Conversely, if interest rates increase over this period, the net
interest margin will improve. Since all interest rates and yields do not adjust
at the same velocity, this is only a general indicator of rate sensitivity.
INTEREST RATE SENSITIVITY GAPS
AS OF SEPTEMBER 30,1997
<TABLE>
<CAPTION>
AMOUNTS REPRICING IN
------------------------------------------------------
91-365 OVER 5
0-90 DAYS DAYS 1-5 YEARS YEARS
--------- ------- --------- ------
(Millions of Dollars)
<S> <C> <C> <C> <C>
Interest-earning assets $ 5.6 $ 5.4 $10.5 $2.8
Interest-bearing liabilities 39.7 20.9 7.6 --
------- ------- ------ -----
Interest sensitivity gap $35.9 $ (15.5) $ 2.9 $2.8
======= ======= ====== =====
</TABLE>
The Mortgage Division has adopted a policy intended to minimize potential
interest rate risk incurred as a result of market movements between the time
commitments to purchase mortgage loans are made and the time the loans are
closed. Accordingly, commitments to purchase loans will be covered either by a
mandatory sale into the secondary market or by the purchase of an option to
deliver to the secondary market a mortgage-backed security. The mandatory sale
commitment is fulfilled with loans closed by the Company or through "pairing
off" the commitment. 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,
1997 the Bank had in place purchase commitment agreements due to terminate from
October 1997 to January 1998 with respect to an aggregate of approximately $64.0
million to hedge the mortgage pipeline of $91.7 million for which the Company
has an interest rate risk.
Attempting to minimize the interest-rate sensitivity gap is a continual
challenge in a changing interest rate environment.
Results of Operations
- ---------------------
The primary source of revenue for the Bank is net interest income, which is
the difference between income on interest-earning assets, such as investment
securities and loans, and interest-bearing sources of funds, such as deposits
and borrowings. The level of net interest income is determined primarily by the
average balances ("volume") of interest-earning assets and the
-19-
<PAGE>
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 the volume of interest-earning assets and interest-
bearing liabilities, increases or decreases in the average interest 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 Bank's 38.5% increase in interest income from $3.9 million for the nine
months ended September 30, 1996 to $5.4 million for the nine months ended
September 30, 1997 was attributable to the growth of interest-earning assets.
The Bank's interest expense increased from $1.5 million for the nine months
ended September 30, 1996 to $2.3 million for the nine months ended September 30,
1997. The 53.3% increase in interest expense is primarily the result of a
higher average of interest-bearing deposits in the first nine months of 1997, in
addition to a higher level of average borrowed funds related to the mortgage
operation. For the nine months ended September 30, 1997 and 1996, interest
expense accounted for 28% and 25% of total expenses, respectively. The 83.3%
increase in the Bank's interest income from $1.2 million for the three months
ended September 30, 1996 to $2.2 million for the three months ended September
30,1997 was the result of a higher average balance of commercial banking loans
in addition to a higher level of mortgage loans held for sale. The 62.0%
increase in the Bank's interest expense from $543,908 for the three months ended
September 30, 1996 to $881,340 for the three months ended September 30, 1997 was
the result of a higher level of average deposits and other borrowed funds. For
the three months ended September 30, 1997 and 1996, interest expense accounted
for 28% and 26% of total expenses, respectively.
Net interest income for the first nine months of 1997 was $3.1 million. The
Bank's net interest margin for the first nine months 1997 was 6.1%. Interest
spread, which represents the difference between average yields on interest-
earning assets and average rates paid on interest-bearing liabilities, was 5.8%.
Net interest income, net interest margin and interest spread for the first nine
months of 1996 were $2.3 million, 6.2% and 5.8%, respectively. Net interest
income for the three months ended September 30, 1997 was $1,275,708 compared to
$694,006 for the three months ended September 30, 1996, an increase of 83.8%.
Net interest margin and interest spread for the three months ended September 30,
1997 were 6.4% and 5.9%, compared to 5.9% and 5.7%, respectively, for the three
months ended September 30, 1996.. The increase in net interest income is
primarily the result of a higher level of commercial banking loans and mortgage
loans fee income associated with the closings of mortgage loans held for sale.
These mortgage fees are accounted for as interest income. The Company closed
$504.4 million of mortgage loans in the first nine months of 1997 compared to
$344.9 million in the first nine months of 1996.
The Bank made provisions to the allowance for loan losses in the total
amount of $143,120 during the first nine months of 1997. The Bank did not make
a provision to the allowance for loan losses in the first nine months of 1996.
During the first nine months of 1997, the Bank had net charge offs of $3,554,
compared to net charge offs of $158,399 during the first nine months of 1996.
Other income was $4.4 million for the first nine months of 1997, compared to
$3.0 million for the first nine months of 1996, an increase of 47.7%. The
increase was primarily related to increased gains on the sale of mortgage
servicing rights as a result of the startup of the New England mortgage
operation. Other expenses increased from $4.6 million for the first nine months
of 1996 to $5.9 million for the first nine months of 1997. The 28.3% increase
in other expenses in the first nine months of 1997 was related to the start up
of mortgage operations in New England. Other income was $1.9 million for the
third quarter 1997 compared to $1 million for the third quarter 1996. The 90%
increase in other income for the third quarter 1997 was the result of the larger
gain on the sale of mortgage servicing rights. The Company sold $214.3 million
of mortgage servicing rights for a gain of $1,650,248 in the first nine months
of 1997, compared to sales of $377 million for a gain of $624,345 in the first
nine months of 1996. Other expenses totaled $2.2 million for the third quarter
of 1997 compared to $1.5 million for the third quarter 1996. The 46.7% increase
in other expenses was the result of an increase in salaries and benefits and
other start up costs related to the Northeast mortgage operation.
The Company had net income of $888,091 for the first nine months of 1997,
compared to net income of $425,177 for the first nine months of 1996. The
108.9% increase in net income is reflective of the start up costs of the
Northeast mortgage operation, an increase in mortgage production and an increase
in commercial banking
-20-
<PAGE>
loans. The Company had income of $569,580 for the third quarter 1997 compared to
$94,183 in the third quarter 1996.
Effects of Inflation
- --------------------
Assets and liabilities of financial institutions are virtually all monetary
in nature. Therefore, inflation does not affect a financial institution as
strongly as do changes in interest rates. While the general level of inflation
does underlie most interest rates, interest rates react more to changes in the
expected rate of inflation and to changes in monetary and fiscal policy.
Inflation affects operating expenses in that salaries, and the cost of supplies
and outside services tend to increase during periods of high inflation.
FISCAL YEARS ENDED DECEMBER 31, 1996 AND 1995
Summary
- -------
The Company's net income for the year ended December 31, 1996 was $583,348
compared with net income of $89,134 for the year ended December 31, 1995. The
554% increase in net income from 1995 to 1996 was primarily the result of the
large provision for loan losses taken in 1995, and expenses incurred in
exploring a trust business plan in 1995.
Balance Sheets
- --------------
The Company's assets increased 30% during 1996 from $57.4 million as of
December 31, 1995 to $74.7 million as of December 31, 1996. The increase in
total assets in 1996 was the result of an increase in commercial banking loans
and mortgage loans held for sale. The increase in assets was funded with a 37%
increase in deposits and through other borrowing sources. The increase in
mortgage banking production and related mortgage loans held for sale from 1995
to 1996 was the result of the relatively low historical mortgage rates during
1996, as well as an increase in correspondents from which the Mortgage Division
purchases mortgage loans.
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 $63.8 million or 85.4% of total assets
at December 31, 1996. This represents a 33.5% increase from December 31, 1995
when earning assets totaled $47.8 million or 83.3% of total assets. The
increase in earning assets resulted primarily from the 17.8% increase of $4.3
million of loans and 90.0% increase of $15.6 million of mortgage loans held for
sale. The increase was primarily funded through an increase in deposits and
other borrowings. Average mortgage loans held for sale during 1996 of $22.1
million constituted 42.1% of average earning assets and 35.4% of average total
assets. Average mortgage loans held for sale during 1995 of $15.2 million
constituted 37.6% of average interest-earning assets and 29.8% of average total
assets.
-21-
<PAGE>
The following table sets forth a distribution of the assets, liabilities
and shareholders' equity for the periods indicated:
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31,1995
----------------------------------- ----------------------------------
DAILY DAILY
AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
BALANCES EXPENSE RATES BALANCES EXPENSE RATES
----------------------------------- ----------------------------------
(IN THOUSANDS)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $26,048 $2,831 10.87% $18,509 $2,002 10.82%
Mortgage loans held for sale 22,067 2,237 10.14% 15,203 1,732 11.39%
Securities, at cost 1,681 108 6.42% 1,264 86 6.80%
Federal funds sold 1,453 81 5.57% 2,548 155 6.08%
Deposit in other banks 1,235 77 6.23% 2,889 166 5.75%
Total interest-earning assets 52,484 5,334 10.16% 40,413 4,141 10.25%
--------------------------------------------------------------------------
Other assets 9,970 10,625
-------- --------
Total assets $62,454 $51,038
======== ========
LIABILITIES &
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits $ 6,327 $ 250 3.95% $ 5,634 $ 216 3.83%
Savings deposit 4,036 239 3.44% 4,354 147 3.38%
Time deposits 26,408 1,679 6.365 19,238 1,166 6.06%
Mortgage warehouse line
of credit and other 2,049 94 4.59% 99 7 7.07%
--------------------------------------------------------------------------
Total interest-bearing
liabilities 38,820 2,162 5.57% 29,325 1,536 5.24%
Noninterest bearing deposits 10,314 8,919
Other liabilities 5,950 5,718
--------
Shareholders' equity 7,370 7,076
--------
Total liabilities &
shareholders' equity $62,454 $51,038
======== ========
Net interest income $3,172 $2,605
======== =======
Net yield on interest-earning
assets 6.04% 6.45%
====== ======
</TABLE>
- --------
(1) For the purpose of these computations, non-accruing loans are included in
the daily average loan amounts outstanding.
During 1996, average commercial banking loans were $26.1 million and
constituted 49.6% of average earning assets and 41.7% of average total assets.
For 1995, average commercial banking loans were $18.5 million and constituted
45.8% of average earning assets and 36.3% of average total assets. The 41.1%
increase in average commercial banking loans was the result of higher loan
demand in the Bank's service area as well as loan production from the Bank's
Bartow County, Georgia LPO.
-22-
<PAGE>
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
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 following table shows the amount of loans (excluding real estate-
construction, mortgage and consumer loans) outstanding as of December 31, 1996
which, based on remaining scheduled repayments of principal, are due in the
periods indicated. Also provided are the amounts due after one year, classified
according to the sensitivity to changes in interest rates. See Note 3 to the
Financial Statements and Supplementary Data for a discussion of concentrations
of credit risk.
<TABLE>
<CAPTION>
LOANS MATURING
-----------------------------------------------------------------------------
AFTER ONE YEAR
BUT WITHIN FIVE
WITHIN ONE YEAR YEARS AFTER FIVE YEARS TOTAL
-----------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial $ 3,325 $4,483 $1,512 $ 9,320
Real estate-construction 9,414 879 53 10,346
----------------------------------------------------------------------------
Total $12,739 $5,362 $1,565 $19,666
============================================================================
Loans maturing after one year with:
Fixed interest rates $3,988 $ 843
Variable interest rates 1,374 722
------------------------------
$5,362 $1,565
==============================
</TABLE>
As a result of economic conditions, losses for all commercial banking loan
categories as a percentage of average loans outstanding are expected to be
approximately .25% to .40% in 1997.
The following table summarizes the Bank's non-accrual, past due and
restructured commercial banking loans:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
(IN THOUSANDS)
<S> <C> <C>
Non-accrual loans $168 $416
======= ======
Accruing loans past due
90 days or more $ 23 $387
======= ======
Restructured loans -- --
======= ======
</TABLE>
The gross income on non-accrual commercial banking loans noted above that
would have been reported in the year ended December 31, 1996, if the loans had
been current in accordance with their original terms and had been outstanding
throughout the year, or since origination, was $13,433. No interest income on
non-accrual commercial banking loans was included in net income for the year
ended December 31, 1996.
-23-
<PAGE>
The following table summarizes activity in the allowance for commercial
banking loan losses for the dates indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995
---------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance, beginning of period $ 566,071 $ 275,286
Loans charged off:
Commercial (217,913) (18,466)
Real estate-construction (19,956) --
Real estate-mortgage -- (166,293)
Installment and other consumer (11,023) (25,921)
---------------------------------
TOTAL LOANS CHARGED OFF (248,892) (210,680)
Recoveries:
Installment and other consumer 15,583 4,142
Commercial 2,750 386
---------------------------------
TOTAL LOANS RECOVERED 18,333 4,528
Net loans charged off (230,559) (206,152)
---------------------------------
Provision for loan losses -- 496,937
---------------------------------
BALANCE, END OF PERIOD $ 335,512 $ 566,071
=================================
Loans outstanding at end of period,
excluding loans held for sale $ 28,500 $ 24,201
Ratio of allowance to loans
outstanding at end of period,
excluding loans held for sale 1.18% 2.34%
Average loans outstanding during
the period, excluding loans held
for sale $ 26,048 $ 18,509
Ratio of net charge offs during the
period to average loans outstanding 0.89% 1.11%
</TABLE>
The allocation of the allowance for commercial banking loan losses by loan
category at the dates indicated is presented below. The Bank does not maintain
a reserve with respect to mortgage loans held for sale due to the low risk
associated with the loans during the Bank's holding period. The percentages
represent banking loans in each category to total loans outstanding at the end
of each respective period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
--------------------------------------
AMT % AMT %
--------------------------------------
<S> <C> <C> <C> <C>
Commercial $183 32.7% $387 50.0%
Real estate-mortgage (1) 28 19.7% 35 20.7%
Real estate-construction
and land development 41 36.3% 27 18.9%
Consumer 61 11.3% 58 10.4%
Unallocated 22 59
--------------------------------------
$335 100.0% $566 100.0%
======================================
</TABLE>
- ---------
(1) Includes any loans secured in whole or in part by real estate.
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
management has determined to be adequate. The allowance for loan losses totaled
$335,512 or 1.18% of
-24-
<PAGE>
total commercial banking loans at December 31, 1996, and $566,071 or 2.34% of
total loans at December 31, 1995. The decrease in the allowance for loan losses
from 1995 to 1996 was the result of net charge offs of $230,559 in 1996. The
determination of the reserve level rests upon management's judgment about
factors affecting loan quality and assumptions about the economy. The adequacy
of the allowance for loan losses is evaluated periodically based on a review of
all significant loans, with a particular emphasis on past due and other loans
that management believes require attention. Management considers the year-end
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. See "Special
Cautionary Notice Regarding Forward-Looking Statements."
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 December 31, 1996, the Bank had $167,916 of loans accounted for
on a non-accrual basis, $23,140 contractually past due more than 90 days and no
loans considered to be troubled debt restructurings, as defined by FASB No. 15.
As of December 31, 1995, the Bank had $415,589 of loans accounted for on a non-
accrual basis, $387,295 contractually past due more than 90 days and no loans
considered to be troubled debt restructurings, as defined by FASB No. 15.
Non-performing loans are defined as non-accrual and renegotiated loans.
Adding real estate acquired by foreclosure and held for sale of $727,159 with
non-performing loans results in non-performing assets of $895,075 at December
31, 1996. The Bank is currently holding the foreclosed properties for sale. At
December 31, 1995, the Bank had non-performing assets totaling $565,589.
The chart below summarizes the Banks' 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.
Potential problem loans to total loans decreased from 6.9% at December 31, 1995
to 1.42% at December 31, 1996. The decrease was primarily a result of one loan
of $575,000 being acquired by foreclosure, charge offs of $248,892 and the
Bank's loan growth in 1996.
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------------------------
<S> <C> <C>
Non-performing loans (1) $167,916 $ 415,589
Troubled debt restructurings (2) -- --
Foreclosed properties 727,159 150,000
-------- ----------
Total non-performing assets 895,075 565,589
======== ==========
Loans 90 days or more past due on accrual status $ 23,140 $ 387,295
Potential problem loans (3) 405,089 1,662,080
Potential problem loans/total loans 1.42% 6.9%
Non-performing assets/total loans
and foreclosed properties 3.06% 2.32%
Non-performing assets and loans 90 days
or more past due on accrual status/
total loans and foreclosed properties 3.14% 3.91%
</TABLE>
- ---------------------
(1) Defined as non-accrual loans and renegotiated loans.
(2) As defined by FASB No. 15.
(3) Loans identified by management as potential problem loans (classified and
criticized loans) but still accounted for on an accrual basis.
-25-
<PAGE>
The information on non-accrual and restructured loans in the above table is
not comparable with the information on impaired loans as disclosed in Note 3 of
the Financial Statements and Supplementary Data.
The Bank invests its excess funds in U.S. Government and 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 $1.7 million at December 31, 1996 compared to $5.3 million at December
31, 1995. Federal funds sold totaled $570,000 at December 31, 1996 compared to
$1.0 million at December 31, 1995. These changes reflect increased lending and
loan demand in 1996.
The following table sets forth the maturities of securities, as of December
31,1996 and the weighted average yields of such securities (calculated on the
basis of the cost and effective yields weighted for the scheduled maturity of
each security). See Note 2 to the Financial Statements and Supplementary Data,
which provides details regarding the Bank's investment portfolio as of December
31, 1996 and 1995.
<TABLE>
<CAPTION>
MATURING
----------------------------------------------------------------------
AFTER ONE BUT
WITHIN ONE WITHIN FIVE WITHIN TEN AFTER TEN
YEAR YEARS YEARS YEARS
----------------------------------------------------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Municipal Bond -- -- -- -- $345 4.45% -- --
Mortgage-backed securities -- -- -- -- -- -- 404 6.77%
----------------------------------------------------------------------
Total -- -- -- -- $345 4.45% $404 6.77%
======================================================================
</TABLE>
The Bank's Mortgage Division acquires mortgage loans from small retail-
oriented originators in the Southeast United States through various funding
sources, including an $18.0 million warehouse line of credit from the FHLB-
Atlanta and a $40 million gestation repurchase agreement with Paine Webber
Incorporated. Under the repurchase agreement, the Bank sells mortgage loans and
simultaneously assigns the related forward sale commitments to Paine Webber
Incorporated. Substantially all of the Bank's mortgage loans are currently
being resold in the secondary market to Freddie Mac, 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 Bank retains the servicing rights on mortgage loans that it resells, it
collects annual servicing fees while the loan is outstanding. The Bank
periodically sells a portion of its retained servicing rights in bulk form. The
annual servicing fees and gains on the sale of servicing rights are an integral
part of the Bank's mortgage banking operation and its contribution to net
income. The Bank currently pays a third party subcontractor to perform
servicing functions with respect to its loans sold with retained servicing.
-26-
<PAGE>
The following table presents the outstanding balances of the Bank's
borrowings under its warehouse line of credit and the weighted average interest
rates thereon for the last two years. Draws on such line of credit have a 30-
day maturity.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
------------------------------
<S> <C> <C>
Balance at period end $7,396,755 $ --
Weighted average interest rate at period end 6.98% --
Maximum amount outstanding at any month's end $7,396,755 $ --
Average amount outstanding $1,966,391 $53,393
Weighted average interest rate 4.61% 7.31%
</TABLE>
During 1996, the Mortgage Division acquired $467.8 million of mortgage
loans, of which $452.1 million (96.6%) were resold in the secondary market with
servicing rights retained by the Bank. The remaining $33.0 million were carried
as mortgage loans held for sale on the balance sheet as sale of the loans was
pending.
At December 31, 1996, capitalized costs of $4.1 million related to the
purchase of mortgage servicing rights were carried on the balance sheet as
purchased mortgage servicing rights. At December 31, 1995, the Bank carried
$4.5 million of purchased mortgage servicing rights on its balance sheet. The
Bank is amortizing the purchased mortgage servicing rights over an accelerated
period. At December 31, 1996, the Bank held servicing rights with respect to
loans with unpaid principal balances totaling $407.8 million compared to $392.1
at December 31, 1995. During 1996, the Bank sold servicing rights with respect
to $438.8 million of mortgage loans carried on its balance sheet at $5.0 million
for a gain of $884,457. During 1995, the Bank sold servicing rights with
respect to $399.5 million of mortgage loans carried on its balance sheet at $4.6
million for a gain of $920,408. The market value of the servicing portfolio is
contingent upon many factors including the interest rate environment, the
estimated life of the servicing portfolio, the loan quality of the servicing
portfolio and the coupon rate of the loan portfolio. There can be no assurance
that the Bank will continue to experience a market value of the servicing
portfolio in excess of the cost to acquire the servicing rights, nor can there
be any assurance as to the expected life of the servicing portfolio.
The Bank's deposits totaled $55.7 million and $40.5 million at December 31,
1996 and 1995, respectively. Deposits averaged $47.1 million and $38.1 million
during the years ended December 31, 1996 and 1995, respectively. Interest-
bearing deposits represented 77% and 81% of total deposits at December 31, 1996
and 1995, respectively. The decrease of interest-bearing deposits as a percent
of total deposits was the result of growth in non-interest bearing deposits
including escrow balances related to the Mortgage Division. Certificates of
deposit composed 70% of total interest-bearing deposits for December 31, 1996
compared to 67% at December 31, 1995. 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.
-27-
<PAGE>
The following table summarizes average daily balances of deposits and rates
paid on such deposits for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
-----------------------------------------------------------------
AMOUNT RATE AMOUNT RATE
-----------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $10,314 - $ 8,919 -
Interest-bearing
demand deposits 6,327 3.95% 5,634 3.83%
Savings deposits 4,036 3.44% 4,354 3.38%
Time deposits 26,408 6.36% 19,238 6.06%
------- -------
Total $47,085 $38,145
======= =======
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 1996 are summarized as follows (in thousands):
<TABLE>
<S> <C>
Under 3 months $ 946
3 to 6 months 737
6 to 12 months 2,130
Over 12 months 3,044
------
$6,857
======
</TABLE>
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 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 to maintain a leverage ratio of
8.0%. At December 31, 1996 the Bank's leverage ratio was 8.97%.
At December 31, 1996 the Company's total shareholders' equity was $7.7
million or 10.31% of total assets, compared to $7.1 million or 12.4% of total
assets at December 31, 1995. The decrease in shareholders' equity to total
asset ratio in 1996 was the result of a 30% increase in total assets. At
December 31, 1996, total capital to risk-adjusted assets was 14.4%, with 11.6%
consisting of tangible common shareholders' equity. The Company paid $35,077 of
dividends during 1996 or $.05 per share compared to $176,139 or $.25 per share
during 1995. The Company's dividends in 1996 were paid during the last quarter,
as the payment of dividends had been suspended in the third quarter of 1995.
The suspension of dividends was the result of a decrease in earnings caused by a
large provision for loan losses and expenses incurred exploring a trust business
plan.
-28-
<PAGE>
The following table shows operating and capital ratios for each of the last
two years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
----------------------------
<S> <C> <C>
Percentage of net income to:
Average shareholders' equity 7.92% 1.26%
Average total assets 0.93% 0.17%
Percentage of average
shareholders' equity to
average total assets 11.80% 13.86%
Percentage of dividends paid
to net income 6.01% 197.61%
</TABLE>
During 1995, the Company purchased 3,334 shares of Common Stock to be held
in Treasury for an aggregate of $36,091. During 1995, 600 shares of Common
Stock were issued pursuant to employee stock option exercises for an aggregate
of $6,000. There is no active market for the Common Stock.
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 $24.1 million and $19.4 million during 1996 and 1995, representing
47% and 51% of average deposits for those years, respectively. The increase in
average liquid assets was the result of the increase in mortgage loans held for
sale. Average non-mortgage loans were 55% and 49% of average deposits for 1996
and 1995, respectively. Average deposits were 90% and 94% of average interest-
earning assets for 1996 and 1995, respectively. As noted in the tables included
in this Management's Discussion and Analysis section, approximately $19.7
million, or 69%, of the commercial banking loan portfolio consisted of
commercial and real estate construction loans.
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. The Bank's
liquidity position has also been enhanced by the operations of the Mortgage
Division due to the investment of funds in short-term assets in the form of
mortgages held for sale. Once funded, mortgages will generally be held by the
Bank for a period of 10 to 30 days. 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 repricing opportunities exist for both assets and liabilities
in roughly equivalent amounts at approximately the same time intervals.
Imbalances in these repricing opportunities, at any point in time, 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.
-29-
<PAGE>
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 $6.5
million at December 31, 1996 and $5.1 million at December 31, 1995. 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 December 31, 1996. 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 December 31, 1996, the Bank
was within its policy guidelines of rate-sensitive assets to rate-sensitive
liabilities of 80 - 120% at the one year interval. Since all interest rates and
yields do not adjust at the same velocity, this is only a general indicator of
rate sensitivity. The total excess of interest-bearing assets over interest-
bearing liabilities, based on a five-year time period, was $13.3 million, or
17.8% of total assets.
INTEREST RATE SENSITIVITY GAPSAS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
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 $49.8 $ 3.8 $8.6 $1.6
Interest-bearing
liabilities 25.0 17.0 8.5 --
---------------------------------------------------------
Interest sensitivity
gap $24.8 $(13.2) $ .1 $1.6
=========================================================
</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.
While other hedging techniques may be used, speculation is not allowed
under the Mortgage Division's secondary marketing policy. As of December 31,
1996, the Bank had in place purchase commitment agreements terminating between
January and March of 1997 with respect to an aggregate of approximately $20.5
million to hedge the mortgage pipeline of $31.7 for which the Bank had an
interest rate risk. At December 31, 1996, the Financial Accounting Standards
Board had issued an exposure draft "Accounting for Derivative and Similar
Financial Instrument and for Hedging Activities." The pronouncement would
require the forward commitments to be recorded as an asset or liability with the
changes in fair value recorded in the income statement. Management has not yet
determined the impact of this pronouncement on its financial statements.
Management continually tries to minimize the interest rate sensitivity gap.
Attempting to minimize the gap is a continual challenge in a changing interest
rate environment and one of the objectives of the Bank's asset/liability
management strategy.
-30-
<PAGE>
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 Bank had interest income of $5.3 million in 1996, and $4.1 million in
1995. The 24.4% increase in interest income is attributable to the increase in
interest-earning assets which is the result of the higher volume of commercial
banking loans as well as a higher volume of fee income associated with mortgage
loans which is included in interest income The Bank had closed $467.8 million
of mortgage loans during 1996 compared to 329.1 million during 1995.
The Bank had interest expense of $2.2 million in 1996 and $1.5 million in
1995. The increase resulted from a higher volume of interest-bearing deposits.
The increase in interest-bearing time deposits was the result of the increase in
brokered deposits utilized to fund mortgage loans held for sale as well as core
deposits growth. Deposits increased $15.2 million in 1996 of which $13.8
million represented core deposits and $1.4 million represent broker deposits.
Growth of the interest-bearing deposits accounted for 67.1% of the total growth
in 1996. In 1996 and 1995, interest expense accounted for 26% and 22% of total
expenses, respectively.
Net interest income for 1996 was $3.2 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 Bank's net interest margin
during 1996 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 4.6%. Net interest income, interest margin and net
interest spread in 1995 were $2.6 million, 6.5%, and 5.0%, respectively. The
increase in net interest income 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
decrease in net interest margin and interest spread is indicative of the
interest rate-conscious and highly competitive market in which the Bank
operates.
-31-
<PAGE>
The following table sets forth for the periods indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rate:
<TABLE>
<CAPTION>
1996 COMPARED TO 1995 1995 COMPARED TO 1994
------------------------------------------------------------------------------
INCREASE (DECREASE DUE TO (1)
------------------------------------------------------------------------------
VOLUME RATE NET VOLUME RATE NET
------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans $ 819 $ 10 $ 829 $ 235 $ 268 $503
Mortgage loans held for sale 713 (208) 505 (413) 652 239
Securities, at cost 27 (5) 22 (3) 16 13
Federal funds sold (62) (12) (74) 143 4 147
Deposits in other banks (102) 13 (89) (100) 63 (37)
------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS $1,395 ($202) $1,193 ($138) $1,003 $865
==============================================================================
Interest paid on:
Demand deposits $ 27 $ 7 $ 34 ($4) $ 29 $ 25
Savings deposits (11) 3 (8) (17) 16 (1)
Time deposits 453 60 513 90 203 293
Mortgage warehouse
line of credit and other 90 (3) 87 (19) (5) (24)
------------------------------------------------------------------------------
TOTAL INTEREST-BEARING
LIABILITIES $ 559 $ 67 $ 626 $ 50 $ 243 $293
==============================================================================
</TABLE>
(1) The change in interest due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
The Bank did not make a provision to the allowance for loan losses in 1996,
due to a decrease of $1.3 million of the Bank's problem loans which are defined
as classified and critical but still accounted for on an accrual basis. The
Bank made provisions to the allowance for loan losses in the amount of $496,937
in 1995. During 1996, the Bank charged off $248,892 of loans to the allowance
for loan losses. During 1995, the Bank charged off $210,680 of loans to the
allowance for loan losses. The ratios of net charge offs to average non-
mortgage loans outstanding during the year were .89%, and 1.11% for 1996 and
1995, respectively.
Other income was $4.0 million in 1996 compared to $3.4 million in 1995.
The 17.6% increase in other income was related to the increase of gestation fee
income. The Bank sold bulk blocks of servicing rights with respect to $438.8
million of mortgage loans in 1996 for a total net gain of $884,457 compared to
servicing rights sales in 1995 of $339.5 million for a net gain of $920,408.
The Bank currently plans to sell, on a quarterly basis, a portion of the
servicing rights retained during 1997, 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 Bank sells mortgage loans and simultaneously assigns the related
forward sale commitments to a securities broker. The Bank continues to receive
fee income from the securities broker until the loan is delivered into the
forward commitment.
Other operating expenses increased to $6.2 million in 1996 from $5.4
million in 1995. The increase in other operating expenses was related to the
increase in salaries and benefits and third party mortgage outsourcing expense.
The Company had net income of $583,348 in 1996 which was primarily related
to the improvement in net interest income, mortgage banking operations and the
related gains on the sale of servicing rights. The Company's net income of
$89,134 in 1995 was in part due to the result of the mortgage banking operations
and related servicing rights sales gains. Income tax as a percentage of pretax
net income was 40% for both 1996 and 1995.
-32-
<PAGE>
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.
-33-
<PAGE>
MANAGEMENT
The Board of Directors of the Company currently consists of six members
divided into three classes, designated Class I, Class II, and Class III, each
class serving for a period of three years. The current members of the Company's
Board of Directors are serving terms ending with the Company's annual meetings
of shareholders in 1998 (Class I), 1999 (Class II) and 2000 (Class III). One-
third of the members of the Board of Directors are elected by the shareholders
annually.
The following table sets forth as to each director and officer of the
Company his name; age at December 31, 1997; the date first elected as a director
or officer; a description of positions and offices with the Company (other than
as a director, as applicable), the Bank, and CMS, if any; a brief description of
principal occupation or occupations over at least the last five years; other
business experience; the number of shares of Common Stock beneficially owned on
December 31, 1997; and the percentage of the total shares of Common Stock
outstanding on December 31, 1997 that such beneficial ownership represents.
Messrs. Howell and Rast have served as directors of the Company since its
organization, and as directors of the Bank from its organization until April
1995. Mr. Lowe has served as director of the Bank and of the Company since
their respective organizations. Mr. Fendley, who has served as a director of
the Bank since its organization, was elected to the Company's Board of Directors
at the 1994 Annual Meeting. Mr. Howard has served as a director of the Bank and
Company since the 1994 Annual Meeting. Mr. Elliott has served as a director of
the Company since October 1996 and a director of the Bank since April 1995.
<TABLE>
<CAPTION>
NAME AND AGE
AT DECEMBER 31, 1997
AND DATE FIRST ELECTED PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
- --------------------------- ---------------------------------------------------------------------------
CLASS I DIRECTORS (TERM EXPIRING 1998)
---------------------------------------------------------------------------
<C> <S>
Charles R. Fendley Mr. Fendley served as the Vice President of Jasper Yarn Processing, Inc.,
Age 51 a textile business, from 1972 until 1996, and has been a director of
1994 Oglethorpe Power Corporation since 1993. Since August 1996, Mr. Fendley
has served as a mortgage officer of the Bank. Mr. Fendley has served as
Secretary of the Company since May 1995.
A. James Elliott Mr. Elliott served as a partner with the Atlanta law firm of Alston & Bird
Age 55 LLP for 30 years before retiring in 1994, to join Emory University Law
1995 School as the Associate Dean. Mr. Elliott has been a director of the Bank
since April 1995 and has served as its Chairman since April 1996. Mr.
Elliott has served on the Board of Directors of the Company since October
1996.
</TABLE>
-34-
<PAGE>
<TABLE>
<CAPTION>
CLASS II DIRECTORS (TERM EXPIRING 1999)
---------------------------------------------------------------------------
<C> <S>
L. Edmund Rast Mr. Rast began his career with the Southern Bell Telephone Company in 1937
Age 81 and served in various capacities before leaving as the President and Chief
1991 Executive Officer of Southern Bell in 1981. Mr. Rast then joined
Audichron Co., an Atlanta electronics company, as Chairman and Chief
Executive Officer in 1983, where he remained until his retirement in 1984.
Mr. Rast served as Chairman of the Board of Directors of the Bank from
1989 until April 1995, when he retired from such position. Mr. Rast also
served as the Chairman of the Board of Directors of the Company from 1991
until May 1995.
Harry C. Howard Mr. Howard was a partner with the Atlanta law firm of King & Spalding from
Age 67 1960 through 1992 and is presently a retired partner of such firm. Mr.
1994 Howard served as Chairman of the Board of Directors of the Bank from April
1995 to April 1996.
CLASS III DIRECTORS (TERM EXPIRING 2000)
---------------------------------------------------------------------------
Arthur Howell Mr. Howell was a partner with the Atlanta law firm of Alston & Bird LLP
Age 78 from 1945 through August 1988, and is currently of counsel with that firm.
1991 He is the President and a director of Summit Industries, Inc., a
family-owned consumer products company, and is a director of the
Enterprise Group of Funds, Inc. Mr. Howell has served as Chairman of the
Board of Directors of the Company since May 1995 and had previously served
as Secretary of the Company. Mr. Howell retired from the Bank's Board in
April 1995.
Michael W. Lowe Mr. Lowe founded Jasper Jeep Sales, Inc. in 1976 and has served as its
Age 49 Chief Executive Officer since that time.
1991
OFFICERS OF THE COMPANY
---------------------------------------------------------------------------
J. Donald Boggus, Jr. Mr. Boggus, Jr. has served as President of the Bank since April, 1996.
33 Mr. Boggus, Jr. had served as the Vice President and Controller of the
1989 Bank since February 1989 and as the Vice President, Treasurer and Chief
Financial Officer of the Company since November 1991. He graduated from
the Georgia Institute of Technology with a Bachelor of Science in
Management in 1986. He first worked as an accountant and then joined the
Etowah Bank, Canton, Georgia as an Assistant Comptroller in September
1987. He was promoted to Comptroller and Auditor in October 1988 and
served in that position until leaving to join the Bank.
Robert C. KenKnight Mr. KenKnight joined the Bank as its Executive Vice President for Mortgage
56 Banking Operations in February 1993. He has served as the President of
1993 CMS since its organization in October 1994. Mr. KenKnight was the
President of Liberty Mortgage Corporation, an Atlanta-based mortgage
company with a mortgage servicing portfolio of approximately $900 million,
from October 1989 until joining the Bank. He was previously employed as
Executive Vice President of Entrust Funding Company, Atlanta, from
February 1986 to August 1989, and has worked in the mortgage industry
since 1963. Mr. KenKnight is past President of the Mortgage Bankers
Association of Georgia and the Atlanta Mortgage Bankers Association.
</TABLE>
-35-
<PAGE>
<TABLE>
<C> <S>
Michael P. Leddy Mr. Leddy has a B.S. from the University of Central Florida where he
53 majored in finance. He was head of the Secondary Marketing group of
1993 Molton Allen & Williams, Inc. before leaving in 1976 to join Paine Webber
Incorporated's institutional sales division in Atlanta, Georgia. In 1985,
he served on the initial management team that started Arvida Mortgage
Company in Boca Raton, Florida, a subsidiary of Walt Disney Productions.
He then returned to Paine Webber Incorporated before joining the Company
in 1993 as Senior Vice President of Secondary Marketing for the Bank and
CMS.
</TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table reflects the number of shares of Common Stock
beneficially owned by (i) each of the directors, (ii) each of the executive
officers named in the Summary Compensation Table, and (iii) all of the directors
and executive officers of the Company as a group including the name and address
of the only person known by the Company to beneficially own more than 5% of the
Common Stock as of December 31, 1997, together with the number of shares and
percentage of outstanding shares beneficially owned. Management of the Company
is informed that all such shares were held individually by each such shareholder
with sole voting and investment power, except as otherwise noted herein.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS(2)
------------------- --------------------------- --------------------
<S> <C> <C>
Michael W. Lowe, Director 70,350 (3) 9.69%
Fox Run
Jasper, GA 30143
Charles R. Fendley, Secretary 6,850 0.94%
165 Town Creek Trail
Jasper, GA 30143
Arthur Howell, Chairman 17,960 (4) 2.47%
200 Larksbur Lane
Highlands, NC 28741
Harry C. Howard, Director 14,185 1.95%
191 Peachtree Street
Suite 4900
Atlanta, GA 30303-1763
Robert C. KenKnight, Executive Officer 8,147 1.12%
2043 Woodland Way
Dunwoody, GA 30338
L. Edmund Rast, Director 11,600 1.60%
4434 Harris Valley Road
Atlanta, GA 30327
J. Donald Boggus, Jr., President/CEO (5) 6,750 (5) .93%
281 Happy Talk Trail
Jasper, GA 30143
</TABLE>
-36-
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS(2)
------------------- --------------------------- --------------------
<S> <C> <C>
A. James Elliott, Director 5,600 .77%
732 Big Canoe
Big Canoe, GA 30143
Michael P. Leddy, Senior Officer -- --
4698 East Conway Drive
Atlanta, GA 30327
All current directors and executive 141,442 19.47%
officers as a group (9 persons)
</TABLE>
- --------------------
(1) Information relating to beneficial ownership of Common Stock is based upon
information furnished by each person using "beneficial ownership" concepts
as set forth in the rules of the Commission. Under those rules, a person is
deemed to be a "beneficial owner" of a security if that person has or shares
"voting power," which includes the power to vote or direct the voting of
such security, or "investment power," which includes the power to dispose of
or to direct the disposition of such security. The person is also deemed to
be a beneficial owner of any security of which that person has a right to
acquire beneficial ownership within 60 days. Under such rules, more than
one person may be deemed to be a beneficial owner of the same securities,
and a person may be deemed to be a beneficial owner of securities as to
which he or she may disclaim any beneficial interest. Accordingly,
directors are named as beneficial owners of shares as to which they may
disclaim any beneficial interest.
(2) Based on 726,354 shares issued and outstanding. Includes options to
purchase 20,267 shares of Common Stock.
(3) Includes 13,200 shares held as custodian for Mr. Lowe's children and 2,500
shares held by his wife.
(4) Includes 1,000 shares held by Mr. Howell's wife, as to which shares Mr.
Howell disclaims beneficial ownership.
(5) Includes 6,000 shares subject to stock options exercisable currently or
within 60 days and 340 shares held by Mr. Boggus' wife.
DIRECTOR COMPENSATION
Members of the Board of Directors each receive a retainer fee in the amount
of $1,000 per quarter for their service on the Company's Board of Directors.
Beginning in 1995, non-employee directors of the Company and the Bank received
stock options pursuant to the 1995 Stock Option Plan for Outside Directors (the
"Plan"). Each Outside Director, as defined by the Plan, who serves in such
capacity is granted an option to purchase 200 shares of Common Stock as of the
day following the annual meeting of the Company's shareholders. The plan covers
25,000 shares of which 12,800 were granted in 1995. Each director of the
Company during 1997 attended at least 75% of the aggregate number of meetings of
the Board of Directors and committees of the Board of Directors on which he
serves.
COMPENSATION OF EXECUTIVE OFFICERS
Under rules established by the Commission, the Company is required to provide
certain data and information in regard to the compensation and benefits provided
to the Company's chief executive officer and other executive officers who
receive in excess of $100,000 per year (collectively, the "named executive
officers").
-37-
<PAGE>
SUMMARY COMPENSATION TABLE
The table below sets forth certain elements of compensation for the named
executive officers of the Company or the Bank for the periods indicated.
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION LONG-TERM COMPENSATION
---------------------------- ----------------------------------------------
SECURITIES
RESTRICTED UNDERLYING ALL OTHER
NAME AND STOCK OPTIONS/ COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) AWARDS SARS (#) ($)(1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
J. Donald Boggus, Jr. 1996 $ 65,000 $ 6,500 -- $4,361
President and Chief 1995 50,000 5,000 -- 87
Executive Officer of the 1994 46,000 10,000 --
Company and the Bank
Robert C. KenKnight 1996 $322,286 -- 2,500 $9,050
Executive Vice President 1995 283,364 -- -- 5,064
of the Bank; President of 1994 176,375 -- -- 5,064
the Bank's Mortgage
Division
Michael P. Leddy 1996 $125,000 $25,000 1,500 $5,008
Senior Vice President of 1995 112,500 9,000 5,000 864
the Bank in Charge of 1994 110,864 25,000 -- 864
Secondary Mortgage
Marketing
</TABLE>
(1) Other compensation represents insurance premiums paid by the Company on
group term life insurance in excess of $50,000 and car allowance.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors and executive officers of the Company and the Bank, and certain
business organizations and individuals associated with such persons, have been
customers of and have had, and may continue to have, banking transactions with
the Bank in the ordinary course of business. Such transactions include loans,
commitments, lines of credit, and letters of credit. Such transactions were
made on substantially the same terms, including interest rates, repayment terms,
and collateral, as those prevailing at the time for comparable transactions with
other persons, and did not and do not involve more than normal risk of
collectibility or other unfavorable features. Additional transactions with such
persons and businesses are anticipated in the future. At September 30, 1997,
the amount of credit extended to directors, executive officers, principal
shareholders and their associates was approximately $1,686,770, or 19.96% of the
Company's total consolidated shareholders equity.
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<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning stock options
granted during 1996 to the named executive officers. No stock appreciation
rights ("SARs") were granted in 1996.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE
NAME GRANTED (#) FISCAL YEAR ($/SHARE) EXPIRATION DATE
- --------------------- ------------ ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
J. Donald Boggus, Jr. N/A N/A N/A N/A
Robert C. KenKnight 2,500 (1) 28% $13.00 May 1, 2006
Michael P. Leddy 1,500 (1) 17% $13.00 May 1, 2006
</TABLE>
- -------------------
(1) One-third of the options granted to Messrs. KenKnight and Leddy become
exercisable on May 1 of each of 1999, 2000, and 2001.
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<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN 1996
AND 1996 YEAR-END OPTION/SAR VALUES
The following table shows stock options exercised by the named executive
officers during 1996, including the aggregate value of gains on the date of
exercise. In addition, this table includes the number of shares covered by both
exercisable and non-exercisable options as of December 31, 1996. Also reported
are the values for "in-the-money" options, which represent the positive spread
between the exercise price of any such existing options and the year-end price
of the Company's Common Stock. No SARs were outstanding in 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISABLE
OPTIONS/SARS AT FY-END IN-THE-MONEY
SHARES (#) OPTIONS/SARS FY-END ($)
ACQUIRED ON VALUE REALIZED EXERCISABLE (E) / EXERCISABLE (E)
NAME EXERCISE (#) ($) UNEXERCISABLE (U) UNEXERCISABLE (U)
- ----------------------- ------------ -------------- ----------------------- ------------------------
<S> <C> <C> <C> <C>
J. Donald Boggus, Jr. -- N/A 6,000 (E) $15,000 (E)
-- (U) -- (U)
Robert C. KenKnight -- N/A 3,333 (E) $ 4,166 (E)
9,167 (U) $ 8,950 (U)
Michael P. Leddy -- N/A -- (E) -- (E)
6,500 (U) -- (U)
A. James Elliott -- N/A 400- (E) -- (E)
-- (U) -- (U)
Charles R. Fendley -- N/A 1,400 (E) -- (E)
-- (U) -- (U)
Harry C. Howard -- N/A 400- (E) -- (E)
-- (U) -- (U)
Arthur Howell -- N/A 1,400 (E) -- (E)
-- (U) -- (U)
Michael W. Lowe -- N/A 1,400 (E) -- (E)
-- (U) -- (U)
L. Edmund Rast -- N/A 1,400 (E) -- (E)
-- (U) -- (U)
</TABLE>
EXECUTIVE EMPLOYMENT AGREEMENT
Robert C. KenKnight, the President of CMS and Executive Vice President of
the Bank, has entered into an employment agreement with the Company. In
addition to Mr. Ken Knight's salary, he is entitled to receive incentive
compensation in the form of cash and shares of restricted stock, based on a
percentage of the total added value of the Bank's Mortgage Division and CMS. In
the event the Bank or the Company is acquired and Mr. Ken Knight's employment is
terminated as a result of such acquisition, the employment agreement authorizes
a severance payment approximately equal to 12 months of annual compensation in
effect at such time, plus any accrued incentive compensation.
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<PAGE>
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. The following discussion summarizes certain statutes,
rules and regulations affecting the Company and the Bank. This summary is
qualified in its entirety by reference to the statutory and regulatory
provisions referred to below and is not intended to be an exhaustive description
of the statutes or regulations applicable to the Company's and the Bank's
businesses. Any change in applicable law or regulations may have a material
effect on the business of the Company and the Bank. Supervision, regulation and
examination of banks by the bank regulatory agencies are intended primarily for
the protection of depositors rather than holders of Company common stock.
BANK HOLDING COMPANY REGULATION
As a bank holding company registered with the Federal Reserve under the BHC
Act, and with the Georgia Department under the Georgia Financial Institutions
Code, the Company is subject to supervision, examination and reporting by the
Federal Reserve and the Georgia Department.
The Company is required to file with the Federal Reserve its periodic
reports and such additional information as the Federal Reserve may require. The
Federal Reserve examines the Company and may examine its subsidiaries. The
Georgia Department also may examine the Company.
The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
of the assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company. A bank holding company may acquire
direct or indirect ownership or control of voting shares of any company that is
engaged directly or indirectly in banking or managing or controlling banks or
performing services for its authorized subsidiaries. A bank holding company
may, however, engage in or acquire an interest in a company that engages in
activities which the Federal Reserve has determined by regulation or order to be
so closely related to banking as to be a proper incident thereto.
The BHC Act, as amended by the interstate banking provisions of the Riegle-
Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate
Banking Act"), which became effective on September 29, 1995, repealed the prior
statutory restrictions on interstate acquisitions of banks by bank holding
companies, such that the Company and any other bank holding company located in
Georgia may now acquire a bank located in any other state, and any bank holding
company located outside Georgia may lawfully acquire any bank based in another
state, regardless of state law to the contrary, in either case subject to
certain deposit-percentage, aging requirements, and other restrictions. The
Interstate Banking Act also generally provides that, after June 1, 1997,
national and state-chartered banks may branch interstate through acquisitions of
banks in other states. By adopting legislation prior to that date, a state has
the ability either to "opt in" and accelerate the date after which interstate
branching is permissible or "opt out" and prohibit interstate branching
altogether. In March 1996, the Georgia legislature adopted legislation opting
into interstate branching effective June 1, 1997.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996
("EGRPRA") was signed into law on September 30, 1996. EGRPRA streamlined the
non-banking activities application process for well-capitalized and well-managed
bank holding companies. Under EGRPRA, qualified bank holding companies may
commence a regulatory approved non-banking activity without prior notice to the
Federal Reserve; written notice is required within 10 days after commencing the
activity. Under EGRPRA, the prior notice period is reduced to 12 days in the
event of any non-banking acquisition or share purchase or de novo non-baking
activity previously approved by order of the Federal Reserve, but not yet
implemented by regulations, assuming the size of the acquisition or proposed
activity does not exceed 10% of risk-weighted assets of the acquiring bank
holding company and the consideration does not exceed 15% of Tier 1 Capital.
On February 20, 1997, the Federal Reserve adopted, effective April 21,
1997, amendments to its Regulation Y implementing certain provisions of EGRPRA.
Among other things, these amendments to Federal Reserve Regulation Y reduce the
notice and application requirements applicable to bank and nonbank acquisitions
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<PAGE>
and de novo expansion by well-capitalized and well managed holding companies;
expand the list of non-banking activities permitted under Regulation Y and
reduce certain limitations on previously permitted activities; and amend Federal
Reserve anti-tying restrictions to allow banks greater flexibility to package
products with their affiliates.
The Company is a legal entity separate and distinct from the Bank and its
other Subsidiaries. Various legal limitations restrict the Bank from lending or
otherwise supplying funds to the Company or its non-bank Subsidiaries, including
CMS. The Company and the Bank are subject to Section 23A of the Federal Reserve
Act. Section 23A defines "covered transactions", which include extensions of
credit, and limits a bank's covered transactions with any affiliate to 10% of
such bank's capital and surplus. All covered and exempt transactions between a
bank and its affiliates must be on terms and conditions consistent with safe and
sound banking practices, and banks and their subsidiaries are prohibited from
purchasing low-quality assets from the bank's affiliates. Finally, Section 23A
requires that all of a bank's extensions of credit to an affiliate be
appropriately secured by acceptable collateral, generally United States
government or agency securities. The Company and the Bank also are subject to
Section 23B of the Federal Reserve Act, which generally limits covered and other
transactions among affiliates to terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the bank
or its subsidiary as prevailing at the time for transactions with unaffiliated
companies.
Federal Reserve policy requires a bank holding company to act as a source
of financial strength and to take measures to preserve and protect bank
subsidiaries in situations where additional investments in a troubled bank may
not otherwise be warranted. In addition, under the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), where a bank holding
company has more than one bank or thrift subsidiary, each of the bank holding
company's subsidiary depository institutions are responsible for any losses to
the FDIC as a result of an affiliated depository institution's failure. As a
result, a bank holding company may be required to loan money to its subsidiaries
in the form of capital notes or other instruments which qualify as capital under
regulatory rules. However, any loans from the holding company to such
subsidiary banks likely will be unsecured and subordinated to such bank's
depositors and perhaps to other creditors of the bank.
The Company is also regulated by the Georgia Department. The Financial
Institutions Code requires annual registration with the Georgia Department by
all Georgia bank holding companies. Such registration includes information with
respect to the financial condition, operations and management of intercompany
relationships of the bank holding company and its subsidiaries and related
matters. The Georgia Department may also require such other information as is
necessary to keep itself informed as to whether the provisions of Georgia law
and the regulations and orders issued thereunder by the Georgia Department have
been complied with.
BANK REGULATION
As a Georgia bank whose deposits are insured by the FDIC's BIF maintained
by the FDIC, the Bank is subject to regulation and examination by the Georgia
Department and by its primary federal regulator, the FDIC. The Georgia
Department and the FDIC regulate and monitor all of the Bank's operations,
including reserves, loans, mortgages, payments of dividends, interest rates and
the establishment of branches. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates.
There are various statutory and contractual limitations on the ability of
the Bank to pay dividends, extend credit or otherwise supply funds to the
Company and its subsidiaries. Dividends from the Bank are expected to
constitute the Company's major source of funds for any cash dividends to be paid
on the Common Stock. Under Georgia law, the Georgia Department's approval of a
dividend by the Bank is not required if each of the following conditions is met:
(1) total classified assets at the most recent examination of the Bank do not
exceed 80% of equity capital as reflected at such examination; (2) the aggregate
amount of dividends to be paid in the calendar year does not exceed 50% of the
Bank's net profits, after taxes but before dividends, for the previous year; and
(3) the ratio of the Bank's equity capital to its adjusted total assets is not
less than 6%.
The FDIC has the general authority to limit the dividends paid by insured
banks if such payment may be deemed to constitute an unsafe and unsound
practice. The FDIC has indicated that paying dividends that deplete a state
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<PAGE>
non-member bank's capital base to an inadequate level would be an unsound and
unsafe banking practice. The FDIC regularly examines the Bank and has the
authority to approve or disapprove the establishment of branches, mergers,
consolidations and other similar corporate actions. Furthermore, the FDIC has
the right to prevent or remedy unsafe or unsound banking practices or other
violations of law.
During its 1996 Session, the Georgia Legislature adopted legislation
effective July 1, 1996, that permits, subject to the prior approval of the
Georgia Department, banks in Georgia to establish new branch banks in up to
three counties in Georgia. Statewide branching will be permissible after June
30, 1998. Branch banks established pursuant to the acquisition of existing
depository institutions are not counted towards the three new branch bank
limitation. Other legislation that was passed recently by the Georgia
Legislature deletes the reciprocity requirements for interstate acquisitions,
and will permit bank holding companies to enter Georgia by acquiring banks in
Georgia that are at least five years old and banks to merge across state lines
beginning July 1, 1997.
MORTGAGE BANKING REGULATION
CMS is licensed and regulated as a "mortgage banker" by the Georgia
Department. It is also qualified as a Freddie Mac seller/servicer and CMS must
meet the requirements of such corporations and various private parties with
which it conducts business, including warehouse lenders and those private
entities to which it sells mortgage loans.
CAPITAL REQUIREMENTS
The Federal Reserve and the FDIC have adopted risk-based capital guidelines
for bank holding companies and national and state member banks. The guideline
for a minimum ratio of capital to risk-weighted assets (including certain off-
balance-sheet activities, such as standby letters of credit) is 8%. At least
half of the total capital must consist of Tier 1 Capital, which includes common
equity, retained earnings and a limited amount of qualifying preferred stock,
less goodwill. The remainder may consist of subordinated debt, non qualifying
preferred stock and a limited amount of any loan loss allowance ("Tier 2
Capital" and, together with Tier 1 Capital, "Total Capital").
In addition, the federal agencies have established minimum leverage ratio
guidelines for bank holding companies, national banks, and state member banks,
which provide for a minimum leverage ratio of Tier 1 Capital to adjusted average
quarterly assets ("leverage ratio") equal to 3%, plus an additional cushion of
100 to 200 basis points (i.e., 1%-2%) if the institution has less than the
highest regulatory rating. The guidelines also provide that institutions
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 Federal
Reserve's guidelines indicate that 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 and the FDIC have
not advised the Company or the Bank of any specific minimum leverage ratio or
Tangible Tier 1 Leverage Ratio applicable to them.
The Federal Deposit Insurance Corporation Improvement Act of 1992
("FDICIA"), among other things, requires the federal banking agencies to take
"prompt corrective action" in respect of depository institutions that do not
meet minimum capital requirements. FDICIA establishes five capital tiers: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." A depository
institution's capital tier will depend upon how its capital levels compare to
various relevant capital measures and certain other factors, as established by
regulation.
All of the federal banking agencies have adopted regulations establishing
relevant capital measures and relevant capital levels. The relevant capital
measures are the Total Capital ratio, Tier 1 Capital ratio, and the leverage
ratio. Under the regulations, a national or state member bank will be (i) well
capitalized if it has a Total Capital ratio of 10% or greater, a Tier 1 Capital
ratio of 6% or greater, and a leverage ratio of 5% or greater and is not subject
to any order or written directive by a federal bank regulatory agency to meet
and maintain a specific capital level for any capital measure, (ii) adequately
capitalized if it has a Total Capital ratio of 8% or greater, a Tier 1 Capital
ratio of 4% or greater, and a leverage ratio of 4% or greater (3% in certain
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<PAGE>
circumstances) and is not well capitalized, (iii) undercapitalized if it has a
Total Capital ratio of less than 8%, a Tier 1 Capital ratio of less than 4% (3%
in certain circumstances), or (iv) critically undercapitalized if its tangible
equity is equal to or less than 2% of average quarterly tangible assets.
The Federal Reserve has adopted changes to its risk-based and leverage
ratio requirements applicable to bank holding companies and state-chartered
member banks that require that all intangibles, including core deposit
intangibles, purchased mortgage servicing rights ("PMSR's") and purchased credit
card relationships ("PCCR's") be deducted from Tier 1 Capital. The changes,
however, grandfather identifiable assets (other than PMSR's and PCCR's) acquired
on or before February 19, 1992, and permit the inclusion of readily marketable
PMSR's and PCCR's to be included in Tier 1 Capital only up to the lesser of (i)
90% of their fair market value, and (ii) 100% of the remaining unamortized book
value of such assets. The FDIC has adopted substantially similar regulations.
As of September 30, 1997, the Company had Tier 1 Capital and total capital
of approximately 11.70% and 12.30% of risk-weighted assets, and the Bank had
Tier 1 Capital and total capital of approximately 10.90% and 11.70% of risk-
weighted assets. As of September 30, 1997, the Company had a leverage ratio of
Tier 1 Capital to total average assets of approximately 8.80% and the Bank had a
leverage ratio of Tier 1 Capital to total average assets of approximately 8.60%.
The Company has not been informed of a particular leverage capital
requirement applicable to it, however, the Bank has agreed with the Georgia
Department to maintain a leverage ratio of 8%.
The Georgia Department also expects bank holding companies to maintain
minimum levels of primary capital and adjusted primary capital on a consolidated
basis (generally 5% of total assets). Under Georgia Department policies, the
components of primary capital include common stock, perpetual preferred stock,
surplus, undivided profits, mandatory convertible instruments, allowances for
loan and lease losses, minority interests in consolidated subsidiaries and
certain types of debt for loan and lease losses, minority interests in
consolidated subsidiaries and certain types of debt instruments. While the
Georgia Department's policies do not require the risk-weighing of assets as the
Federal Reserve's risk-based capital rules do, the Georgia Department assumes
that moderate degrees of risk exist. If it discovers high amounts of risk or
significant non-banking activities, the Georgia Department may require higher
capital ratios. Further, the written policies of the Georgia Department require
that Georgia banks generally maintain a minimum ratio of primary capital to
total assets of 6.0%.
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<PAGE>
The table which follows sets forth certain capital information of the
Company and Bank as of September 30, 1997:
<TABLE>
<CAPTION>
CAPITAL ADEQUACY
(DOLLARS IN THOUSANDS)
COMPANY BANK
------------------------------- --------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leverage Ratio:
Actual $8,451 8.80 $7,092 8.60
Minimum Required (1) 4,786 5.00 $6,617 8.00 (2)
Risk-Based Capital:
Tier 1 Capital
Actual $8,451 11.70 $7,092 10.90
Minimum Required $2,892 4.00 $2,595 4.00
Total Capital:
Actual $8,926 12.30 $7,567 11.70
Minimum Required $5,785 8.00 $5,189 8.00
</TABLE>
_________________________________
(1) Represents the highest minimum requirement. Institutions that are
contemplating acquisitions or are anticipating or experiencing significant
growth may be required to maintain a substantially higher leverage ratio.
(2) Results from an agreement with the Georgia Department.
Bank regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations, including a proposal to add an
interest rate-risk component to risk-based capital requirements.
On December 20, 1996, the FDIC adopted the Federal Financial Institutions
Examination Council's ("FFIEC") updated statement of policy entitled "Uniform
Financial Institutions Rating System" ("UFIRS") effective January 1, 1997.
UFIRS is an internal rating system used by the federal and state regulators for
assessing the soundness of financial institutions on a uniform basis and for
identifying those institutions requiring special supervisory attention. Under
the previous UFIRS, each financial institution was assigned a confidential
composite rating based on an evaluation and rating of five essential components
of an institution's financial condition and operations including Capital
adequacy, Asset quality, Management, Earnings, and Liquidity. The major changes
include an increased emphasis on the quality of risk management practices and
the addition of a sixth component of Sensitivity to market risk. For most
institutions, the FDIC has indicated that market risk primarily reflects
exposures to changes in interest rate. When regulators evaluate this component,
consideration is expected to be given to management's ability to identify,
measure, monitor and control market risk; the institution's size; the nature and
complexity of its activities and its risk profile; and the adequacy of its
capital and earnings in relation to its level of market risk exposure. Market
risk is rated based upon, but not limited to, an assessment of the sensitivity
of the financial institution's earnings or the economic value of its capital to
adverse changes in interest rates, foreign exchange rates, commodity prices, or
equity prices; management's ability to identify measure, and control exposure to
market risk; and the nature and complexity of interest rate risk exposure
arising from nontrading positions.
FDICIA
FDICIA directs that each federal banking regulatory agency prescribe
standards for depository institutions and depository institution holding
companies relating to internal controls, information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, a maximum ratio of classified assets to capital, minimum
earnings sufficient to absorb losses, a minimum ratio of market value to book
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<PAGE>
value for publicly traded shares, and such other standards as the agency deems
appropriate. These standards are not expected to have any material effect on
the Company and the Bank.
FDICIA also contains a variety of other provisions that may affect the
operations of the Company and the Bank, including new reporting requirements,
regulatory standards for estate lending, "truth in savings" provisions, the
requirement that a depository institution give 90 days' prior notice to
customers and regulatory authorities before closing any branch, and a
prohibition on the acceptance or renewal of brokered deposits by depository
institutions that are not well capitalized or are adequately capitalized and
have not received a waiver from the FDIC. Under regulations relating to
brokered deposits, the Bank is well capitalized and not restricted.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
growth limitations and are required to submit a capital restoration plan for
approval. For a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution comply
with such capital restoration plan. The aggregate liability of the parent
holding company is limited to the lesser of 5% of the depository institution's
total assets at the time it became undercapitalized and the amount necessary to
bring the institution into compliance with applicable capital standards. If a
depository institution fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized. If the controlling holding company fails
to fulfill its obligations under FDICIA and files (or has filed against it) a
petition under the federal Bankruptcy Code, the claim would be entitled to a
priority in such bankruptcy proceeding over third party creditors of the bank
holding company.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets, and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator.
FDIC INSURANCE ASSESSMENTS
The Bank is subject to FDIC deposit insurance assessments. The Bank's
deposits are primarily insured by the FDIC Bank Insurance Fund ("BIF"). The
FDIC utilizes a risk-based deposit insurance premium scheme to determine the
assessment rates for BIF-insured depository institutions. Each financial
institution is assigned to one of three capital groups -- well capitalized,
adequately capitalized or undercapitalized -- and further assigned to one of
three subgroups within a capital group, on the basis of supervisory evaluations
by the institution's primary federal and, if applicable, state regulators and
other information relevant to the institution's financial condition and the risk
posed to the applicable insurance fund. The actual assessment rate applicable
to a particular institution will, therefore, depend in part upon the risk
assessment classification so assigned to the institution by the FDIC. During
the year ended December 31, 1996, the Bank paid $7,759 in BIF deposit premiums.
The FDIC's Board of Directors voted on May 6, 1996, to retain the 1996 BIF
assessment schedule of 0 to 27 basis points (annual rates) for the second
semiannual period of 1997, and on May 20, 1997, voted to collect an assessment
against BIF-assessable deposits to be paid to the Financing Corporation
("FICO"). The Deposit Insurance Funds Act of 1996 (the "Funds Act") authorized
FICO to levy assessments on BIF-assessable deposits at a rate equal to one-fifth
of the FICO assessment rate that is applied to deposits assessable by the
Savings Association Insurance Fund ("SAIF"). The actual assessment rates for
FICO for 1997 have been set at 1.26 basis points on an annual basis for BIF-
assessable deposits.
BIF and SAIF assessment rates are designed to increase the reserve ratios
(i.e., the ratios of reserves to insured deposits) of these funds to 1.25%.
During 1995, the BIF reached 1.25%. As a result, the FDIC refunded BIF premiums
in September 1995, and reduced BIF premiums with a nominal payment of $2,000 per
year for the best-rated banks.
EGRPRA also recapitalized the FDIC's Saving Association Insurance Fund
("SAIF") in order to bring it into parity with the Bank Insurance Fund ("BIF")
of the FDIC. As part of this recapitalization, holdings of SAIF-insured
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<PAGE>
deposits were subjected to a one-time special deposit insurance assessment.
During 1996, the Bank held no SAIF deposits and was not subject to such special
assessment.
COMMUNITY DEVELOPMENT ACT
The Community Development Act has several titles. Title I provides for the
establishment of community development financial institutions to provide equity
investments, loans and development services to financially undeserved
communities. A portion of this Title also contains various provisions regarding
reverse mortgages, consumer protection for qualifying mortgages and hearings for
home equity lending, among other things. Title II provides for small business
loan securitization and securitizations of other loans, including authorizing a
study on the impact of additional securities based on pooled obligations. Small
business capital enhancement is also provided. Title III of the Act provides for
paperwork reduction and regulatory improvement, including certain examination
and call report issues, as well as changes in certain consumer compliance
requirements, certain audit requirements and real estate appraisals, and
simplification and expediting processing of bank holding company applications,
merger applications and securities filings, among other things. It also
provides for commercial mortgage-related securities to be added to the
definition of a "mortgage-related security" in the Exchange Act. This will
permit commercial mortgages to be pooled and securitized, and permit investment
in such instruments without limitation by insured depository institutions. It
also preempts state legal investment and blue sky laws related to qualifying
commercial mortgage securities. Title IV deals with money laundering and
currency transaction reports, and Title V reforms the national flood insurance
laws and requirements.
COMMUNITY REINVESTMENT ACT
The Company and the Bank are subject to the provisions of the Community
Reinvestment Act of 1977, as amended (the "CRA") and the federal banking
agencies' regulations thereunder. Under the CRA, all banks and thrifts have a
continuing and affirmative obligation, consistent with its safe and sound
operation to help meet the credit needs for their entire communities, including
low- and moderate-income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions, nor does it limit
an institution's discretion to develop the types of products and services that
it believes are best suited to its particular community, consistent with the
CRA. The CRA requires a depository institution's primary federal regulator, in
connection with its examination of the institution, to assess the institution's
record in assessing and meeting the credit needs of the community served by that
institution, including low- and moderate-income neighborhoods. The regulatory
agency's assessment of the institution's record is made available to the public.
Further, such assessment is required of any institution which has applied to:
(i) charter a national bank; (ii) obtain deposit insurance coverage for a newly-
chartered institution; (iii) establish a new branch office that accepts
deposits; (iv) relocate an office; or (v) merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution. In the case of a bank holding company applying for approval to
acquire a bank or other bank holding company, the Federal Reserve will assess
the records of each subsidiary depository institution of the applicant bank
holding company, and such records may be the basis for denying the application.
Following their most recent CRA examinations, the Bank received a "satisfactory"
CRA rating.
Under new CRA regulations, effective January 1, 1996, the process-based CRA
assessment factors have been replaced with a new evaluation system that rates
institutions based on their actual performance in meeting community credit
needs. The evaluation system used to judge an institution's CRA performance
consists of three tests: a lending test; an investment test; and a service
test. Each of these tests will be applied by the institution's primary federal
regulator taking into account such factors as: (i) demographic data about the
community; (ii) the institution's capacity and constraints; (iii) the
institution's product offerings and business strategy; and (iv) data on the
prior performance of the institution and similarly-situated lenders. The new
lending test, the most important of the three tests for all institutions other
than wholesale and limited purpose (e.g., credit card) banks, will evaluate an
institution's lending activities as measured by its home mortgage loans, small
business and farm loans, community development loans, and, at the option of the
institution, its consumer loans.
Each of these lending categories will be weighted to reflect its relative
importance to the institution's overall business and, in the case of community
development loans, the characteristics and needs of the institution's service
area and the opportunities available for this type of lending. Assessment
-47-
<PAGE>
criteria for the lending test will include: (i) geographic distribution of the
institution's lending; (ii) distribution of the institution's home mortgage and
consumer loans among different economic segments of the community; (iii) the
number and amount of small business and small farm loans made by the
institution; (iv) the number and amount of community development loans
outstanding; and (v) the institution's use of innovative or flexible lending
practices to meet the needs of low-to-moderate income individuals and
neighborhoods. At the election of an institution, or if particular
circumstances so warrant, the banking agencies will take into account in making
their assessments lending by the institution's affiliates as well as community
development loans made by the lending consortia and other lenders in which the
institution has invested. As part of the new regulation, all financial
institutions will be required to report data on their small business and small
farm loans as well as their home mortgage loans, which are currently required to
be reported under the Home Mortgage Disclosure Act.
The investment test focuses on the institution's qualified investments
within its service area that (i) benefit low-to-moderate income individuals and
small businesses or farms, (ii) address affordable housing needs, or (iii)
involve donations of branch offices to minority or women's depository
institutions. Assessment of an institution's performance under the investment
test is based upon the dollar amount of the institution's qualified investments,
its use of innovative or complex techniques to support community development
initiatives, and its responsiveness to credit and community development needs.
The service test evaluates an institution's systems for delivering retail
banking services, taking into account such factors as (i) the geographic
distribution of the institution's branch offices and ATMs, (ii) the
institution's record of opening and closing branch offices and ATMs, and (iii)
the availability of alternative product delivery systems such as home banking
and loan production offices in low-to-moderate income areas. The federal
regulators also will consider an institution's community development service as
part of the service test. A separate community development test will be applied
to wholesale or limited purpose financial institutions.
Institutions having total assets of less than $250 million, such as the
Bank, will be evaluated under more streamlined criteria. In addition, a
financial institution will have the option of having its CRA performance
evaluated based on a strategic plan of up to five years in length that it had
developed in cooperation with local community groups. In order to be rated
under a strategic plan, the institution will be required to obtain the prior
approval of its federal regulator.
The interagency CRA regulations provide that an institution evaluated under
a given test will receive one of five ratings for that test: outstanding, high
satisfactory, low satisfactory, needs to improve, or substantial non-compliance.
An institution will receive a certain number of points for its rating on each
test, and the points are combined to produce an overall composite rating of
either outstanding, satisfactory, needs to improve, or substantial
noncompliance. Under the agencies' rating guidelines, an institution that
receives an "outstanding" rating on the lending test will receive an overall
rating of at least "satisfactory", and no institution can receive an overall
rating of "satisfactory" unless it receives a rating of at least "low
satisfactory" on its lending test. In addition, evidence of discriminatory or
other illegal credit practices would adversely affect an institution's overall
rating. Under the new regulations, an institution's CRA rating would continue
to be taken into account by its primary federal regulator in considering various
types of applications.
LEGISLATIVE AND REGULATORY CHANGES
Various changes have been proposed with respect to restructuring and
changing the regulation of the financial services industry. FIRREA required a
study of the deposit insurance system. On February 5, 1991, the Department of
the Treasury released "Modernizing the Financial System; Recommendations for
Safer, More Competitive Banks." Among other matters, this study analyzed and
made recommendations regarding reduced bank competitiveness and financial
strength, overextension of deposit insurance, the fragmented regulatory system
and the under capitalized deposit insurance fund. It proposed restoring
competitiveness by allowing banking organizations to participate in a full range
of financial services outside of insured commercial banks. Deposit insurance
coverage could be narrowed to promote market discipline. Risk based deposit
insurance premiums were feasibility tested through an FDIC demonstration project
using private reinsurers to provide market pricing for risk based premiums.
-48-
<PAGE>
The United States Supreme Court in 1995 and 1996 decided in Valic that
-----
national banks could sell annuities, and in Barnett Bank that national banks
------------
could sell other forms of insurance from towns of 5,000 or fewer population.
The State of Georgia generally prohibits bank-affiliates from selling insurance.
However, in 1996, the Georgia Department of Insurance and the Georgia Department
adopted regulations permitting the sales of certain other insurance products.
The Bank has not exercised any activities permitted by these new regulations,
but may do so in the future.
Other legislative and regulatory proposals regarding changes in banking,
and the regulation of banks, thrifts and other financial institutions and bank
and bank holding company powers are being considered by the executive branch of
the Federal government, Congress and various state governments, including
Georgia. Among other items under consideration are changes in or repeal of the
Glass-Steagall Act which separates commercial banking from investment banking,
and changes in the BHC Act to broaden the powers of "financial services"
companies to own and control depository institutions and engage in activities
not closely related to banking. Certain of these proposals, if adopted, could
significantly change the regulation of banks and the financial services
industry. It cannot be predicted whether any of these proposals will be
adopted, and, if adopted, how these proposals will affect the Company.
FISCAL AND MONETARY POLICY
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
its other borrowings, and the interest received by a bank on its loans and
securities holdings, constitutes the major portion of a bank's earnings. Thus,
the earnings and growth of the Company and the Bank will be subject to the
influence of economic conditions generally, both domestic and foreign, and also
to the monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve. The Federal Reserve regulates the supply of
money through various means, including open market dealings in United States
government securities, the discount rate at which banks may borrow from the
Federal Reserve, and the reserve requirements on deposits. The nature and
timing of any changes in such policies and their effect on the Bank cannot be
predicted.
SHARES ELIGIBLE FOR FUTURE SALE
If all Shares offered are sold, 861,354 shares of the Company's Common
Stock will be outstanding. The 135,000 Shares offered hereby will be freely
tradable without restriction or further registration unless purchased by
"affiliates" of the Company. As defined in Commission Rule 144 under the
Securities Act, an "affiliate" of an issuer is a person who directly, or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with such issuer, and generally includes members of the
Board of Directors of the Company and the Bank, executive officers of the
Company and the Bank, and holders of 5% or more of the Company's Common Stock.
In general, under Rule 144, as currently in effect, any affiliate of the
Company who purchases Shares pursuant to this Offering is entitled to sell
within any three-month period, a number of Shares that does not exceed the
greater of 1% of the outstanding shares of the Company's Common Stock (8,614
shares immediately after the Offering), or the average weekly trading volume in
the Company's Common Stock during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain provisions regarding the manner
of sale, notice requirements, and the availability of current public information
about the Company. Following the Expiration Date of this Offering, the Company
intends to file with the Commission periodic reports that provide the "current
public information" required by Rule 144. A shareholder (or shareholders whose
shares are aggregated) who has not been an affiliate of the Company for at least
90 days prior to a proposed sale transaction, and who has beneficially owned
"restricted securities" for at least two years is entitled to sell such Shares
under Rule 144 without regard to the value or other limitations described above.
Upon the completion of the Offering, there will be outstanding options to
purchase approximately 55,200 shares of Common Stock pursuant to employee stock
options and director stock options. Each of the outstanding options has or will
become fully vested after a period of three years. For additional information
regarding these options, see "Financial Statements and Supplementary Data--
Note 7."
-49-
<PAGE>
No active trading market exists for the Common Stock, and the Company has
no reason to believe that a more active trading market will develop in the
foreseeable future. There are no present plans for the Common Stock to be
listed or qualified for trading on any stock exchange or in the over-the-counter
market. There are currently two independent market makers in the Common Stock.
As a result, no prediction can be made of the effect, if any, that this Offering
will have on the market price of the Common Stock prevailing from time to time.
Sales of substantial amounts of such shares, or the perception that such sales
could occur, could adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of equity securities. See "Risk Factors."
DESCRIPTION OF COMPANY CAPITAL STOCK
The following information concerning the Company's capital stock summarizes
certain provisions of the Company's Articles and Bylaws and certain statutes
regulating the rights of holders of Company capital stock. The information does
not purport to be a complete description of such matters and is qualified in all
respects by the provisions of the Company's Articles and Bylaws and the
corporate laws of the State of Georgia.
COMMON STOCK
General. The Company's Articles authorize the Company's Board of Directors
to issue a maximum of 2,500,000 shares of Common Stock. As of the date of this
Prospectus, 726,354 shares of Common Stock were issued and outstanding. In
addition, a total of approximately 55,200 shares were subject to outstanding
employee stock options and director stock options.
Voting Rights. The holders of Common Stock are entitled to one vote per
share and are not entitled to cumulative voting rights in the election of
directors. As a result, the holders of more than 50% of the shares of the
Common Stock voting in the election of directors (subject to the voting rights
of any preferred shares then outstanding) can elect all of the directors then
standing for election if they choose to do so and, in such event, the holders of
the remaining less than 50% of the shares voting for the election of directors
are not able to elect any person or persons to the Board.
Classified Board. The Company's Board of Directors is divided into three
classes with as equal a number of directors in each class as possible.
Directors elected by the shareholders to each class are serving or will serve
three-year terms of office.
The classification of directors has the effect of making it more time-
consuming to change majority control of the Company's Board of Directors. At
least two shareholder meetings, instead of one, will be required to effect a
change in the majority control of the Board of Directors, except in the event of
vacancies resulting from removal for cause or other reason (in which case the
remaining directors would fill the vacancies so created). The longer time
required to elect a majority of a classified board also helps to assure
continuity and stability of the Company's management and policies, since a
majority of the directors at any given time will have prior experience as
directors of the Company.
The classified board is intended to encourage persons seeking to acquire
control of the Company, through a proxy contest or otherwise, to initiate such
an acquisition through arms-length negotiations with the Company's management
and Board of Directors. The classified board could have the effect of
discouraging a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company's Shareholders or favored by a majority of the Company's
shareholders. In addition, since the classified board is designed in part to
discourage accumulations of large blocks of the Company's Common Stock by
purchasers whose objective is to have such stock repurchased by the Company at a
premium, the classified board could tend to reduce the temporary fluctuation in
the market price of the Common Stock which could be caused by such accumulation.
Accordingly, holders of the Common Stock could be deprived of certain
opportunities to sell their shares at a temporarily higher market price.
-50-
<PAGE>
Transactions with Interested Shareholders. The Company's Articles require
the affirmative vote of the holders of at least two-thirds of all the shares of
the Company's voting stock not owned by an Interested Shareholder (as defined
below) for the approval of a business combination, merger, consolidation, lease,
sale of assets, reclassification of securities or certain other transactions
with an Interested Shareholder. An "Interested Shareholder" means any person
(including such person's affiliates) who is the beneficial owner of 15% or more
of the Company's outstanding stock.
The Company believes that the provisions relating to Interested Shareholder
transactions encourage persons seeking control of the Company to consult with
the Board of Directors, thus enabling the Board of Directors to negotiate and
give due consideration on behalf of the Company's shareholders and other
constituencies as to the merits of any offer which may be made. These
provisions also grant the Company and its Board of Directors the maximum
flexibility to respond to initiatives from others and to pursue acquisition
opportunities for the Company using authorized but unissued shares. These
provisions protect the Company and its shareholders from unsolicited, hostile
takeover attempts, which are costly and detract from the Company's efforts to
serve its communities pursuant to its successful, long-term plan, and to thereby
best serve the shareholders.
Takeovers or changes in management of the Company which are proposed and
effected without prior consultation and negotiation with the Company's
management are not necessarily detrimental to the Company and its shareholders.
However, the Board of Directors believes that the benefits of seeking to protect
the Company's ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure the Company outweigh the
disadvantages of discouraging such proposals.
Nonetheless, the Interested Shareholder provisions make more difficult or
otherwise discourage attempts to take control of the Company by a holder of a
substantial block of the Company's capital stock, without the prior negotiation
with the Company's Board of Directors and, therefore, could have the effect of
entrenching incumbent management.
Dividend Rights. Subject to any preferences of preferred shares then
outstanding, each share of Company Common Stock is entitled to participate
equally in dividends as and when declared by the Board of Directors out of funds
legally available therefor. Generally, cash dividends may not render the
Company insolvent. See "Market Information and Dividends."
Preemptive Rights. The holders of the Company's Common Stock do not have
any preemptive or preferential right to purchase or to subscribe for any
additional shares of Common Stock or any other securities that may be issued by
the Company.
Assessment and Redemption. The shares of Common Stock presently
outstanding are fully paid and nonassessable. There is no provision for
redemption or conversion of the Company's Common Stock.
Liquidation Rights. In the event of liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary, the holders of the Company's
Common Stock (and the holders of any class or series of stock entitled to
participate with the Company's Common Stock in the distribution of assets) will
be entitled to share ratably in any of the net assets or funds which are
available for distribution to shareholders, after the satisfaction of all
liabilities, or after adequate provision is made therefor and after distribution
to holders of any class of stock having preference over the Company's Common
Stock in the case of liquidation.
PREFERRED STOCK.
General. The Company's Articles authorize the Board of Directors, without
further shareholder action, to issue from time to time, a maximum of 1,000,000
shares of preferred stock, $1.00 par value, in one or more series, upon such
terms, at such times and for such consideration as the Company's Board of
Directors may determine. Each such series may have such voting powers, full or
limited, or no voting powers, and such designations, preferences and relative,
participating, optional or other special rights and qualifications, limitations
or restrictions thereof, as are established by the Company's Board of Directors.
-51-
<PAGE>
The Company had not issued any shares of its preferred stock as of the date of
this Prospectus. Any shares of preferred stock issued in the future may have
priority over previously issued shares of Common Stock as to payment of
dividends and upon liquidation.
Anti-Takeover Considerations. The Company's organizers authorized the
preferred stock without a view toward its use in any shareholder rights plan or
other measure which has as its primary purpose making a takeover or change in
control of the Company more difficult. However, the terms of any preferred
instrument, as is the case with any financial instrument, could have the effect
of discouraging persons who might otherwise seek to attempt to acquire the
Company or control or affect its management or policies.
LEGAL MATTERS
The legality of the Shares of Common Stock to be issued in the Offering has
been passed upon by Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
The consolidated financial statements of the Company as of and for the
years ended December 31, 1996 and 1995 have been included herein and in the
registration statement in reliance upon the report of Mauldin & Jenkins, LLC,
independent certified public accountants, appearing elsewhere herein and upon
the authority of such firm as experts in accounting and auditing.
INDEMNIFICATION
The GBCC permits, under certain circumstances, the indemnification of
officers, directors, employees and agents of a corporation with respect to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, to which such person was or is a
party or is threatened to be made a party, by reason of his action in such
capacity for, or at the request of, such corporation. To the extent that such
person is successful in defending any such suit, Georgia law provides that he
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
The Company's Bylaws provide for the indemnification of the Company's
directors, officers, employees and agents in accordance with the GBCC. Georgia
law also provides that, with certain exceptions, the above rights will not be
deemed exclusive of other rights of indemnification contained in any Bylaw,
resolution or agreement approved by the holders of a majority of the Company's
voting stock. The Company's Bylaws provide that the Company may purchase and
maintain insurance on behalf of directors, officers, employees and agents, as
well as others serving at their request, against any liabilities asserted
against such persons whether or not the Company would have the power to
indemnify such persons against such liability under the GBCC. The Company has
purchased and maintains such insurance.
Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
As permitted under Georgia law, the Company's Articles provide that a
director shall not be personally liable to the corporation or its shareholders
for monetary damages for breach of duty of care or other duty as a director,
except for liability (a) for any appropriation, in violation of his duties, of
any business opportunity of the corporation, (b) for acts or omissions which
involve intentional misconduct or a knowing violation of law, (c) for unlawful
corporate distributions, or (d) for any transaction from which the director
received an improper personal benefit.
Under Article Nine of its Bylaws, the Company is required to indemnify its
directors and officers (and may indemnify its other employees and agents)
against the obligation to pay judgments, fines, penalties, amounts paid in
settlement, and reasonable expenses, including attorney's fees, resulting from
any threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative and whether formal or informal, if
-52-
<PAGE>
the actions of the party being indemnified met the standards of conduct
specified therein. Determination concerning whether or not the applicable
standard of conduct has been met (and authorization to indemnify employees and
agents) shall be made by (a) the Board of Directors by a majority vote of a
quorum consisting of disinterested directors, (b) a majority vote of a committee
of disinterested directors, (c) independent legal counsel, or (d) an affirmative
vote of a majority of shares held by the disinterested shareholders. No
indemnification shall be made by or on behalf of a corporate director, officer,
employee or agent (i) in connection with a proceeding by or in the right of the
corporation in which such person was adjudged liable to the corporation or (ii)
in connection with any other proceeding in which such person was adjudged liable
on the basis that he improperly received a personal benefit.
-53-
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Balance Sheet as of September 30, 1997 (unaudited) F-2
Consolidated Statements of Income for the quarters ended
September 30, 1997 and September 30, 1996 and the six months
ended September 30, 1997 and September 30, 1996 (unaudited) F-3
Consolidated Statements of Cash Flows for the six months ended
September 30, 1997 and September 30, 1996 (unaudited) F-4
Notes to Consolidated Financial Statements (unaudited) F-5
Independent Auditors' Report F-8
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-9
Consolidated Statements of Income for the years ended
December 31, 1996 and 1995 F-10
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996 and 1995 F-11
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995 F-12
Notes to Consolidated Financial Statements F-14
F-1
<PAGE>
UNAUDITED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1997
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30,
1997
-------------
ASSETS
Cash and due from banks $ 3,061,099
Federal funds sold 710,000
Interest bearing deposits in other banks 564,309
Securities available for sale 940,975
Securities held for investment, at cost (fair value of
approximately $1,717,660, at September 30, 1997 and
$749,386 at December 31, 1996) 1,728,739
Mortgage loans held for sale 54,813,319
Loans 35,534,901
Less allowance for loan losses (475,078)
------------
Loans, net 35,059,823
Premises and equipment, net 2,180,354
Other real estate 151,909
Purchased mortgage servicing rights 4,144,342
Other assets 1,963,924
------------
$105,318,793
============
LIABILITIES
Deposits
Noninterest-bearing demand deposits $ 12,120,174
Interest-bearing demand 13,312,667
Savings 1,438,191
Time, $100,000 and over 9,132,062
Other time 27,065,134
------------
Total deposits 63,068,228
Drafts payable 14,034,849
Deferred taxes payable 1,303,111
Accrued interest and other liabilities 11218,265
Other borrowings 17,243,752
------------
Total liabilities 96,868,205
SHAREHOLDERS' EQUITY
Common stock, par value $1.00; 2,500,000 shares
authorized; Issued and outstanding shares -
706,354 at 9/30/97 and 704,854 at 12/31196 706,354
Surplus 6,369,186
Retained earnings 1,411,139
Less cost of 3,334 shares acquired for the treasury (36,091)
------------
Total shareholders' equity 8,450,588
------------
$105,318,793
============
F-2
<PAGE>
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
1997 1996 1997 1996
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans 939,312 677,781 2,498,529 2,023,225
Interest and fees on mortgage loans held for sale 1,139,377 502,660 2,677,881 1,662,542
Interest on securities:
Taxable 34,995 19,496 88,403 67,859
Nontaxable 3,888 3,838 11,514 11,514
Interest on deposits in other banks 18,098 18,447 48,965 56,342
Interest on Federal funds sold 21,378 15,692 71,665 48,899
--------------------------- ---------------------------
2,157,048 1,237,914 5,396,957 3,870,381
Interest expense
Interest on deposits 696,646 526,146 1,936,096 1,482,013
interest on other borrowings 184,694 17,762 342,851 60,056
--------------------------- ---------------------------
881,340 543,908 2,278,947 1,542,069
Net interest income 1,275,708 694,006 3,118,010 2,328,312
Provision for loan losses (Note 4) 67,800 0 143,120
--------------------------- ---------------------------
Net interest income after provision for loan losses 1,207,908 694,006 2,974,890 2,328,312
Other income
Service charges on deposit accounts 52,011 46,864 158,861 144,789
Mortgage servicing fee income 253,308 189,090 741,593 508,681
Gestation fee income 346,957 205,210 917,665 714,580
Gains on sale of mortgage servicing rights 984,711 262,990 1,650,248 624,345
Gains on sale of mortgage loans held for sale 232,324 286,821 850,508 947,429
Other 27,301 23,739 46,107 48,498
--------------------------- ---------------------------
1,896,612 1,014,714 4,364,982 2,988,322
Other expenses
Salaries and employee benefits 1,000,936 670,682 2,734,469 2,037,012
Net occupancy and equipment expense 99,428 103,660 274,646 271,160
Supplies, postage, and telephone 169,448 95,615 468,266 311,756
Advertising 144,024 77,608 420,772 239,641
Insurance expense 21,272 18,976 67,542 66,077
Depreciation and amortization 217,257 207,787 629,899 530,359
Legal and professional 240,577 140,389 586,785 498,831
Director fees 33,350 32,900 98,200 81,350
Mortgage subservicing expense 77,570 67,643 235,709 187,907
Other 149,808 105,013 351,725 343,631
--------------------------- ---------------------------
2,153,670 1,520,273 5,868,013 4,567,724
Income before income taxes 950,850 188,447 1,471,859 748,910
Applicable income taxes 381,270 94,264 583,768 323,733
--------------------------- ---------------------------
Net income 569,580 94,183 888,091 425,177
=========================== ===========================
Per share of common stock
Net income $0.81 $0.13 $1.26 $0.60
Cash dividends $0.06 -- $0.18 --
Weighted average shares outstanding 706,354 704,854 705,431 704,854
</TABLE>
F-3
<PAGE>
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 888,091 $ 425,177
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan loss 143,120
Depreciation and amortization 629,899 530,359
Provision for deferred taxes 581,872 299,073
Gains on sales of mortgage servicing rights (1,650,248) (624,345)
Increase in mortgage loans held for sale (21,816,651) (10,252,144)
Increase in interest receivable (188,259) (124,896)
Increase (decrease) in drafts payable 11,596,116 (1,092,898)
Increase (decrease) in interest payable 4,066 (47,970)
Increase in other assets and liabilities, net (63,829) (492,026)
----------------------------------
Net cash used in operating activities (9,875,823) (11,379,670)
INVESTING ACTIVITIES
Net decrease in interest-bearing deposits
in other banks (487,606) 3,468,361
Acquisition of securities available for sale (250,000)
Proceeds from sale of securities available for sale 191,500
Acquisition of securities held to maturity (1,865,661)
Proceeds from maturities of securities held to maturity 47,610 38,626
Proceeds from sale of securities held to maturity 837,942
Acquisition of purchased mortgage servicing rights (5,036,755) (3,806,176)
Proceeds from sales of purchased mortgage
servicing rights 6,216,069 4,958,381
Increase in Federal funds sold, net (140,000) 1,020,000
Net increase in loans (6,462,805) (3,425,639)
Purchase of premises and equipment (183,182) (177,316)
----------------------------------
Net cash provided by (used in) investing activities (7,132,888) 2,076,237
FINANCING ACTIVITIES
Net increase in deposits 7,322,320 9,016,707
Net increase in mortgage warehouse line of credit 9,846,997 1650000
Proceeds from exercise of stock options 15,000 --
Dividends paid (126,371)
----------------------------------
Net cash provided by financing activities 17,057,946 10,666,707
Net increase in cash and cash equivalents 49,235 1,363,274
Cash and cash equivalents at beginning of year 3,011,864 1,791,026
Cash and cash equivalents at end of year $ 3,061,099 $ 3,154,300
Supplemental Disclosure of Cash Flow Information
Cash paid during period for interest $ 2,274,881 $ 1,590,039
</TABLE>
F-4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
NOTE A --- GENERAL
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Article 10 of
Regulations S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments necessary
for a fair presentation of the financial position and results of operations of
the interim periods have been made. All such adjustments are of a normal
recurring nature. Results of operations for the nine months ended September 30,
1997 are not necessarily indicative of the results of operations for the full
year or any interim periods.
NOTE B --- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organizational costs: The expenses associated with the formation of the Company
- --------------------
were paid by the Company and capitalized as organizational costs and are being
amortized on the straight-line method over five years.
Earnings per share: Earnings per share have been computed using the weighted
- ------------------
average number of shares outstanding during each period.
Cash flow information: For purposes of the statements of cash flows, cash
- ---------------------
equivalents include amounts due from banks and federal funds sold.
Reclassifications: Certain amounts as previously reported have been
- -----------------
reclassified to conform to the current period presentation.
NOTE C --- SERVICING PORTFOLIO
The Company services residential loans for various investors under contract for
a fee. As of September 30, 1997, the Company had purchased loans for which it
provides servicing with principal balances totaling $419.9 million. The Company
sold $449.1 million of mortgage servicing rights in the nine months of 1997 for
a net gain of $1.6 million.
F-5
<PAGE>
NOTE D --- INCOME TAXES
The Company uses the liability method of accounting for income taxes as required
by FASB statement number 109, "Accounting for Income Taxes".
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
temporary differences which create deferred tax assets and liabilities at
January 1, 1997 are outlined in the table below. Net deferred income tax
liabilities of $1,303,1 1 1 and $721,239 at September 30, 1997 and December 31,
1996, respectively, are included in other liabilities.
Deferred assets:
Allowance for loan losses $ 52,864
Net operating loss carryforward 549,801
Alternative minimum tax carryforward 42,084
Other 5,018
----------
649,767
----------
Deferred liabilities:
Purchased mortgage servicing rights $1,206,433
Tax over book depreciation 153,025
Other 11,548
----------
1,371,006
----------
Net deferred tax liabilities $ (721,239)
==========
NOTE E --- RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 125
was amended by SFAS No. 127, which defers the effective date of certain
provisions of SFAS No. 125 until Jan 1, 1998. This statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers that are secured borrowings. The adoption of this statement is not
expected to have a material effect on the Company's financial statements.
The FASB has issued SFAS No. 128, "Earnings Per Share". SFAS No. 128 supersedes
Accounting Principles Board Opinion No. 15 "Earnings Per Share" and specifies
the computation, presentation, and disclosure requirements for earnings per
share (EPS) for entities with publicly held common stock or potential issuable
common stock. SFAS No. 128 replaces the presentation of primary EPS with a
presentation of basic EPS and fully diluted EPS with diluted EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the diluted EPS computation.
SFAS No. 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. The impact on the Company's financial
statements of the provisions of SFAS No. 128 is not expected to be material.
The FASB has issued SFAS No. 129, "Disclosure of Information about Capital
Structure". SFAS No. 129 is effective for financial statements for periods
ending after December 15, 1997. The Company does not expect that SFAS No. 129
will require significant revision of prior disclosures since SFAS No. 129 lists
required disclosures that had been included in a number of previously existing
separate statements or opinions.
ThE FASB has issued SFAS No. 130, "Reporting Comprehensive Income". This
statement established standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
SFAS No. 130 requires all items that are required to be recognized under
accounting standards as
F-6
<PAGE>
components or comprehensive income to be reported in a financial statement that
is displayed in equal prominence with the other financial statements. the term
"comprehensive income" is used in the SFAS to describe the total of all
components of comprehensive income including net income. "Other comprehensive
income" refers to revenues, expenses, gains and losses that are included in
comprehensive income but excluded from earnings current accounting standards.
Currently, "other comprehensive income" for the COMPANY consists of items
previously recorded directly in equity under SFAS No. 115, "Accounting for
Certain Investments in DEBT and Equity Securities". SFAS No. 130 is effective
for financial statements beginning after December 15, 1997.
The FASB has issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information". SFAS No. 131 establishes standards for the way public
business enterprises are to report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also established standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company does not expect that SFAS No. 131 will require significant
revision of prior disclosures.
F-7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS
CRESCENT BANKING COMPANY AND SUBSIDIARIES
JASPER, GEORGIA
We have audited the accompanying consolidated balance sheets of the
CRESCENT BANKING COMPANY AND SUBSIDIARIES as of December 31, 1996 and 1995 and
the related consolidated statements of income, stockholders' equity, and cash
flows for the years then ended December 31, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Crescent Banking Company and Subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
Mauldin & Jenkins, LLC
Atlanta, Georgia
February 21, 1997
F-8
<PAGE>
CRESCENT BANKING COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------ ----------- -----------
<S> <C> <C>
Cash and due from banks $ 3,011,864 $ 1,791,026
Interest-bearing deposits in banks 76,703 3,551,138
Federal fund sold 570,000 1,020,000
Securities available-for-sale 882,475 902,175
Securities held-to-maturity, fair value of $749,386 and $797,710 748,630 802,233
Mortgage loans held for sale 32,996,668 17,361,494
Loans 28,500,400 24,200,956
Less allowance for loan losses 335,515 566,071
----------- -----------
Loans, net 28,164,888 23,634,885
Premises and equipment 2,195,828 2,182,169
Other real estate owned 727,159 150,000
Purchased mortgage servicing rights 4,093,493 4,510,966
Other assets 1,184,644 1,477,580
----------- -----------
TOTAL ASSETS $74,652,352 $57,383,666
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits
Noninterest-bearing demand $12,655,027 $ 7,643,492
Interest-bearing demand 11,547,662 9,770,708
Savings 1,366,145 1,234,616
Time, $100,000 and over 6,857,157 5,859,788
Other time 23,319,917 15,989,405
----------- -----------
Total deposits 55,745,908 40,498,009
Drafts payable 2,438,733 8,766,438
Other liabilities 675,849 636,217
Deferred taxes 721,239 357,405
Other borrowings 7,396,755 -
----------- -----------
TOTAL LIABILITIES 66,978,484 50,258,069
----------- -----------
Commitments and contingent liabilities - -
Shareholders' equity
Preferred stock, par value $1, 1,000,000 shares authorized,
no shares issued or outstanding - -
Common stock, par value $1; 2,500,000 shares authorized;
704,854 issued and outstanding 704,854 704,854
Capital surplus 6,355,686 6,355,686
Retained earnings 649,419 101,148
Treasury stock, 3,334 shares (36,091) (36,091)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 7,673,868 7,125,597
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $74,652,352 $57,383,666
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
CRESCENT BANKING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
INTEREST INCOME
Loans $2,830,673 $2,002,249
Mortgage loans held for sale 2,236,949 1,731,570
Taxable securities 93,162 84,429
Nontaxable securities 15,353 1,706
Deposits in banks 77,001 166,263
Federal funds sold 80,521 154,542
---------- ----------
TOTAL INTEREST INCOME 5,333,659 4,140,759
---------- ----------
INTEREST EXPENSE
Deposits 2,067,996 1,528,710
Other borrowings 93,686 6,780
---------- ----------
TOTAL INTEREST EXPENSE 2,161,682 1,535,490
---------- ----------
NET INTEREST INCOME 3,171,977 2,605,269
PROVISION FOR LOAN LOSSES - 496,937
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 3,171,977 2,108,332
---------- ----------
OTHER INCOME
Service charges on deposit accounts 193,300 171,389
Gestation fee income 989,350 559,500
Mortgage servicing fee income 735,336 1,003,850
Gains on sales of purchased mortgage servicing rights 884,457 920,408
Gains on sales of mortgage loans held for sale 1,154,026 680,149
Other operating income 52,903 63,984
---------- ----------
TOTAL OTHER INCOME 4,009,372 3,399,280
---------- ----------
OTHER EXPENSES
Salaries and employee benefits 2,689,768 2,359,579
Equipment and occupancy expenses 651,827 478,789
Other operating expenses 2,862,917 2,520,687
---------- ----------
TOTAL OTHER EXPENSES 6,204,512 5,359,055
---------- ----------
INCOME BEFORE INCOME TAXES 976,837 148,557
INCOME TAX EXPENSE 393,489 59,423
---------- ----------
NET INCOME $ 583,348 $ 89,134
========== ==========
NET INCOME PER SHARE OF COMMON STOCK $0.83 $0.13
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 701,520 703,037
========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-10
<PAGE>
CRESCENT BANKING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
-------------------- CAPITAL RETAINED ------------------ SHAREHOLDERS
SHARES PAR VALUE SURPLUS EARNINGS SHARES COST EQUITY
------- --------- ---------- --------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 704,254 $704,254 $6,350,286 $ 188,153 - $ - $7,242,693
Net income - - - 89,134 - - 89,134
Cash dividends declared,
$.25 per share - - - (176,139) - - (176,139)
Exercise of stock options 600 600 5,400 - - - 6,000
Purchase of treasury stock - - - - 3,334 (36,091) (36,091)
------- -------- ---------- --------- ----- -------- ----------
BALANCE, DECEMBER 31. 1995 704,854 704,854 6,355,686 101,148 3,334 (36,091) 7,125,597
Net income - - - 583,348 - - 583,348
Cash dividends declared,
$.05 per share - - - (35,077) - - (35,077)
------- -------- ---------- --------- ----- -------- ----------
BALANCE, DECEMBER 31, 1996 704,854 $704,854 $6,355,686 $ 649,419 3,334 $(36,091) $7,673,868
======= ======== ========== ========= ===== ======== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-11
<PAGE>
CRESCENT BANKING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 583,348 $ 89,134
Adjustments to reconcile net income to net cash
provided by (use in) operating activities:
Depreciation 247,003 180,105
Amortization of purchased mortgage servicing rights 441,151 545,853
Provision for loan losses - 496,937
Provision for losses on other real estate owned 25,000 -
Deferred income taxes 363,834 58,243
Gains on sales of purchased mortgage servicing rights (884,457) (920,408)
Net increase in mortgage loans held for sale (15,635,174) (3,335,142)
Increase (decrease) in drafts payable (6,327,705) 7,486,845
(Increase) decrease in interest receivable 79,703 (150,264)
Increase (decrease) in interest payable (27,302) 48,415
Other operating activities 280,167 (694,036)
------------ ------------
Net cash provided by (used in) operating activities (20,854,432) 3,805,682
------------ ------------
INVESTING ACTIVITIES
Proceeds from sales of securities available-for-sale 19,700 -
Purchases of securities held-to-maturity - (345,000)
Proceeds from maturities of securities held-to-maturity 53,603 76,404
Net decrease in Federal funds sold 450,000 480,000
Net (increase) decrease in interest-bearing deposits in
banks 3,474,435 (2,327,806)
Net increase in loans (5,132,162) (8,146,274)
Purchase of premises and equipment (260,662) (358,482)
Acquisition of purchased mortgage servicing rights (5,040,376) (5,293,161)
Proceeds from sale of purchased mortgage servicing
rights 5,901,155 5,547,286
------------ ------------
Net cash used in investing activities (534,307) (10,367,033)
------------ ------------
</TABLE>
F-12
<PAGE>
CRESCENT BANKING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
<S> <C> <C>
FINANCING ACTIVITIES
Net increase in deposits 15,247,899 6,342,902
Proceeds from other borrowings 112,596,755 -
Repayment of other borrowings (105,200,000) (22,444)
Dividends paid (35,077) (176,139)
Proceeds from exercise of stock options - 6,000
Purchase of treasury stock - (36,091)
------------ ------------
Net cash provided by financing activities 22,609,577 6,114,228
------------ ------------
Net increase (decrease in cash and due from banks $ 1,220,838 $ (447,123)
Cash and due from banks at beginning of year 1,791,026 2,238,149
------------- ------------
Cash and due from banks at end of year $ 3,011,864 $ 1,791,026
============= ============
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 2,188,984 $1,487,075
Income taxes $ 29,331 $ -
NONCASH TRANSACTION
Principal balances of loans transferred to other real
estate $ 602,159 $ -
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-13
<PAGE>
CRESCENT BANKING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Crescent Banking Company (the "Company") provides a full range of
banking services to individual and corporate customers through its
subsidiary, Crescent Bank and Trust Company (the "Bank") in Jasper,
Pickens County, Georgia and the surrounding areas. The Company also
provides mortgage loan origination and servicing to customers
throughout the southeastern United States. The Company is involved
in additional mortgage loan servicing activities through its
subsidiary, Crescent Mortgage Services, Inc. ("Crescent Mortgage").
Crescent Mortgage, located in Atlanta, Georgia, provides mortgage
loan servicing to customers throughout the southeastern United States
and, in December 1996, established operations to provide mortgage
loan servicing to customers throughout the northeastern United
States.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Significant intercompany transactions
and accounts are eliminated in consolidation.
The accounting and reporting policies of the Company conform to
generally accepted accounting principles and general practices within
the financial services industry. In preparing the financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period.
Actual results could differ from those estimates.
CASH AND DUE FROM BANKS
Cash on hand, cash items in process of collection, and amounts due
from banks are included in cash and due from banks.
The Company maintains amounts due from banks which, at times, may
exceed Federally insured limits. The Company has not experienced any
losses in such accounts.
SECURITIES
Securities are classified based on management's intention on the date
of purchase. Securities which management has the intent and ability
to hold to maturity are classified as held-to-maturity and reported
at amortized cost. Equity securities without a readily determinable
fair value are carried at cost.
Interest and dividends on securities, including amortization of
premiums and accretion of discounts, are included in interest income.
Realized gains and losses from the sales of securities are determined
using the specific identification method.
F-14
<PAGE>
MORTGAGE LOANS HELD FOR SALE
The Company originates first mortgage loans with the intention to
sell the loans in the secondary market. These loans are usually held
for a period of less than thirty days prior to delivery to investors.
Due to the short period these loans are held, they are reported at
cost which approximates fair value. Interest collected on these
loans during the period they are held in inventory is included in
interest income. Income from the sale of these loans is recognized
at the time of sale and is determined by the difference between net
sales proceeds and the book value of the loans.
LOANS
Loans are carried at their principal amounts outstanding less the
allowance for loan losses. Interest income on loans is credited to
income based on the principal amount outstanding.
Loan origination fees and certain direct costs of loans are
recognized at the time the loan is recorded. Because net origination
loan fees and costs are not material, the results of operations are
not materially different than the results which would be obtained by
accounting for loan fees and costs in accordance with generally
accepted accounting principles.
The allowance for loan losses is maintained at a level that
management believes to be adequate to absorb potential losses in the
loan portfolio. Management's determination of the adequacy of the
allowance is based on an evaluation of the portfolio, past loan loss
experience, current economic conditions, volume, growth, composition
of the loan portfolio, and other risks inherent in the portfolio. In
addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for
loan losses, and may require the Company to record additions to the
allowance based on their judgment about information available to them
at the time of their examinations.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due. Interest income is subsequently recognized only to
the extent cash payments are received.
A loan is impaired when it is probable the Company will be unable to
collect all principal and interest payments due in accordance with
the terms of the loan agreement. Individually identified impaired
loans are measured based on the present value of payments expected to
be received, using the contractual loan rate as the discount rate.
Alternatively, measurement may be based on observable market prices
or, for loans that are solely dependent on the collateral for
repayment, measurement may be based on the fair value of the
collateral. If the recorded investment in the impaired loan exceeds
the measure of fair value, a valuation allowance is established as a
component of the allowance for loan losses. Changes to the valuation
allowance are recorded as a component of the provision for loan
losses.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally by the straight-
line method over the estimated useful lives of the assets.
OTHER REAL ESTATE OWNED
Other real estate owned represents properties acquired through
foreclosure. Other real estate owned is held for sale and is carried
at the lower of the recorded amount of the loan or fair value of the
properties less estimated selling costs. Any write-down to fair
value at the time of transfer to other real estate owned is charged
to the allowance for loan losses. Subsequent
F-15
<PAGE>
gains or losses on sale and any subsequent adjustment to the value
are recorded as other expenses.
PURCHASED MORTGAGE SERVICING RIGHTS
Purchased mortgage servicing rights represent the cost of acquiring
the rights to service mortgage loans. Those rights are being
amortized in proportion to, and over the period of, estimated future
net servicing income. Gains related to the sales of purchased
mortgage servicing rights represent the difference between the sales
proceeds and the related capitalized purchased mortgage servicing
rights.
DRAFTS PAYABLE
Drafts payable represent the amount of mortgage loans held for sale
that have been closed by the Bank, but for which the cash has not yet
been disbursed. The Bank disburses the cash funds when the loan
proceeds checks are presented for payment.
GESTATION FEE INCOME
The Bank uses gestation repurchase agreements to facilitate the sales
of mortgage loans to security brokers. Gestation fee income, which
is recognized as earned, represents the spread between the gestation
fee (which is based on the loan's coupon rate) received on the
mortgage loan and the fee charged by the security broker during the
gestation period.
MORTGAGE SERVICING FEES AND EXPENSES
Mortgage servicing fees are based on a contractual percentage of the
unpaid principal balance of the loans serviced and are recorded as
income when received. Mortgage servicing costs are charged to
expense when incurred.
INCOME TAXES
Income tax expense consists of current and deferred taxes. Current
income tax provisions approximate taxes to be paid or refunded for
the applicable year. Deferred tax assets and liabilities are
recognized on the temporary differences between the bases of assets
and liabilities as measured by tax laws and their bases as reported
in the financial statements. Deferred tax expense or benefit is then
recognized for the change in deferred tax assets or liabilities
between periods.
Recognition of deferred tax balance sheet amounts is based on
management's belief that it is more likely than not that the tax
benefit associated with certain temporary differences, tax operating
loss carryforwards and tax credits will be realized. A valuation
allowance is recorded for those deferred tax items for which it is
more likely than not that realization will not occur.
The Company and the subsidiaries file a consolidated income tax
return. Each entity provides for income taxes based on its
contribution to income taxes (benefits) of the consolidated group.
EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents consist of stock
options.
F-16
<PAGE>
NOTE 2. SECURITIES
The amortized cost and fair value of securities are summarized as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
DECEMBER 31, 1996:
EQUITY SECURITIES $882,475 $ - $ - $882,475
======== ======== ======== ========
December 31, 1995:
Equity securities $902,175 $ - $ - $902,175
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY
DECEMBER 31, 1996:
STATE AND MUNICIPAL SECURITIES $345,000 $ - $ (931) $344,069
MORTGAGE-BACKED SECURITIES $403,630 1,687 - 405,317
-------- ------ -------- --------
$748,630 1,687 (931) $749,386
======== ====== ======== ========
December 31, 1995:
State and municipal securities $345,000 $ - (224) $344,776
Mortgage-backed securities $457,233 - (4,299) 452,934
-------- ------ -------- --------
$802,233 $ - (4,523) $797,710
======== ====== ======== ========
</TABLE>
F-17
<PAGE>
The amortized cost and fair value of securities as of December 31,
1996 by contractual maturity are shown below. Maturities may differ
from contractual maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or prepaid with or
without penalty. Therefore, these securities and equity securities
are not included in the maturity categories in the following maturity
summary.
<TABLE>
<CAPTION>
SECURITIES SECURITIES
AVAILABLE-FOR-SALE HELD-TO-MATURITY
--------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Due from five to ten years $ - $ - $345,000 $344,069
Mortgage-backed securities - - 403,630 405,317
Equity securities 882,475 882,475 - -
-------- -------- -------- --------
$882,475 $882,475 $748,630 $749,386
======== ======== ======== ========
</TABLE>
Securities with a carrying value of $ - - and $190,770 at December 31,
1996 and 1995, respectively, were pledged to secure public deposits
and for other purposes.
There were no gains or losses on sales of securities available-for-
sale in 1996. There were no sales of securities available-for-sale in
1995.
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
DECEMBER 31,
----------------------------
1996 1995
----------- -----------
Commercial $ 3,425,000 $ 5,779,000
Real estate - construction and
land development 10,346,000 4,577,000
Real estate - mortgage 11,522,000 11,335,000
Consumer 3,207,400 2,509,956
----------- -----------
28,500,400 24,200,956
Allowance for loan losses (335,512) (566,071)
Loans, net $28,164,888 $23,634,885
=========== ===========
F-18
<PAGE>
Changes in the allowance for loan losses were as follows:
DECEMBER 31,
------------------------
1996 1995
--------- ---------
BALANCE, BEGINNING OF YEAR $ 566,071 $ 275,286
Provision for loan losses - 496,937
Loans charged off (248,892) (210,680)
Recoveries of loans previously
charged off 18,333 4,528
--------- ---------
BALANCE, END OF YEAR $ 335,512 $ 566,071
========= =========
The total recorded investment in impaired loans was $167,916 and
$415,589 at December 31, 1996 and 1995, respectively. There were no
loans that had related allowances for loan losses determined in
accordance with Statement of Financial Accounting Standard No. 114
("Accounting by Creditors for Impairment of a Loan") at December 31,
1996 and 1995, respectively. The average recorded investment in
impaired loans for 1996 and 1995 was $521,901 and $315,765,
respectively. Interest income on impaired loans of $46,984 and
$18,644 was recognized for cash payments received for the years ended
1996 and 1995, respectively.
The Company has granted loans to certain directors, executive
officers, and related entities of the Company and the Bank. The
interest rates on these loans were substantially the same as rates
prevailing at the time of the transaction and repayment terms are
customary for the type of loan involved. Changes in related party
loans for the year ended December 31, 1996 are as follows:
BALANCE, BEGINNING OF YEAR $ 2,105,060
Advances 1,302,900
Repayments (1,191,838)
-----------
BALANCE, END OF YEAR $ 2,216,122
===========
F-19
<PAGE>
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31,
--------------------------
1996 1995
---------- ----------
Land $ 263,978 $ 263,978
Buildings and improvements 1,154,906 1,154,906
Equipment 1,651,402 1,474,634
---------- ----------
3,070,286 2,893,518
Accumulated depreciation (874,458) (711,349)
$2,195,828 $2,182,169
========== ==========
NOTE 5. BROKERED DEPOSITS
Brokered deposits amounted to $6,529,000 and $5,144,000 at December
31, 1996 and 1995, respectively, and are included in time deposits as
follows:
DECEMBER 31,
--------------------------
1996 1995
---------- ----------
Time, $100,000 and over $ 500,000 $ 200,000
Other time 6,029,000 4,944,000
---------- ----------
$6,529,000 $5,144,000
========== ==========
F-20
<PAGE>
NOTE 6. OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
$18,000,000 line of credit from Federal Home $5,100,000 $ -
Loan Bank with interest at the FHLB Daily
Rate Credit plus .25% (7.20% at
December 31, 1996) due on demand and
collateralized by first mortgage loans
and investment in FHLB
$26,000,000 line of credit with interest at 2,296,755 -
the one month LIBOR rate plus .80% due on
demand, and collateralized by
first mortgage loans
__________ ________
$7,396,755 $ -
</TABLE>
At December 31, 1996 and 1995, the Company had unsecured lines of
credit available totaling $19,600,000 and $4,600,000, respectively,
which bear interest ranging from the prevailing Federal funds rate to
the prime rate. The Company had no funds borrowed under these
agreements at December 31,1996 and 1995.
At December 31,1996 and 1995, the Company had the ability to sell up
to $40 million in mortgage loans to security brokers without recourse
under gestation repurchase agreements. Under these agreements, the
Company sells mortgage loans and simultaneously assigns the related
forward sale commitments to the security broker. The Company
continues to receive fee income from the security broker until the
loan is delivered into the forward commitment.
F-21
<PAGE>
NOTE 7. STOCK OPTIONS
The Company has a non-qualified stock option plan for key employees
and has reserved 73,566 shares of common stock. At the discretion of
the Company, cash awards may be paid to option holders which are
designed to compensate the employee for the difference in the tax
treatment between the non-qualified options and incentive stock
options. The Company also has a non-qualified stock option plan for
directors and has reserved 25,000 shares of common stock. All options
under these plans are granted at the estimated fair market value at
the date of grant and expire ten years from the date of grant. At
December 31, 1996, 9,666 and 12,200 options were available to grant
under the employee and director plans, respectively. Other pertinent
information related to the options follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1996 1995
------------------------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Under option, beginning of year 54,900 $10.96 55,500 $11.15
Granted 21,800 14.76 5,000 13.75
Exercised - - (600) 10.00
Terminated - - (5,000) 16.00
------ -------
Under option, end of year 76,700 12.04 54,900 10.96
====== =======
Exercisable, end of year 54,700 11.73 36,567 10.20
====== =======
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE REMAINING
RANGE OF EXERCISE CONTRACTUAL
NUMBER PRICES PRICE LIFE
------ --------------- ----------- -----------
<S> <C> <C> <C> <C>
Under option, end of year 63,900 $10.00 - 13.75 $11.24 5
12,800 16.00 16.00 10
------
76,700
======
Options exercisable, end of year 41,900 10.00 - 13.75 10.42 2
12,800 16.00 16.00 10
------
54,700
======
</TABLE>
F-22
<PAGE>
As permitted by SFAS No. 123 ("Accounting for Stock-Based
Compensation"), the Company recognizes compensation cost for stock-
based employee compensation awards in accordance with APB Opinion No.
25 ("Accounting for Stock Issued to Employees"). The Company
recognized no compensation cost for stock-based employee compensation
awards for the year ended December 31, 1996. If the Company had
recognized compensation cost in accordance with SFAS No. 123, net
income and earnings per share would have been reduced as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1996 1995
------------------------ ---------------------
NET EARNINGS NET EARNINGS
INCOME PER SHARE INCOME PER SHARE
--------- ----------- ------- ----------
<S> <C> <C> <C> <C>
As reported $583,438 $ 0.83 $89,134 $ 0.13
Stock-based compensation, net of
related tax effect (48,450) (0.07) (3,738) (0.01)
-------- ------ ------- ------
As adjusted $534,988 $ 0.76 $85,396 $ 0.12
======== ====== ======= =======
</TABLE>
The fair value of the options granted or vested during the year was
based upon the discounted value of future cash flows of the options
using the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate 6.50%
Expected life of the options 5 Years
Expected dividends (as a percent of the fair value of the stock) 3.85%
</TABLE>
F-23
<PAGE>
NOTE 8. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
--------- ---------
<S> <C> <C>
Current $ 360,690 $ 1,180
Deferred 363,834 446,309
Benefit of net operating loss carryforward (331,035) (388,066)
--------- ---------
Income tax expense $ 393,489 $ 59,423
========= =========
</TABLE>
The Company's income tax expense differs from the amounts computed by
applying the Federal income tax statutory rates to income before
income taxes. A reconciliation of the differences is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1996 1995
--------------------- ----------------------
AMOUNT PERCENT Amount Percent
------- ------- ------ -------
<S> <C> <C> <C> <C>
Income taxes at statutory rate $332,125 34% $50,509 34%
Other items, net 61,364 6 8,914 6
-------- -- ------- --
Income tax expense $393,489 40% $59,423 40%
======== == ======= ==
</TABLE>
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $ 52,864 $ 148,563
Net operating loss carryforward 549,801 909,189
Alternative minimum tax carryforward 42,084 -
Accrual to cash adjustment for income tax
reporting purposes - 44,904
Other 5,018 36,994
---------- ----------
649,767 1,139,650
---------- ----------
Deferred tax liabilities:
Purchased mortgage servicing rights 1,206,433 1,328,083
Depreciation 153,025 157,106
Other 11,548 11,866
---------- ----------
1,371,006 1,497,055
---------- ----------
Net deferred tax liabilities $ (721,239) $ (357,405)
========== ==========
</TABLE>
At December 31, 1996, the Company has available net operating loss
carryforwards of $1,853,234 for Federal income tax purposes. If
unused, the carryforwards will expire beginning in 2008.
F-24
<PAGE>
NOTE 9. MORTGAGE LOAN SERVICING
Mortgage loans serviced for others are not reflected in the financial
statements. The Company is obligated to service the unpaid principal
balances of these loans, which approximated $407 million as of
December 31, 1996. The Company pays a third party subcontractor to
perform servicing and escrow functions with respect to loans sold with
retained servicing. During 1996, substantially all of the Company's
mortgage lending and servicing activity was concentrated within the
Southeastern United States. Also, the servicing portfolio was
comprised principally of mortgage loans serviced on behalf of the
Federal Home Loan Mortgage Corporation.
At December 31, 1996, the Company had errors and omissions and
fidelity bond insurance coverage in force of $1,000,000.
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company has entered into
financial instruments with off-balance-sheet risk which are not
reflected in the financial statements (through the purchase and sale
of mortgage loans and the management of the related loss exposure
caused by fluctuations in interest rates.) These financial
instruments include commitments to extend credit, mortgage loans in
process of origination (the pipeline), mandatory and optional forward
commitments, and other hedging instruments. These instruments
involve, to varying degrees, elements of credit and interest rate risk
in excess of the amount recognized in the balance sheet. Credit risk
is managed by the Company by entering into agreements only with
permanent investors meeting the credit standards of the Company. At
any time the risk to the Company, in the event of default by the
purchaser, is the difference between the contract price and current
market value of an alternative financial instrument, the amount of
which is a percentage of the outstanding commitments.
In addition to the mortgage loans held for sale on the balance sheet,
the Company's mortgage loan pipeline at December 31, 1996 totaled
approximately $113,595,000. The Company's exposure to credit loss in
the event of nonperformance by another party to the mortgage is
represented by the principal balance of loans for which the Company
has offered to extend credit. The pipeline consists of approximately
$31,657,000 in mortgage loans for which the Company has interest rate
risk. The remaining $81,938,000 of mortgage loans are not subject to
interest rate risk. The mortgages not subject to interest rate risk
are comprised of (1) loans under contract to be placed with a private
investor through a "best efforts" agreement, whereas the investor
purchases the loans from the Company at whatever rate the loan
contains, (2) loans with floating interest rates, therefore, the loan
closes at the current market rate and therefore, does not subject the
Company to any interest rate risk, and (3) loans where the original
fixed interest rate commitment has expired, therefore, the loans will
reprice at the current market rate. The Company funds approximately
fifty percent of its mortgage pipeline every month and has adequate
lines of credit and availability under gestation repurchase agreements
at December 31, 1996 to fund its projected loan closing from its
mortgage pipeline.
The Company hedges the interest rate risk of the mortgage loan
pipeline that is expected to close and of mortgage loans held for
sale. Mandatory forward commitments to sell whole loans are the
Company's primary hedge. At December 31, 1996, the Company had
approximately $20,450,000 of mandatory commitments for the mortgage
pipeline. To the extent mortgage loans at the appropriate rates are
not available to fill these commitments, the Company has interest rate
risk due to interest fluctuations. In addition, the Company had
mandatory commitments for all mortgage loans held for sale at December
31, 1996.
F-25
<PAGE>
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the
contractual amount of those instruments. The Company uses the same
credit and collateral policies for these off-balance-sheet financial
instruments as it does for on-balance-sheet financial instruments. A
summary of the Bank's commitments is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
------------ ----------
<S> <C> <C>
Commitments to extend credit $7,594,000 $6,895,000
Standby letters of credit 563,190 209,500
------------ ----------
$8,157,190 $7,104,500
============ ==========
</TABLE>
Commitments to extend credit generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future
cash requirements. The credit risk involved in issuing these
financial instruments is essentially the same as that involved in
extending loans to customers. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit,
is based on management's credit evaluation of the customer.
Collateral held varies but may include real estate and improvements,
marketable securities, accounts receivable, inventory, equipment and
personal property.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan
facilities to customers. Collateral held varies as specified above
and is required in instances which the Company deems necessary.
The Company does not anticipate any material losses as a result of the
commitments and contingent liabilities.
In the normal course of business, the Company is involved in various
legal proceedings. In the opinion of management of the Company, any
liability resulting from such proceedings would not have a material
effect on the Company's financial statements.
EMPLOYMENT CONTRACTS:
At December 31, 1996, the Company was obligated under an employment
agreement with one of its key officers. The employment agreement
includes provisions for severance pay that would be paid if certain
events occur, including but not limited to, the termination of the
employee due to a change in control of the Company. The maximum
amount the Company would be obligated to pay under this plan is
approximately $240,000.
F-26
<PAGE>
NOTE 11. CONCENTRATIONS OF CREDIT
The Company originates primarily commercial, residential, and consumer
loans to customers in Pickens County and surrounding areas. The
ability of the majority of the Company's customers to honor their
contractual loan obligations is dependent on the economy in these
areas.
Seventy-six percent (76%) of the Company's loan portfolio is
concentrated in loans secured by real estate of which a substantial
portion is secured by real estate in the Company's primary market
area. In addition, a substantial portion of the other real estate
owned is located in those same markets. Accordingly, the ultimate
collectibility of the loan portfolio and the recovery of the carrying
amount of other real estate owned are susceptible to changes in market
conditions in the Company's primary market area. The other
significant concentrations of credit by type of loan are set forth in
Note 3.
The Company, as a matter of policy, does not generally extend credit
to any single borrower or group of related borrowers in excess of 25%
of statutory capital, or approximately $1,380,000.
NOTE 12. REGULATORY MATTERS
The Bank is subject to certain restrictions on the amount of dividends
that may be declared without prior regulatory approval. At December
31, 1996, approximately $344,000 of retained earnings were available
for dividend declaration without regulatory approval.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and
possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and Bank must meet
specific capital guidelines that involve quantitative measures of the
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Company and Bank capital
amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios of total and Tier I capital to risk-weighted assets and of
Tier I capital to average assets. Management believes, as of December
31, 1996, the Company and the Bank meet all capital adequacy
requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the following
table. There are no conditions or events since that notification that
management believes have changed the Bank's category.
F-27
<PAGE>
The Company and Bank's actual capital amounts and ratios are presented
in the following table.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------------- --------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total Capital
(to Risk Weighted Assets):
Company $ 7,806,958 14.40% $ 4,337,033 8% $ 5,421,291 10%
Bank $ 6,394,313 12.27% $ 4,169,111 8% $ 5,211,389 10%
Tier I Capital
(to Risk Weighted Assets):
Company $ 7,471,445 13.78% $ 2,168,516 4% $ 3,252,775 6%
Bank $ 6,058,800 11.63% $ 2,084,555 4% $ 3,126,834 6%
Tier I Capital
(to Average Assets):
Company $ 7,471,445 10.67% $ 2,801,101 4% $ 3,501,377 5%
Bank $ 6,058,800 8.97% $ 2,700,440 4% $ 3,375,550 5%
</TABLE>
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments. In
cases where quoted market prices are not available, fair values are
based on estimates using discounted cash flow methods. Those methods
are significantly affected by the assumptions used, including the
discount rates and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. The use of different
methodologies may have a material effect on the estimated fair value
amounts. Also, the fair value estimates presented herein are based on
pertinent information available to management as of December 31, 1996
and 1995. Such amounts have not been revalued for purposes of these
financial statements since those dates and, therefore, current
estimates of fair value may differ significantly from the amounts
presented herein.
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments as disclosed herein:
CASH, DUE FROM BANKS, AND FEDERAL FUNDS SOLD:
The carrying amounts of cash, due from banks, and Federal funds sold
approximate their fair value.
SECURITIES
Fair values for securities are based on quoted market prices. The
carrying values of equity securities with no readily determinable
fair value approximate fair values.
F-28
<PAGE>
LOANS:
For mortgage loans held for sale and variable-rate loans that reprice
frequently and have no significant change in credit risk, fair values
are based on carrying values. For other loans, the fair values are
estimated using discounted cash flow methods, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for impaired loans are estimated
using discounted cash flow methods or underlying collateral values.
PURCHASED MORTGAGE SERVICING RIGHTS:
Fair values for purchased mortgage servicing rights are based upon
independent appraisal.
DEPOSITS AND DRAFTS PAYABLE:
The carrying amounts of demand deposits, savings deposits, variable-
rate certificates of deposit and drafts payable approximate their
fair values. Fair values for fixed-rate certificates of deposit are
estimated using discounted cash flow methods, using interest rates
currently being offered on certificates.
OTHER BORROWINGS:
The fair values of the Company's other borrowings are estimated using
discounted cash flow methods based on the Company's current
incremental borrowing rates for similar types of borrowing
arrangements.
ACCRUED INTEREST:
The carrying amounts of accrued interest approximate their fair
values.
OFF-BALANCE SHEET INSTRUMENTS:
Fair values of the Company's off-balance sheet financial instruments
are based on fees charged to enter into similar agreements. However,
commitments to extend credit and standby letters of credit do not
represent a significant value to the Company until such commitments
are funded. The Company has determined that these instruments do not
have a distinguishable fair value and no fair value has been
assigned.
F-29
<PAGE>
The estimated fair values of the Company's financial instruments were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------------------- ------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------------ ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks,
interest-bearing deposits with
banks and Federal funds sold $ 3,658,567 $ 3,658,567 $ 6,362,164 $ 6,362,164
Securities available-for-sale 882,475 882,475 902,175 902,175
Securities held-to-maturity 748,630 749,386 802,233 797,710
Mortgage loans held for sale 32,996,668 32,996,668 17,361,494 17,361,494
Loans 28,164,888 28,453,632 23,634,885 23,890,142
Accrued interest receivable 249,489 249,489 329,193 329,193
Purchased mortgage
servicing rights 4,093,493 5,186,999 4,510,966 4,814,511
Financial liabilities:
Deposits 55,745,908 55,868,834 40,498,009 40,668,115
Drafts payable 2,438,733 2,438,733 8,766,438 8,766,438
Other borrowings 7,396,755 7,396,755 - -
Accrued interest payable 460,371 460,371 487,673 487,673
</TABLE>
NOTE 14. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total
revenue are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---------- --------
<S> <C> <C>
Outside service fees $547,926 $311,202
Subservicing expense 276,965 356,626
Amortization of purchased mortgage 441,151 486,327
servicing rights
Business development 229,930 266,352
Stationery and printing 143,164 126,930
Telephone 144,288 101,010
Directors fees 92,250 89,775
</TABLE>
F-30
<PAGE>
NOTE 15. SUPPLEMENTAL SEGMENT INFORMATION
<TABLE>
<CAPTION>
SEGMENT PERFORMANCE
-----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
------------- -----------
<S> <C> <C>
Net interest income after provision for loan losses
Mortgage banking $ 1,284,449 $ 920,552
Commercial banking 1,887,528 1,187,780
----------- -----------
Total $ 3,171,977 $ 2,108,332
=========== ===========
Pre-tax earnings
Mortgage banking $ 155,321 $ 253,758
Commercial banking 525,864 (490,078)
----------- -----------
Operating (loss) profit segments 681,185 (236,320)
Unallocated holding company expenses 66,194 37,936
----------- -----------
Operating (loss) profit 614,991 (274,256)
Other income 1,207,920 746,833
Other expenses 846,074 324,020
----------- -----------
Total $ 976,837 $ 148,557
=========== ===========
Assets
Mortgage banking $38,772,499 $29,911,732
Commercial banking 35,879,853 27,471,934
----------- -----------
Total $74,652,352 $57,383,666
=========== ===========
Depreciation and amortization
Mortgage banking $ 494,097 $ 573,411
Commercial banking 195,254 138,868
----------- -----------
Segments 689,351 712,279
Corporate 13,679 13,679
----------- -----------
Total $ 703,030 $ 725,958
=========== ===========
Capital expenditures
Mortgage banking $ 129,761 $ 67,798
Commercial banking 130,901 308,185
----------- -----------
Total $ 260,662 $ 375,983
=========== ===========
</TABLE>
F-31
<PAGE>
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheets,
statements of income, and cash flows of Crescent Banking Company as of
and for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
1996 1995
---------- -----------
<S> <C> <C>
ASSETS
Cash $ 109,207 $ 783,758
Investment in subsidiaries 7,588,184 6,317,682
Other assets 10,477 24,157
---------- ----------
TOTAL ASSETS $7,707,868 $7,125,597
========== ==========
LIABILITIES, other $ 34,000 $ -
SHAREHOLDERS' EQUITY 7,673,868 7,125,597
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $7,707,868 $7,125,597
========== ==========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
1996 1995
-------- -------
<S> <C> <C>
INCOME, dividends from subsidiary $ - $176,139
-------- --------
EXPENSES, other 87,154 51,614
-------- --------
INCOME (LOSS) BEFORE EQUITY
IN UNDISTRIBUTED INCOME OF SUBSIDIARIES
(87,154) 124,525
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES
(DISTRIBUTIONS IN EXCESS OF EARNINGS OF
SUBSIDIARIES) 670,502 (35,391)
-------- --------
NET INCOME $583,348 $ 89,134
======== ========
</TABLE>
F-32
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
1996 1995
--------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 583,348 $ 89,134
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
(Undistributed income of subsidiaries) distributions in
excess of earnings of subsidiaries (670,502) 35,391
Other operating activities 47,680 (27,341)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
(39,474) 97,184
--------- ---------
INVESTING ACTIVITIES
Investment in subsidiaries (600,000) (105,889)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (600,000) (105,889)
--------- ---------
FINANCING ACTIVITIES
Dividends paid (35,077) (176,139)
Proceeds from exercise of stock options - 6,000
Purchase of treasury stock - (36,091)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (35,077) (206,230)
--------- ---------
Net decrease in cash (674,551) (214,935)
Cash at beginning of year 783,758 998,693
--------- ---------
Cash at end of year $ 109,207 $ 783,758
========= =========
</TABLE>
F-33
<PAGE>
SUBSCRIPTION AGREEMENT
CRESCENT BANKING COMPANY
The undersigned (individually and collectively the "Subscriber"), intending
to be legally bound, hereby applies to Crescent Banking Company (the "Company")
to purchase the number of shares of Company's $1.00 par value common stock (the
"Common Stock") at $__________ per share (the "Purchase Price") specified below,
in accordance with the terms and conditions of this Agreement and the Offering
as described in the Prospectus relating to the offer and sale of the Common
Stock.
1. Receipt of Prospectus. The Subscriber has received and read a copy of
the Prospectus with respect to the Offering, and understands that upon
acceptance by the Company, this Subscription will be a binding obligation of the
Subscriber to immediately purchase the shares subscribed.
2. Purchase for Subscriber's Account Only. The Subscriber represents,
warrants, and covenants that he is offering this Subscription Agreement and will
purchase the Common Stock solely for his own account and for the person(s) in
whose name(s) such shares are to be register (or in whose names a brokerage
account is to be established) as set forth below.
3. Payment and Delivery of Subscription. ALL CHECKS IN PAYMENT OF
SUBSCRIPTIONS SHALL ACCOMPANY THIS SUBSCRIPTION AGREEMENT AND SHALL BE PAYABLE
TO "CRESCENT BANKING COMPANY". All shares subscribed and made available to the
undersigned Subscriber by the Company must be paid in full before the Company
will be obligated to issue any Common Stock in respect of such Subscription.
SUBSCRIPTION AGREEMENTS AND CHECKS IN PAYMENT FOR COMMON STOCK SUBSCRIBED SHOULD
BE DELIVERED TO MR. J. DONALD BOGGUS, JR., CRESCENT BANKING COMPANY, 251 HIGHWAY
515, JASPER, GEORGIA 30143. The offering period for the Common Stock will
terminate on the date that all shares of Common Stock offered by the Prospectus
are sold, but the Company reserves the right to terminate the Offering at any
time.
4. Allocation of Shares. The Subscriber understands and agrees that, as
described in the Prospectus, if fewer than all shares subscribed for by the
undersigned are accepted by the Company, the excess subscription funds will be
returned to the undersigned without interest. The Subscriber understands and
agrees that the Company has, in its sole discretion, the right to allocate
shares among Subscribers, and to accept or reject Subscriptions in whole or in
part.
5. Delivery of Certificates. As a convenience to the Subscriber, unless
the Subscriber indicates otherwise in the space provided below, the Subscriber
will receive physical delivery of the certificate, registered in his name, as
indicated in this Subscription Agreement.
6. Miscellaneous. The Subscriber confirms that all information supplied
by it is true, accurate, and complete, and shall constitute representations,
warranties, and covenants which shall survive the execution, delivery, and
acceptance of this Agreement and the issuance and delivery of the Common Stock
to the Subscriber or his broker. When accepted by the Company, this Agreement
shall bind the Subscriber and his successors and assigns, personal and legal
representatives, and heirs to pay for all shares subscribed. The Subscriber may
not assign or transfer this Subscription Agreement or any interest herein, and
this Agreement may not be revoked by the Subscriber. Headings used herein are
for convenience of reference only and shall not be considered in construing the
terms of this Agreement. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Georgia.
Common Stock purchased by the undersigned shall be registered as listed
below. In the absence of any contrary instructions, all shares subscribed by
two or more individuals will be registered to such persons as joint tenants with
rights of survivorship. (If certificates for shares are to be issued, or a
brokerage account is to be established, in more than one name, please specify
whether ownership is to be as tenants in common, joint tenants, etc. If
certificates for shares are to be issued in the name of one person for the
benefit of another, or in a person's Individual Retirement Account (or other
qualifying retirement account), please indicate whether registration should be
as trustee, custodian, or holder of an IRA/Retirement Account for each person,
and if as trustee, please provide the full name and date of such trust.)
A-1
<PAGE>
IN WITNESS WHEREOF, the undersigned, acting with full authority and
capacity has executed, or caused to be executed, this Subscription Agreement.
<TABLE>
<CAPTION>
<S> <C>
Number of shares of Common Stock subscribed: Name(s) of Subscriber(s):
_________________________________________________ ______________________________________________
______________________________________________
Total Subscription Price Please PRINT or TYPE exact name(s) in which the
(at $____ per share): $________________________________ undersigned desires Common Stock to be registered
PLEASE INDICATE THE FORM OF OWNERSHIP THE UNDERSIGNED DESIRES FOR THE COMMON STOCK:
[ ] Individual [ ] Tenants in Common [ ] Joint Tenants with Rights of Survivorship
[ ] Trustee [ ] Custodian [ ] Beneficiary of IRA/Retirement Account
[ ] Corporation [ ] Partnership [ ] Other __________________________
- -----------------------------------------------------------------------------------------------------------------------------------
SUBSTITUTE FORM W-9
Under the penalties of perjury, I certify that: (1) the Social Security Number or Taxpayer Identification Number given below is
correct; and (2) I am not subject to backup withholding either because I have not been notified that I am subject to backup
withholding as a result of a failure to report all interest or dividends, or because the Internal Revenue Service has notified me
that I am no longer subject to backup withholding. Instructions: You must cross out #2 above if you have been notified by the
Internal Revenue Service that you are subject to backup withholding because of under reporting interest or dividends on your tax
return and if you have not received a notice from the Internal Revenue Service advising you that backup withholding due to notified
payee under reporting has terminated.
SIGNATURE*___________________________________ DATE:___________________________,1998
- -----------------------------------------------------------------------------------------------------------------------------------
SUBSCRIBER #1 SUBSCRIBER #2 (IF ANY)
___________________________________________________ ___________________________________________________
Signature* Date Signature* Date
___________________________________________________ ___________________________________________________
Social Security or Federal Taxpayer Identification No. Social Security or Federal Taxpayer Identification No.
___________________________________________________ ___________________________________________________
Residence Street Address/Route Residence Street Address/Route
___________________________________________________ ___________________________________________________
City and State Zip City and State Zip
___________________________________________________ ___________________________________________________
Area Code and Telephone Number Area Code and Telephone Number
* If a corporation, please sign in full corporate name by president or other authorized officer. When signing as officer, attorney,
custodian, trustee, administrator, guardian, etc., please give your full title as such. In case of joint tenants, each person must
sign.
DO NOT WRITE BELOW THIS LINE
- -----------------------------------------------------------------------------------------------------------------------------------
Accepted as of this ______ day of ___________________, 1998, as to ______________________ shares of Common Stock.
CRESCENT BANKING COMPANY
By:_______________________________________________________ Title:_____________________________________________________________
</TABLE>
A-2
<PAGE>
================================================
No person has been authorized to give any
information or to make any representation other
than those contained in this Prospectus and, if
given or made, such information or representation
should not be relied upon as having been
authorized by the Company. Neither the delivery
of this Prospectus nor any distribution of the
securities to which this Prospectus relates shall,
under any circumstances, create any implication
that there has been no change in the affairs of
the Company or its subsidiaries since the date
hereof or that the information contained herein
is correct as of any time subsequent to its date.
This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to purchase,
any securities other than the securities to which
it relates or an offer to sell or a solicitation
of an offer to purchase the securities offered by
this Prospectus in any jurisdiction in which such
an offer or solicitation is not lawful.
_________________________
TABLE OF CONTENTS
PAGE
Available Information..................... 2
Notice to Florida Residents............... 2
Special Cautionary Notice Regarding
Forward-Looking Statements............. 2
Summary................................... 3
Risk Factors.............................. 6
The Offering.............................. 9
Use of Proceeds........................... 11
Capitalization............................ 11
Market Information and Dividends.......... 11
Business.................................. 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................... 16
Management................................ 34
Security Ownership of Certain Beneficial
Owners and Management................. 36
Director Compensation..................... 37
Compensation of Executive Officers........ 37
Certain Relationships and
Related Transactions.................. 39
Supervision and Regulation................ 41
Shares Eligible for Future Sale........... 49
Description of Company Capital Stock...... 50
Legal Matters............................. 52
Experts................................... 52
Indemnification........................... 52
Financial Statements and
Supplementary Data.................... F-1
Subscription Agreement.................... A-1
================================================
================================================
CRESCENT BANKING COMPANY
135,000 SHARES
$1.00 PAR VALUE COMMON STOCK
---------------
PROSPECTUS
---------------
JANUARY__, 1998
================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
ARTICLE NINE
Indemnification
---------------
Section 9.1. Certain Definitions.
-------------------
As used in this Article, the term:
(a) "Corporation" includes any domestic or foreign predecessor entity of
this Corporation in a merger or other transaction in which the predecessor's
existence ceased upon consummation of the transaction.
(b) "Director" means an individual who is or was a director of the
Corporation or an individual who, while a director of the Corporation, is or was
serving at the Corporation's request as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust, employee benefit plan, or other enterprise. Directors of
the Corporation who are serving as directors, officers, employees or agents of
Crescent Bank and Trust Company or any other wholly owned subsidiary of the
Corporation shall be considered to be serving at the Corporation's request and
shall be considered a "director" for the purposes of this Article. A director
is considered to be serving an employee benefit plan at the Corporation's
request if his duties to the Corporation also impose duties on, or otherwise
involve services by, him to the plan or to participants in or beneficiaries of
the plan. "Director" includes, unless the context requires otherwise, the
estate or personal representative of a director.
(c) "Expenses" includes attorneys' fees.
(d) "Liability" means the obligation to pay a judgment, settlement,
penalty, fine (including an excise tax assessed with respect to an employee
benefit plan), or reasonable expenses incurred with respect to a proceeding.
(e) "Officer" means an individual who is or was an officer of the
Corporation or an individual who, while an officer of the Corporation, is or was
serving at the Corporation's request as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust, employee benefit plan, or other enterprise. Officers of
the Corporation who are serving as directors, officers, employees or agents of
Crescent Bank and Trust Company or any other wholly owned subsidiary of the
Corporation shall be considered to be serving at the Corporation's request and
shall be considered an "officer" for the purposes of this Article. An officer
is considered to be serving an employee benefit plan at the Corporation's
request if his duties to the Corporation also impose duties on, or otherwise
involve services by, him to the plan or to participants in or beneficiaries of
the plan. "Officer" includes, unless the context requires otherwise, the estate
or personal representative of an officer.
(f) "Party" includes an individual who was, is, or is threatened to be made
a named defendant or respondent in a proceeding.
(g) "Proceeding" means any threatened, pending, or completed action, suit,
or proceeding, whether civil, criminal, administrative, or investigative and
whether formal or informal.
(h) "Reviewing Party" shall mean the person or persons making all the
entitlement determination pursuant to Section 9.4 of this Article, and shall not
include a court making any determination under this Article or otherwise.
II-1
<PAGE>
Section 9.2. Basic Indemnification Arrangement.
---------------------------------
(a) To the extent that a director or officer has been successful, on the
merits or otherwise, in the defense of any proceeding to which he was a party,
or in defense of any claim, issue, or matter therein, because he is or was a
director or officer, the Corporation shall indemnify the director or officer
against reasonable expenses incurred in connection therewith. Except as
provided in subsections 9.2(d) and 9.2(e) below, the Corporation shall in
addition indemnify an individual who is made a party to a proceeding because he
is or was a director or officer against liability incurred by him in the
proceeding if he acted in a manner he believed in good faith to be in or not
opposed to the best interests of the Corporation and, in the case of any
criminal proceeding, he had no reasonable cause to believe his conduct was
unlawful.
(b) A person's conduct with respect to an employee benefit plan for a
purpose he believed in good faith to be in the interests of the participants in
and beneficiaries of the plan is conduct that satisfies the requirement of
subsection 9.2(a).
(c) The termination of a proceeding by judgment, order, settlement, or
conviction, or upon a plea of nolo contendere or its equivalent shall not, of
itself, be determinative that the proposed indemnitee did not meet the standard
of conduct set forth in subsection 9.2(a).
(d) The Corporation shall not indemnify a person under this Article in
connection with (i) a proceeding by or in the right of the Corporation in which
such person was adjudged liable to the Corporation, or (ii) any proceeding in
which such person was adjudged liable on the basis that he improperly received a
personal benefit; unless in either case, and then only to the extent that, a
court of competent jurisdiction acting pursuant to Section 9.5 of this Article
or Section 14-2-854 of the Georgia Business Corporation Code, determines that,
in view of the circumstances of the case, such person is fairly and reasonably
entitled to indemnification.
(e) Indemnification permitted under this Article in connection with a
proceeding by or in the right of the Corporation is limited to reasonable
expenses incurred in connection with the proceeding.
Section 9.3. Advances for Expenses.
---------------------
(a) The Corporation shall pay for or reimburse the reasonable expenses
incurred by a director or officer as a party to a proceeding in advance of final
disposition of the proceeding if:
(i) Such person furnishes the Corporation a written affirmation of his
good faith belief that he has met the standard of conduct set forth in
subsection 9.2(a) above; and
(ii) Such person furnishes the Corporation a written undertaking (meeting
the qualifications set forth below in subsection 9.3(b)), executed
personally or on his behalf, to repay any advances if it is ultimately
determined that he is not entitled to indemnification under this
Article or otherwise.
(b) The undertaking required by subsection 9.3(a)(ii) above must be an
unlimited general obligation of the proposed indemnitee but need not be secured
and shall be accepted without reference to financial ability to make repayment.
Section 9.4. Authorization of and Determination of Entitlement to
----------------------------------------------------
Indemnification.
- ---------------
(a) The Corporation acknowledges that indemnification of a director or
officer under Section 9.2 has been pre-authorized by the Corporation in the
manner described in subsection 9.4(b) below. Nevertheless, the Corporation
shall not indemnify a director or officer under Section 9.2 unless a separate
determination has been made in the specific case that indemnification of such
person is permissible in the circumstances because he has met the standard of
conduct set forth in subsection 9.2(a); provided, however, that regardless of
the result or absence of any such determination, and unless limited by the
articles of incorporation of the Corporation, to the
II-2
<PAGE>
extent that a director or officer has been successful, on the merits or
otherwise, in the defense of any proceeding to which he was a party, or in
defense of any claim, issue or matter therein, because he is or was a director
or officer, the Corporation shall indemnify such person against reasonable
expenses incurred by him in connection therewith.
(b) The determination referred to in subsection 9.4(a) above shall be made,
at the election of the board of directors:
(i) by the board of directors of the Corporation by majority vote of a
quorum consisting of directors not at the time parties to the
proceeding;
(ii) if a quorum cannot be obtained under subdivision (i), by majority
vote of a committee duly designated by the board of directors (in
which designation directors who are parties may participate),
consisting solely of two or more directors not at the time parties
to the proceeding;
(iii) by special legal counsel:
(1) selected by the board of directors or its committee in the manner
prescribed in subdivision (i) or (ii); or
(2) if a quorum of the board of directors cannot be obtained under
subdivision (i) and a committee cannot be designated under
subdivision (ii), selected by a majority vote of the full board of
directors (in which selection directors who are parties may
participate); or
(iv) by the shareholders; provided that shares owned by or voted under the
control of directors or officers who are at the time parties to the
proceeding may not be voted on the determination.
(c) As acknowledged above, the Corporation has pre-authorized the
indemnification of directors and officers hereunder, subject to a case-by-case
determination that the proposed indemnitee met the applicable standard of
conduct under subsection 9.2(a). Consequently, no further decision need or
shall be made on a case-by-case basis as to the authorization of the
Corporation's indemnification of directors and officers hereunder.
Nevertheless, evaluation as to reasonableness of expenses of a director or
officer in the specific case shall be made in the same manner as the
determination that indemnification is permissible, as described in subsection
9.4(b) above, except that if the determination is made by special legal counsel,
evaluation as to reasonableness of expenses shall be made by those entitled
under subsection 9.4(b)(iii) to select counsel.
(d) The Reviewing Party acting pursuant to subsections 9.4(b) or 9.4(c)
above shall act expeditiously and reasonably upon an application for
indemnification or advancement of expenses, and shall cooperate in the
procedural steps required to obtain court-ordered indemnification or advancement
of expenses under Section 9.5 below.
Section 9.5. Court-Ordered Indemnification and Advances for Expenses.
-------------------------------------------------------
Unless this Corporation's articles of incorporation provide otherwise, a
director or officer who is a party to a proceeding may apply for indemnification
or advances for expenses to the court conducting the proceeding or to another
court of competent jurisdiction. For purposes of this Article, the Corporation
hereby consents to personal jurisdiction and venue in any court in which is
pending a proceeding to which a director or officer is a party. Regardless of
any determination by the Reviewing Party that the proposed indemnitee is not
entitled to indemnification or advancement of expenses or as to the
reasonableness of expenses, and regardless of any failure by the Reviewing Party
to make a determination as to such entitlement or the reasonableness of
expenses, such court's review shall be a de novo review, and its determination
shall be binding, on the questions of whether:
(i) The applicant is entitled to mandatory indemnification under the final
clause of subsection 9.4(a) above (in which case the Corporation shall
pay the indemnitees reasonable expenses incurred to obtain court-
ordered indemnification);
II-3
<PAGE>
(ii) the applicant is fairly and reasonably entitled to indemnification in
view of all the relevant circumstances, whether or not he met the
standard of conduct set forth in subsection 9.2(a) above or was
adjudged liable as described in subsection 9.2(d) above (but if he
was adjudged so liable, any court-ordered indemnification shall be
limited to reasonable expenses incurred by the indemnitee, including
reasonable expenses incurred to obtain court-ordered indemnification,
unless the articles of incorporation of this Corporation or a bylaw,
contract or resolution approved or ratified by the shareholders
pursuant to Section 9.7 provides otherwise); or
(iii) In the case of advances for expenses, the applicant is entitled
pursuant to the articles of incorporation, bylaws or applicable
resolution or agreement to payment for or reimbursement of his
reasonable expenses incurred as a party to a proceeding in advance of
final disposition of the proceeding (in which case the Corporation
shall pay the applicant's reasonable expenses incurred to obtain
court-ordered advancement of expenses).
In any claim brought be the proposed indemnitee seeking court-ordered
indemnification or advancement of expenses, the failure of the Reviewing Party
to act in accordance with Section 9.4(d) may properly be considered by the court
in assessing the expenses of the proposed indemnitee.
Section 9.6. Indemnification of Employees and Agents.
---------------------------------------
Unless this Corporation's articles of incorporation provide otherwise, the
Corporation may indemnify and advance expenses under this Article to an employee
or agent of the Corporation, Crescent Bank and Trust Company or any other wholly
owned subsidiary of the Corporation who is not a director or officer to the same
extent as to a director or officer, or to any lesser extent (or greater extent
if permitted by law), determined by the board of directors.
Section 9.7. Shareholder Approved Indemnification.
------------------------------------
(a) If authorized by the articles of incorporation or a bylaw, contract or
resolution approved or ratified by the shareholders of the Corporation by a
majority of the votes entitled to be cast, the Corporation may indemnify or
obligate itself to indemnify a person made a party to a proceeding, including a
proceeding brought by or in the right of the Corporation, without regard to the
limitations in other sections of this Article. The Corporation shall not
indemnify a person under this Section 9.7 for any liability incurred in a
proceeding in which the person is adjudged liable to the Corporation or is
subjected to injunctive relief in favor of the Corporation;
(i) for any appropriation, in violation of his duties, of any business
opportunity to the Corporation;
(ii) for acts or omissions which involve intentional misconduct or a
knowing violation of law;
(iii) for the types of liability set forth in Section 14-2-832 of the
Georgia Business Corporation Code; or
(iv) for any transaction from which he received an improper personal
benefit.
(b) Where approved or authorized in the manner described in subsection
9.7(a) above, the Corporation may advance or reimburse expenses incurred in
advance of final disposition of the proceeding only if:
(i) the proposed indemnitee furnishes the Corporation a written
affirmation of his good faith belief that his conduct does not
constitute behavior of the kind described in subsection 9.7(a)(i) -
(iv) above; and
(ii) the proposed indemnitee furnishes the Corporation a written
undertaking, executed personally, or on his behalf, to repay any
advances if it is ultimately determined that he is not entitled to
indemnification.
II-4
<PAGE>
Section 9.8. Liability Insurance.
-------------------
The Corporation may purchase and maintain insurance on behalf of a director
or officer or an individual who is or was an employee or agent of the
Corporation or who, while an employee or agent of the Corporation, is or was
serving at the request of the Corporation as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise
against liability asserted against or incurred by him in that capacity or
arising from his status as a director, officer, employee, or agent, whether or
not the Corporation would have power to indemnify him against the same liability
under Section 9.2, Section 9.3, or Section 9.4 above.
Section 9.9. Witness Fees.
------------
Nothing in this Article shall limit the Corporation's power to pay or
reimburse expenses incurred by a person in connection with his appearance as a
witness in a proceeding at a time when he has not been made a named defendant or
respondent in the proceeding.
Section 9.10. Report to Shareholders.
----------------------
If the Corporation indemnifies or advances expenses to a director in
connection with a proceeding by or in the right of the Corporation, the
Corporation shall report the indemnification or advance, in writing, to the
shareholders with or before the notice of the next shareholders' meeting.
Section 9.11. Security for Indemnification Obligations.
----------------------------------------
The Corporation may at any time and in any manner, at the discretion of the
board of directors, secure the Corporation's obligations to indemnify or advance
expenses to a person pursuant to this Article.
Section 9.12. No Duplication of Payments.
--------------------------
The Corporation shall not be liable under this Article to make any payment
to a person hereunder to the extent such person has otherwise actually received
payment (under any insurance policy, agreement or otherwise) of the amounts
otherwise payable hereunder.
Section 9.13. Subrogation.
-----------
In the event of payment under this Article, the Corporation shall be
subrogated to the extent of such payment to all of the rights of recovery of the
indemnitee, who shall execute all papers required and shall do everything that
may be necessary to secure such rights, including the execution of such
documents necessary to enable the Corporation effectively to bring suit to
enforce such rights.
Section 9.14. Contract Rights.
---------------
The right to indemnification and advancement of expenses conferred
hereunder to directors and officers shall be a contract right and shall not be
affected adversely to any director or officer by any amendment of these bylaws
with respect to any action or inaction occurring prior to such amendment;
provided, however, that this provision shall not confer upon any indemnitee or
potential indemnitee (in his capacity as such) the right to consent or object to
any subsequent amendment of these bylaws.
Section 9.15. Non-Exclusivity, Etc.
---------------------
The rights of a director or officer hereunder shall be in addition to any
other rights with respect to indemnification, advancement of expenses or
otherwise that he may have under contract or the Georgia Business Corporation
Code or otherwise.
II-5
<PAGE>
Section 9.16. Severability.
------------
To the extent that the provisions of this Article are held to be
inconsistent with the provisions of Part 5 of Article 8 of the Georgia Business
Corporation Code, such provisions of such Code shall govern. In the event that
any of the provisions of this Article (including any provision within a single
section, subsection, division or sentence) is held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, the remaining
provisions of this Article shall remain enforceable to the fullest extent
permitted by law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the Company's estimated expenses in connection with
the issuance and distribution of the Shares offered by this Registration
Statement.
<TABLE>
<S> <C> <C>
Registration Fee $ 618
Blue Sky Fees and Expenses 5,000
Printing and Engraving 5,000
Legal Fees and Expenses 25,000
Accountant's Fees and Expenses 5,000
Miscellaneous 5,000
-------
TOTAL $45,618
=======
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
3.1 Articles of Incorporation of Crescent Banking Company (Incorporated by
reference from Exhibit 3.1 to the Company's Registration Statement on
Form S-4 dated January 27, 1992, Commission File No. 33-45254 (the
"Form S-4"))
3.2 Bylaws of Crescent Banking Company (Incorporated by reference to the
Company's Form S-4)
5.1 Opinion of Alston & Bird LLP, including consent
11.1 Statement Regarding Computation of Earnings Per Share
21.1 Subsidiaries of Crescent Banking Company
23.1 Consent of Alston & Bird LLP (Included in Exhibit 5)
23.2 Consent of Mauldin & Jenkins, LLC
24.1 Powers of Attorney (Included in the signature pages on pages II-8 and
II-9 hereof)
II-6
<PAGE>
ITEM 28. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to:
(1) File, during any period in which it offers or sell securities, a post-
effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing;
any increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement; and.
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form or
prospectus filed by the registrant under Rule 424(b)(1), or (4), or
497(h) under the Act as part of this registration statement as of the
time the Commission declared it effective.
(3) For determining any liability under the Act, treat each post-effective
amendment that contains a form of prospectus as a new registration
statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona
fide offering of those securities.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant, Crescent Banking Company, certifies that it has reasonable grounds
to believe that it meets all of the requirements for filing on Form SB-2 and
authorized this Registration Statement to be signed on its behalf by the
undersigned, in the City of Jasper, State of Georgia, on the 12th day of
January, 1998.
CRESCENT BANKING COMPANY
By: /s/ J. Donald Boggus, Jr.
-------------------------------------
J. Donald Boggus, Jr.
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints J. DONALD BOGGUS, JR., CHARLES R. FENDLEY, and A.
JAMES ELLIOTT, or any of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution, and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, including any Registration Statement filed pursuant to Rule 462(b) of
the Securities Act of 1933, as amended, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ J. Donald Boggus, Jr. President, Chief Executive Officer January 12, 1998
- ------------------------------------- and Chief Financial Officer
J. Donald Boggus, Jr.
/s/ Arthur Howell Chairman of the Board of Directors January 12, 1998
- -------------------------------------
Arthur Howell
/s/ Charles R. Fendley Secretary of the Board of Directors January 12, 1998
- -------------------------------------
Charles R. Fendley
/s/ A. James Elliott Director January 12, 1998
- -------------------------------------
A. James Elliott
</TABLE>
II-8
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Harry C. Howard Director January 12, 1998
- -------------------------------------
Harry C. Howard
/s/ Michael W. Lowe Director January 12, 1998
- -------------------------------------
Michael W. Lowe
/s/ L. Edmund Rast Director January 12, 1998
- -------------------------------------
L. Edmund Rast
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
3.1 Articles of Incorporation of Crescent Banking Company (Incorporated by
reference from Exhibit 3.1 to the Company's Registration Statement on
Form S-4 dated January 27, 1992, Commission File No. 33-45254 (the
"Form S-4"))
3.2 Bylaws of Crescent Banking Company (Incorporated by reference to the
Company's Form S-4)
5.1 Opinion of Alston & Bird LLP, including consent
11.1 Statement Regarding Computation of Earnings Per Share
21.1 Subsidiaries of Crescent Banking Company
23.1 Consent of Alston & Bird LLP (Included in Exhibit 5)
23.2 Consent of Mauldin & Jenkins, LLC
24.1 Powers of Attorney (Included in the signature pages on pages II-8 and
II-9 hereof)
II-10
<PAGE>
EXHIBIT 5.1
Opinion of Alston & Bird LLP
Alston&Bird llp
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
404-881-7000
Fax: 404-881-7777
January 12, 1997
Crescent Banking Company
251 Highway 515
Jasper, Georgia 30143
Re: Crescent Banking Company -- 135,000 Shares of $1.00 Par Value Common
Stock
Ladies and Gentlemen:
We have acted as counsel to Crescent Banking Company, a Georgia corporation
(the "Company"), in connection with the Registration Statement on Form SB-2 (the
"Registration Statement") filed with the Securities and Exchange Commission (the
"Commission") for the registration under the Securities Act of 1933, as amended
(the "Securities Act") of 135,000 shares of the common stock, par value $1.00
per share, of the Company (the "Shares").
In rendering this opinion, we have examined and relied upon such corporate
records, documents and other instruments that in our judgment are necessary or
appropriate in order to express the opinions hereinafter set forth. In such
examination, we have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the authenticity of all documents submitted to
us as originals, the conformity to the originals of all documents submitted to
us as copies, the authenticity of the originals of such documents, and the
truth, accuracy and completeness of the information, representations and
warranties contained in the records, documents, instruments and certificates we
have reviewed. Except to the extent expressly set forth herein, we have made no
independent investigations with regard to such records, documents and other
instruments, and, accordingly, we do not express any opinion as to matters that
have been disclosed by independent verification.
Based on the foregoing, we are of the opinion that the Shares are duly
authorized and, when issued and delivered to purchasers against payment in full
as described in the Prospectus under "The Offering" in accordance with the
Registration Statement, will be validly issued, fully paid, and non-assessable
under the Georgia Business Corporation Code as in effect on this date.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to all references to our firm included in or made a
part of the Registration Statement. In giving such consent, we do not consider
that we are "experts," within the meaning of the term as used in the Securities
Act or the rules and regulations of the Commission issued thereunder, with
respect to any part of the Registration Statement, including this opinion as an
exhibit or otherwise.
<TABLE>
<S> <C> <C>
1211 East Morehead Street 3605 Glenwood Avenue 601 Pennsylvania Avenue, N.W.
P. O. Drawer 34009 P. O. Drawer 31107 North Building, Suite 250
Charlotte, NC 28234-4009 Raleigh, NC 27622-1107 Washington, DC 20004-2601
704-331-6000 919-420-2200 202-508-3300
Fax: 704-334-2014 Fax: 919-881-3175 Fax: 202-508-3333
</TABLE>
<PAGE>
Crescent Banking Company
January 12, 1998
Page 2
This opinion is limited to those matters expressly stated herein, and no
opinions may be inferred or implied beyond those expressly stated herein.
Yours very truly,
ALSTON & BIRD LLP
By: /s/ Ralph F. MacDonald, III
------------------------------
Ralph F. MacDonald, III
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
PRIMARY AND FULLY DILATED BASIS
<TABLE>
<CAPTION>
FOR THE MONTHS ENDED FOR THE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Net Income $569,580 $ 94,183 $888,091 $425,177
Weighted average shares outstanding 706,354 704,854 705,431 704,854
Earnings per share $ 0.81 $ 0.13 $ 1.26 $ 0.60
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF CRESCENT BANKING COMPANY
A) CRESCENT BANK & TRUST COMPANY
B) CRESCENT MORTGAGE SERVICES, INC.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITOR
We have issued our report dated February 21, 1997, accompanying the
financial statements of Crescent Banking Company as of and for the period ending
December 31, 1996, contained in the Registration Statement and Prospectus. We
consent to the use of the aforementioned report in the Registration Statement
and Prospectus, and to the use of our name as it appears under the caption
"Experts."
/s/ Mauldin & Jenkins LLC
Atlanta, Georgia
January 12, 1998
