<PAGE>
UNITED STATES SECURITY AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
_____ EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
_____ EXCHANGE ACT OF 1934
For the transition period from _____________to ______________.
Commission file No. 0-20251
Crescent Banking Company
------------------------
(Exact Name of Registrant as Specified in its Charter)
Georgia 58-1968323
------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
251 Highway 515, Jasper, GA 30143
-------------------------------------
(Address of principal executive offices) (Zip code)
(706) 692-2424
--------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Common stock, $1 par value per share, 1,755,908 shares issued and
outstanding as of August 12, 1999. 6,668 shares are held as treasury stock.
Exhibit Index located on page 19.
<PAGE>
CRESCENT BANKING COMPANY
INDEX
<TABLE>
<CAPTION>
Part 1. Financial Information PAGE NO.
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
Part II. Other Information
iTEM 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
--------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 3,717,249 $ 4,382,047
Federal funds sold 13,850,000 7,510,000
Interest bearing deposits in other banks 324,570 733,183
Securities available for sale 7,048,763 4,104,772
Mortgage loans held for sale 126,909,304 128,409,669
Loans 47,264,412 41,328,423
Less allowance for loan losses (835,892) (699,020)
--------------------------------
Loans, net 46,428,520 40,629,403
Premises and equipment, net 6,005,368 3,369,209
Other real estate owned 117,120 263,249
Purchased mortgage servicing rights 4,880,597 4,004,146
Accounts receivable-brokers and escrow agents 6,468,297 4,804,208
Other assets 4,176,708 1,034,575
--------------------------------
Total Assets $219,926,496 $199,244,461
================================
Liabilities
Deposits
Noninterest -bearing demand deposits $ 16,976,945 $ 23,361,371
Interest-bearing demand 20,518,872 20,857,970
Savings 12,173,013 1,861,355
Time, $100,000 and over 20,319,440 16,345,339
Other time 47,233,727 38,175,754
--------------------------------
Total deposits 117,221,997 100,601,789
Drafts payable 5,441,303 4,984,145
Deferred taxes payable 1,588,532 1,526,757
Accrued interest and other liabilities 1,505,543 3,246,863
Other borrowings 78,255,432 74,756,311
--------------------------------
Total liabilities 204,012,807 185,115,865
Shareholders' equity
Common stock, par value $1.00; 10,000,000 shares authorized;
1,742,308 and 1,726,708 issued and outstanding, respectively 1,742,308 1,726,708
Surplus 7,805,894 7,724,224
Retained earnings 6,517,675 4,721,440
Less cost of 6,668 shares acquired for the treasury (36,091) (36,091)
Accumulated other comprehensive income (116,097) (7,685)
--------------------------------
Total stockholders' equity 15,913,689 14,128,596
--------------------------------
Total liabilities and stockholders' equity $219,926,496 $199,244,461
================================
</TABLE>
See notes to Consolidated Financial Statements.
<PAGE>
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1999 1998 1999 1998
--------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans 1,142,989 1,036,414 2,230,674 2,042,343
Interest and fees on mortgage loans held for sale 2,596,696 2,042,009 5,669,125 3,586,851
Interest on securities:
Taxable 108,461 40,145 177,005 79,198
Nontaxable 3,838 3,838 7,676 9,937
Interest on deposits in other banks 60,505 39,998 96,522 63,808
Interest on Federal funds sold 43,742 41,389 83,637 69,810
--------------------------------- --------------------------------
3,956,231 3,203,793 8,264,639 5,851,947
Interest expense
Interest on deposits 998,519 892,840 2,108,690 1,690,069
interest on other borrowings 1,197,951 539,975 2,294,261 815,324
--------------------------------- --------------------------------
2,196,470 1,432,815 4,402,951 2,505,393
Net interest income 1,759,761 1,770,978 3,861,688 3,346,554
Provision for loan losses 90,000 30,000 150,000 73,000
--------------------------------- --------------------------------
Net interest income after provision for loan losses 1,669,761 1,740,978 3,711,688 3,273,554
Other income
Service charges on deposit accounts 65,047 54,015 129,805 98,044
Mortgage servicing fee income 387,665 239,825 641,196 494,377
Gestation fee income 836,612 475,885 1,435,052 766,023
Gains on sale of mortgage servicing rights 3,113,554 2,044,613 7,364,282 4,073,955
Other 272,294 122,451 434,228 219,259
--------------------------------- --------------------------------
4,675,172 2,936,789 10,004,563 5,651,658
10,904,920
Other expenses
Salaries and employee benefits 2,690,834 1,774,715 5,608,501 3,279,668
Net occupancy and equipment expense 239,426 194,281 475,562 319,050
Supplies, postage, and telephone 415,276 252,533 857,575 478,419
Advertising 146,224 120,101 250,298 232,580
Insurance expense 37,295 31,578 76,725 49,405
Depreciation and amortization 353,889 317,302 749,066 552,014
Legal, professional, outside services 1,066,086 538,881 1,657,997 855,124
Director fees 35,825 37,650 78,350 79,400
Mortgage subservicing expense 121,236 84,347 216,089 158,946
Other 237,648 470,192 607,773 783,666
--------------------------------- --------------------------------
5,343,739 3,821,580 10,577,936 6,788,272
Income before income taxes 1,001,194 856,187 3,138,315 2,136,940
Applicable income taxes 308,086 381,451 1,160,707 902,848
--------------------------------- --------------------------------
Net income $ 693,108 $ 474,736 $ 1,977,608 $1,234,092
--------------------------------- --------------------------------
Other comprehensive income, net of tax
Unrealized gains/(losses) on securities available
for sale arising during period 8,667 8,667 (5,942) (5,942)
--------------------------------- --------------------------------
Comprehensive income 701,775 483,403 1,971,666 1,228,150
================================= ================================
Basic earnings per common share $ 0.41 $ 0.28 $ 1.16 $ 0.76
Diluted earnings per common share $ 0.38 $ 0.27 $ 1.09 $ 0.75
Cash dividends per share of common stock $ 0.055 $ 0.040 $ 0.105 $ 0.078
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For the six months ended
June 30,
1999 1998
-------------------------------
<S> <C> <C>
Operating Activities
Net Income 1,977,608 1,234,092
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan loss 150,000 73,000
Depreciation and amortization 749,066 552,014
Provision for deferred taxes 61,775 222,313
Gains on sales of mortgage servicing rights (7,364,282) (3,525,911)
Increase in mortgage loans held for sale 1,500,395 (49,427,890)
Increase in interest receivable 39,714 (261,380)
Decrease in accounts receivable (1,664,089) 1,356,311
Increase (decrease) in drafts payable 457,158 24,143,564
Increase (decrease) in interest payable 98,185 131,280
Increase in other assets and liabilities, net (5,021,352) 782,830
-----------------------------
Net cash used in operating activities (9,015,822) (24,719,777)
Investing Activities
Net (increase) decrease in interest-bearing deposits
in other banks 408,614 181,344
Proceeds from sale of securities available for sale -- (569,202)
Acquisition of securities available for sale (3,052,403) 515,558
Proceeds from maturities of securities held to maturity --
Acquisition of purchased mortgage servicing rights (13,007,049) (5,355,181)
Proceeds from sales of purchased mortgage
servicing rights 19,097,930 9,514,292
Decrease in Federal funds sold, net (6,340,000) (6,220,000)
Net increase in loans (5,803,018) (789,019)
Purchase of premises and equipment (2,988,275) (711,268)
-----------------------------
Net cash provided by (used in) investing activities (11,684,201) (3,433,476)
Financing Activities
Net increase in deposits 16,620,208 3,354,608
Net increase in other borrowings 3,499,121 22,476,110
Proceeds form the issuance of common stock -- 2,136,381
Proceeds from exercise of stock options 97,270 22,400
Dividends paid (181,374) (122,868)
-----------------------------
Net cash provided by financing activities 20,035,225 27,866,631
Net increase in cash and cash equivalents (664,798) (286,622)
Cash and cash equivalents at beginning of year 4,382,047 3,319,054
-----------------------------
Cash and cash equivalents at end of year $ 3,717,249 $ 3,032,432
=============================
Supplemental Disclosure of Cash Flow Information
Cash paid during period for interest 4,409,570 2,374,113
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
NOTE 1 ---- GENERAL
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Article 10 of
Regulations S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments necessary
for a fair presentation of the financial position and results of operations of
the interim periods have been made. All such adjustments are of a normal
recurring nature. Results of operations for the three months ended June 30, 1999
are not necessarily indicative of the results of operations for the full year or
any interim periods.
NOTE 2 ---- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash flow information: For purpose of the statements of cash flows, cash
equivalents include amounts due from banks and federal funds sold.
Reclassifications: Certain amounts as previously reported have been reclassified
to conform to the current period presentation.
NOTE 3 --- SERVICING PROTFOLIO
The Company services residential loans for various investors under contract for
a fee. As of June 30, 1999, the Company had purchased loans for which it
provides servicing with principal balances totaling $525 million.
NOTE 4 --- INCOME TAXES
The Company uses the liability method of account 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, 1999
are outlined in the table below.
<TABLE>
<S> <C>
Deferred assets:
Allowance for loan losses $ 188,529
Accrual to cash adjustment for income
tax reporting purposes $ 12,461
Securities available for sale $ 5,123
----------
TOTAL $ 206,113
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Deferred liabilities:
Purchased mortgage servicing rights $1,510,999
Tax over book depreciation $ 209,054
Other $ 12,817
----------
TOTAL $1,732,870
----------
Net deferred tax liabilities $(1,526757)
</TABLE>
NOTE 5 --- EARNINGS PER SHARE
The following is a reconciliation of net income (the numerator) and weighted
average shares outstanding (the denominator) used in determining basic and
diluted earning per common share (EPS):
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------------------------------------------------
<S> <C> <C> <C>
Basic EPS $ 1,977,608 $ 1,702,376 $ 1.16
Effect of Dilutive securities
Stock options ------- $ 109,185
Diluted EPS $ 1,977,608 $ 1,811,561 $ 1.09
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
Net Weighted-Average
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------------------------------
<S> <C> <C> <C>
Basic EPS $1,234,092 $ 1,618,490 $ .76
Effect of Dilutive Securities
Stock Options --------- 25,168
Diluted EPS $1,234,092 $ 1,643,658 $ .75
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
Net Weighted-Average
Income Shares Per-Share
<S> <C> <C> <C>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(Numerator) (Denominator) Amount
------------------------------------------
<S> <C> <C> <C>
Basic EPS $ 693,108 $ 1,708,366 $ .41
Effect of Dilutive securities
Stock options ----------- $ 127,188
Diluted EPS $ 693,108 $ 1,835554 $ .38
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
Net Weighted-Average
Income Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------
<S> <C> <C> <C>
Basic EPS $ 474,736 $ 1,723,108 $ .28
Effect of Dilutive Securities
Stock Options ----------- 37,918
Diluted EPS $ 474,736 $ 1,761,026 $ .27
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Special Cautionary Notice Regarding Forward-Looking Statements
- --------------------------------------------------------------
The following discussion and analysis of the financial condition and
results of operations of Crescent Banking Company (the "Company") should be read
in conjunction with the Company's financial statements and related notes
included elsewhere herein. Certain of the statements made or incorporated by
reference herein constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, and as such may involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. Such
forward looking statements include statements using the words such as "may,"
"will," "anticipate," "should," "would," "believe," "contemplate," "expect,"
"estimate," "consider," "continue," "intend," "possible" or other similar words
and expressions of the future. The Company's actual results may differ
significantly from the results we discuss in these forward-looking statements.
These forward-looking statements involve risks and uncertainties and
may not be realized due to a variety of factors, including, without limitation:
the effects of future economic conditions; governmental monetary and fiscal
policies, as well as legislative and regulatory changes; the risks of changes in
interest rates on the level and composition of deposits, loan demand, and the
values of loan collateral, securities, and other interest-sensitive assets and
liabilities; interest rate risks; the effects of competition from other
commercial banks, thrifts, mortgage banking firms, consumer finance companies,
credit unions, securities brokerage firms, insurance companies, money market and
other mutual funds and other financial institutions operating in the Company's
market area and elsewhere, including institutions operating, regionally,
nationally and internationally, together with such competitors offering banking
products and services by mail, telephone, computer and the Internet; the
possible effects of the Year 2000 problem on the Company, including such
problems at the Company's vendors, counterparties and customers; and the failure
of assumptions underlying the establishment of reserves for possible loan
losses. All written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by these Cautionary
Statements.
General
- -------
The Company is a Georgia corporation that was incorporated on November
19, 1991, to facilitate a reorganization pursuant to which the Company became
the parent holding company of Crescent Bank and Trust Company (the "Bank"). 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. Through the
Bank, the Company provides a broad range of banking and financial services in
the areas surrounding Jasper, Georgia, Cartersville and Woodstock, Georgia and
wholesale residential mortgage banking services to correspondents located in the
Atlanta, Georgia metropolitan area and throughout the Southeast United States.
On June 30, 1999, the Bank completed its acquisition of the Tucker Federal Bank
branch located on Towne Lake Parkway in Woodstock, Georgia. The acquisition
included deposit accounts of approximately $12.3 million as well as the fixed
assets totaling approximately $1.6 million. On July 9, 1999, the Bank filed an
application to expand the Canton, Georgia loan production office to a full
service Bank branch.
The Company also owns 100% of Crescent Mortgage Services, Inc. ("CMS"),
which offers wholesale residential mortgage banking services in the Southeast,
Northeast and Midwest United States and provides servicing for residential
mortgage loans. CMS was incorporated on October 11, 1994, and is an approved
servicer of mortgage loans sold to Federal Home Loan Mortgage Corporation
("Freddie Mac"), the Federal National Mortgage Association ("Fannie Mae") and
private investors. CMS offers wholesale residential mortgage banking services in
southeastern, northeastern and midwestern states and provides servicing for
residential mortgage loans.
On September 30, 1998, the Company completed a two-for-one split of its
common stock, par value $1.00 per share (the "Common Stock"), and, on January
12, 1999, the Company's Common Stock began trading on the Nasdaq SmallCap Market
under the symbol "CSNT". All of the information presented in this quarterly
report for the quarter ended June 30, 1999 reflects the Company's September 30,
1998 two-for-one stock split.
<PAGE>
The Company's net income for the quarter ended June 30, 1999 was
$693,108 compared to net income of $474,736 for the quarter ended June 30, 1998.
The Company's net income for the six months ended June 30, 1999 was $2.0 million
compared to net income of $1.2 million for the six months ended June 30, 1998.
The 66% increase in net income from the six months ended June 30, 1998 to the
six months ended June 30, 1999 was primarily the result of a 73% increase in
mortgage production and the 14% growth of the loan portfolio.
Financial Condition
- -------------------
The Company's assets increased 10.4% during the first six months of
1999 from $199.2 million as of December 31, 1998 to $219.9 million as of June
30, 1999. The increase in total assets in the first six months of 1999 was the
result of increases in Federal Funds Sold of $6.3 million and in commercial
banking loans of $6.0 million. The increase in assets was funded with a $16.6
million, or 16.5%, increase in deposits and a $3.5 million, or 4.7%, increase in
other borrowings. The increase in deposits was primarily related to the purchase
of deposits related to the Towne Lake branch. All mortgage production generated
by CMS is funded through warehouse lines of credit from the Home Federal Savings
Bank ("Home Federal"), and Paine Webber Incorporated ("Paine Webber"), therefore
the greater volume in 1999 resulted in a higher average balance of other
borrowings. The increase in residential mortgage banking production and related
mortgage loans held for sale from the first six months of 1998 to the first six
months of 1999 was the result of the expansion of CMS' mortgage operations into
the Midwest United States and the increase in volume in the Northeast United
States. However, as a result of an increase in rates, mortgage production
decreased 5% for the month of June 1999 to total $196 million. Mortgage
production was down an additional 26% in July 1999 with total production of $145
million for the month.
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 $194.6 million, or 88.5%, of
total assets at June 30, 1999. This represents a 9.8% increase from December 31,
1998 when earning assets totaled $181.4 million, or 91.1%, of total assets. The
increase in earning assets resulted primarily from a $6.0 million, or 14.5%,
increase of commercial banking loans. Average mortgage loans held for sale for
the six months ended June 30, 1999 of $129.7 million constituted 71.8% of
average earning assets and 65.8% of average total assets. Average mortgage loans
held for sale during 1998 of $85.6 million constituted 65.8% of average
interest-earning assets and 59.8% of average total assets.
During the first six months of 1999, average commercial banking loans
were $43.8 million. Such loans constituted 24.3% of average earning assets and
22.2% of average total assets. For 1998, average commercial banking loans were
$38.2 million, or 29.4% of average earning assets and 26.7% of average total
assets. The 14.7% increase in average commercial banking loans was the result of
higher loan demand in the Bank's service area as well as the expansion of the
Bank with a Loan Production Office in Canton, Georgia in February 1999.
Commercial banking loans are expected to produce higher yields than
securities and other interest-earning assets. In addition, residential 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, brokered
deposits and core deposits. Therefore, the absolute volume of commercial banking
loans and residential mortgage loans held for sale and the volume as a
percentage of total interest-earning assets are an important determinant of the
net interest margin thereof.
The allowance for loan losses represents a reserve for potential losses
in the Bank's commercial banking loan portfolio. The provision for loan losses
is a charge to earnings in the current period to maintain the allowance at a
level that management has determined to be adequate. The allowance for loan
losses totaled $835,892 or 1.76% of total commercial banking loans at June 30,
1999, compared to $699,020 or 1.69% of total loans at December 31, 1998. The
increase in the allowance for loan losses for the first six months of 1999 was
the result of the provision for loan loss of $150,000. The determination of the
reserve level rests upon management's judgment about factors affecting loan
quality and assumptions about the economy. The adequacy of the allowance for
loan losses is evaluated periodically based on a review of all significant
loans, with a particular emphasis on past due and other loans that
<PAGE>
management believes require attention. Management considers the allowance
appropriate and adequate to cover possible losses in the loan portfolio;
however, management's judgment is based upon a number of assumptions about
future events which are believed to be reasonable but which may or may not prove
valid. Thus, there is no assurance that charge offs in future periods will not
exceed the allowance for loan losses or that additional increases in the
allowance for loan losses will not be required. The Bank does not maintain a
reserve with respect to its mortgage loans held for sale due to the low credit
risk associated with the loans during the Bank's holding period.
The Bank's policy is to discontinue the accrual of interest on loans
which are 90 days past due unless they are well secured and in the process of
collection. Interest on these non-accrual loans will be recognized only when
received. As of June 30, 1999, the Bank had $42,914 loans accounted for on a
non-accrual basis, $649,105 contractually past due more than 90 days and no
loans considered to be troubled debt restructurings. As of December 31, 1998,
the Bank had $772 loans accounted for on a non-accrual basis, $457,120
contractually past due more than 90 days and no loans considered to be troubled
debt restructurings.
Non-performing loans are defined as non-accrual and renegotiated loans.
Adding real estate acquired by foreclosure and held for sale of $117,120 with
non-performing loans results in non-performing assets of $160,034 at June 30,
1999. The Bank is currently holding the foreclosed properties for sale. At
December 31, 1998, the Bank had non-performing assets totaling $264,021.
The chart below summarizes those of the Bank's assets that management
believes warrant special attention due to the potential for loss, in addition to
the non-performing loans and foreclosed properties. Potential problem loans
represent loans that are presently performing, but where management has doubts
concerning the ability of the respective borrowers to meet contractual repayment
terms. Of the $3 million of potential problem loans at June 30, 1999, two
relationships account for $1.6 million of the problem credits. One relationship
consists of two credits totaling $716,865 both secured by single family
residential real estate. Currently the borrower has commitments to payoff both
properties with expected closings within 60 days. The other relationship
consists of various credits totaling $851,009 million with collateral consisting
of commercial real estate, investment rental real estate, commercial equipment
and vehicles. The Bank believes the credits to the borrower are adequately
collateralized and expects the borrower to seek other financing to be completed
during the next three months.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------ ------------------
<S> <C> <C>
Non-performing loans (1) $ 42,914 $ 772
Foreclosed properties 117,120 263,249
------- -------
Total non-performing assets 160,034 264,021
======= =======
Loans 90 days or more past due on accrual status $ 649,105 $ 457,120
Potential problem loans (2) 3,035,870 2,445,318
Potential problem loans/total loans 6.42% 5.92%
Non-performing assets/total loans
and foreclosed properties 0.33% 0.63%
Non-performing assets and loans 90 days
or more past due on accrual status/
total loans and foreclosed properties 1.70% 1.74%
</TABLE>
________________________
(1) Defined as non-accrual loans and renegotiated loans.
(2) Loans identified by management as potential problem loans (classified and
criticized loans) but still accounted for on an accrual basis.
<PAGE>
The Bank invests its excess funds in U.S. Government agency
obligations, corporate securities, federal funds sold, and interest-bearing
deposits with other banks. The Bank's investments are managed in relation to
loan demand and deposit growth, and are generally used to provide for the
investment of funds not needed to make loans, while providing liquidity to fund
increases in loan demand or to offset fluctuations in deposits. Thus, investment
securities are used to manage the Bank's exposure to interest rate risk.
Investment securities and interest-bearing deposits with other banks totaled
$7.4 million at June 30, 1999 compared to $4.8 million at December 31, 1998.
Federal funds sold totaled $13.9 million at June 30, 1999 compared to $7.5
million at December 31, 1998.
The Company's Mortgage Division (the "Mortgage Division") acquires
residential mortgage loans from small retail-oriented originators through its
operations of CMS and the mortgage division of the Bank. The Bank acquires
conventional loans in the Southeast United States while CMS acquires
conventional and FHA/VA loans in the Northeast and Midwest United States and
FHA/VA loans in the Southeast United States.
The Bank acquires residential mortgage loans from small retail-oriented
originators in the Southeast United States through various funding sources,
including the Bank's regular funding sources, a $26.5 million warehouse line of
credit from the FHLB-Atlanta and a $45 million repurchase agreement with Paine
Webber. CMS acquires residential mortgage loans from small retail-oriented
originators in the Southeast, Northeast and Midwest United States through
various funding sources, including a $85.0 million line of credit from Paine
Webber, a $6.8 million line of credit from Home Federal, and a $75 million
repurchase agreement from Paine Webber. Under the repurchase agreements, the
Mortgage Division sells its mortgage loans and simultaneously assigns the
related forward sale commitments to Paine Webber. Substantially all of the
Mortgage Division 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. The Mortgage Division purchases loans that it believes will 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
Mortgage Division retains the servicing rights on mortgage loans that it
resells, it collects annual servicing fees while the loan is outstanding. The
Mortgage Division sells a portion of its retained servicing rights in bulk form
or on a monthly flow basis. The annual servicing fees and gains on the sale of
servicing rights is an integral part of the Company's mortgage banking operation
and its contribution to net income. The Company currently pays a third party
subcontractor to perform servicing functions with respect to its loans sold with
retained servicing.
During the first six months of 1999, the Mortgage Division acquired
$1.2 billion of mortgage loans with $1.2 billion being resold in the secondary
market. At June 30, 1999, $146.9 million were carried as mortgage loans held for
sale on the balance sheet pending sale of such loans.
The Bank's Other Borrowings consist of borrowings from the Federal Home
Loan Bank of Atlanta (the "FHLB-Atlanta") which is priced at Federal Funds rate
plus 25 basis points (5.36% as of June 30, 1999). All mortgage production
generated by CMS is funded through warehouse lines of credit from Home Federal,
priced at prime (8.00% at June 30, 1999) and Paine Webber, priced at LIBOR plus
80 basis points (6.74% at June 30, 1999).
At June 30, 1999, capitalized costs of $4.9 million related to the
purchase of mortgage servicing rights were carried on the balance sheet as
purchased mortgage servicing rights. At June 30, 1999, the Company held
servicing rights with respect to loans with unpaid principal balances totaling
$525.2 million. The Company is amortizing the purchased mortgage servicing
rights over an accelerated period. At December 31, 1998, the Company carried
$4.0 million of purchased mortgage servicing rights on its balance sheet. At
December 31, 1998, the Company held servicing rights with respect to loans with
unpaid principal balances totaling $486.0 million. During the first six months
of 1999, the Company sold servicing rights with respect to $1.1 billion of
mortgage loans carried on its balance sheet at costs of $11.8 million for a gain
of $7.4 million. During 1998, the Company sold servicing rights with respect to
$1.6 billion of mortgage loans carried on its balance sheet at costs of $15.1
million for a gain of $10.2 million. The market value of the servicing portfolio
is contingent upon many factors, including, without limitation, the interest
rate environment and changes in such rates, 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 Company 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.
<PAGE>
The Company had fixed assets, consisting of land, building and
improvements, and furniture and equipment of $6.0 million at June 30, 1999
compared to fixed assets of $3.4 million at December 31, 1998. The increase in
fixed assets resulted primarily from a 5,000 square foot addition to the Bank's
main office in Jasper, Georgia and the fixed assets related to the purchase of
the Towne Lake branch.
The Bank's deposits totaled $117.2 million at June 30,1999 compared to
$100.6 million at December 31, 1998. Deposits averaged $104.8 million for the
six months ended June 30, 1999 compared to $84.4 million for the year ended
December 31, 1998. Interest bearing deposits as a percentage of total deposits
was 85% and 77% at June 30,, 1999 and December 31, 1998, respectively. The
increase of interest bearing deposits as a percent of total deposits was the
result of growth in certificates of deposits. Certificates of deposit composed
70% of total interest-bearing deposits for December 31, 1998 compared to 68% at
June 30, 1999. The composition of these deposits is indicative of the interest
rate-conscious market in which the Bank operates. There is no assurance that the
Bank can maintain or increase its market share of deposits in its highly
competitive service area.
Capital
- -------
Capital adequacy is measured by risk-based capital guidelines as well
as against leverage ratios. The risk-based capital guidelines developed by
regulatory authorities assign weighted levels of risk to asset categories to
establish capital requirements. The guidelines currently require a minimum of
8.0% of total capital to risk-adjusted assets. One half of the required capital
must consist of Tier 1 Capital, which includes tangible common shareholders'
equity and qualifying perpetual preferred stock. The leverage guidelines specify
a ratio of Tier 1 Capital to total assets of 3.0% if certain requirements are
met, including having the highest regulatory rating, or between 4.0% and 5.0%
otherwise. The guidelines also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the guidelines indicate
that the Board of Governors of the Federal Reserve System (the "Federal
Reserve") will continue to consider a "Tangible Tier 1 Leverage Ratio"
(deducting all intangibles) in evaluating proposals for expansion or new
activity. The Federal Reserve has not advised the Company, and the FDIC has not
advised the Bank, of any specific minimum leverage ratio or Tangible Tier 1
Leverage Ratio applicable to either of them. The Bank had agreed with the
Georgia Department of Banking and Finance (the "Banking Department") to maintain
a leverage ratio of 8.0%. At June 30, 1999 the Bank's leverage ratio was 7.92%.
The decrease in the Bank's leverage ratio was the result of the purchase of the
Towne Lake branch. In February 1999, the Company entered into a promissory note
(the "Note") with The Bankers Bank for $1.5 million at a rate of "prime" minus
50 basis points (7.25%) for a 10 year term. The Company pledged 100% of the
Bank's common stock as collateral for the Note. The Company transferred the $1.5
million to CMS to increase its capital and liquidity. The Company increased its
borrowings on July 29, 1999 an additional $3 million in order to improve the
Bank's capital position. The Borrowings were on the same terms and price as the
original note with additional collateral required. The Bank's leverage ratio as
a result of the additional capital was 10.19%.
At June 30, 1999 the Company's total shareholders' equity was $15.9
million or 7.24% of total assets, compared to $14.1 million or 7.10% of total
assets at December 31, 1998. The increase in shareholders' equity to total asset
ratio during the first six months of 1999 was the result of the Company's net
income. At June 30, 1999, total capital to risk-adjusted assets was 12.13%, with
11.52% consisting of tangible common shareholders' equity. The Company paid
$181,374 of dividends during the first six months of 1999 or $.0.105 per share.
The Company has declared a dividend of $.06 to be paid August 13, 1999 to
shareholders of record on July 31, 1999.
During the first six months of 1999, 15,600 shares of Common Stock were
issued pursuant to stock option exercises for an aggregate of $97,270. The
Company effectuated a two for one stock split on September 30, 1998. On January
12, 1999, the Company's Common Stock began trading on the Nasdaq SmallCap Market
under the symbol "CSNT".
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
<PAGE>
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 $65.4 million for the six months ended June
30, 1999, representing 62.4% of average deposits. Average liquid assets totaled
$52.2 million during 1998, representing 62% of average deposits. The increase in
average liquid assets was the result of the increase in average mortgage loans
held for sale. Average non-mortgage loans were 41.8% of average deposits for the
six months ended June 30, 1999. Average non-mortgage loans were 46% of average
deposits for the year 1998. Average deposits were 58% of average
interest-earning assets for the six months ended June 30, 1999. Average deposits
were 64% of average interest-earning assets for the year 1998. The decrease of
average deposits as a percentage of earning assets was the result of a higher
level of funds provided by other borrowings in the first six months of 1999.
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 reproaching opportunities exist for both assets and
liabilities in roughly equivalent amounts at approximately the same time
intervals. Imbalances in these reproaching opportunities, at any point in time,
constitute interest rate sensitivity.
Interest rate sensitivity refers to the responsiveness of
interest-bearing assets and liabilities to changes in market interest rates. The
rate-sensitive position, or gap, is the difference in the volume of
rate-sensitive assets and liabilities, at a given time interval. The general
objective of gap management is to actively manage rate-sensitive assets and
liabilities to reduce the impact of interest rate fluctuations on the net
interest margin. Management generally attempts to maintain a balance between
rate-sensitive assets and liabilities as the exposure period is lengthened to
minimize the overall interest rate risk to the Bank.
Interest rate sensitivity varies with different types of
interest-earning assets and interest-bearing liabilities. Overnight federal
funds, on which rates are susceptible to change daily, and loans, which are tied
to the prime rate, differ considerably from long-term investment securities and
fixed-rate loans. Similarly, time deposits over $100,000 and certain
interest-bearing demand deposits are much more interest-sensitive than savings
deposits. In addition, brokered deposits, institutional deposits placed by
independent brokers, are more interest sensitive. The Bank had brokered deposits
of $4.5 million at June 30, 1999 and $6.2 million at December 31, 1998. The Bank
utilizes the brokered deposits to fund its mortgage loans held for sale and
therefore match those maturities as closely as possible. As a result of the
purchase of deposits in conjunction with the Towne Lake branch, the Bank began
in the second quarter 1999 to terminate the use of brokered deposits.
<PAGE>
The following table shows the interest sensitivity gaps for four
different time intervals as of June 30, 1999.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Gaps
As of June 30, 1999
Amounts Repricing In
-------------------------------------------------------------------
0-90 Days 91-365 Days 1-5 Years Over 5 Years
---------------- -------------- -------------- -----------------
(Millions of dollars)
<S> <C> <C> <C> <C>
Interest-earning
assets $161.3 $ 11.0 $16.2 $ 6.9
Interest-bearing
liabilities 122.1 38.7 16.2 1.5
-------------------------------------------------------------------
Interest sensitivity
gap $ 39.2 $(27.7) $ -- $ 5.4
===================================================================
</TABLE>
The Company 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. During the 0-91 day period, which has the greatest sensitivity to
interest rate changes, if rates rise, the net interest margin will decline.
Conversely, if interest rates increase over this period, the net interest margin
will improve. At June 30, 1999, the Company was within its policy guidelines of
rate-sensitive assets to rate-sensitive liabilities of 80 - 140% at the one-year
interval. Since all interest rates and yields do not adjust at the same
velocity, this is only a general indicator of rate sensitivity. Additionally, as
described in the following paragraphs, the Company utilizes mandatory
commitments to deliver mortgage loans held for sale, therefore reducing the
interest rate risk. The total excess of interest-bearing assets over
interest-bearing liabilities, based on a five-year time period, was $16.9
million, or 7.7% of total assets.
At June 30, 1999, the Company's commitments to purchase mortgage loans
(the "Pipeline") totaled approximately $439.7 million. Of the Pipeline, the
Company had, as of June 30, 1999, approximately $179.1 million for which the
Company had interest rate risk. The remaining $260.6 million of mortgage loans
are not subject to interest rate risk. The mortgages not subject to interest
rate risk are comprised of (i) loans under contract to be placed with a private
investor through a "best efforts" agreement, whereby the investor purchases the
loans from the Company at the contractual loan rate, (ii) loans with floating
interest rates which close at the current market rate, and (iii) loans where the
original fixed interest rate commitment has expired and will be reprice at the
current market rate.
The Mortgage Division has adopted a policy intended to reduce interest
rate risk incurred as a result of market movements between the time commitments
to purchase mortgage loans are made and the time the loans are closed.
Accordingly, commitments to purchase loans will be covered either by a mandatory
sale of such loans into the secondary market or by the purchase of an option to
deliver to the secondary market a mortgage-backed security. The mandatory sale
commitment is fulfilled with loans closed by the Company, through "pairing off"
the commitment, or purchasing loans through the secondary market. Under certain
condition 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.
In hedging the Pipeline, the Company must use a best estimation of the
percentage of the Pipeline that will not close (i.e. loans that "fallout").
Loans generally fallout of the Pipeline for various reasons including, without
limitation, the borrowers' failure to qualify for the loan, construction delays,
inadequate appraisal values and changes in interest rates which are substantial
enough for the borrower to seek another financing source. An increasing interest
rate environment provides greater motivation for the consumer to lock and close
loans. Conversely, in a decreasing
<PAGE>
interest rate environment, the consumer has a tendency to delay locking and
closing loans in order to obtain the lowest rate. As a result, an increasing
interest rate environment generally results in the Company's fallout ratio to be
less than in an average market. Conversely, in a decreasing rate environment,
the Company's fallout ratio tends to be greater than in an average market. If
the Company's fallout ratio is greater than anticipated, the Company will have
more mandatory commitments to deliver loans than it has loans for which it has
closed. In this circumstance, the Company must purchase the loans to meet the
mandatory commitment on the secondary market and therefore will have interest
rate risk in these loans. Conversely, if the Company's fallout ratio is less
than anticipated, the Company will have fewer mandatory commitments to deliver
loans than it has loans for which it has closed. In this circumstance, the
Company must sell the loans on the secondary market without a mandatory
commitment and therefore will have interest rate risk in these loans.
The Company's success in reducing its interest rate risk is directly
related to its ability to monitor and estimate its fallout. While other hedging
techniques other than mandatory and optional delivery may be used, speculation
is not allowed under the Mortgage Division's secondary marketing policy. As of
June 30, 1999, the Company had in place purchase commitment agreements
terminating between July and September of 1999 with respect to an aggregate of
approximately $128.2 million to hedge the mortgage pipeline of $179.1 million
for which the Company had an interest rate risk.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" This
statement is required to be adopted for fiscal years beginning after June 15,
2000. The Company expects to adopt this statement effective January 1, 2001.
SFAS No. 133 requires the Company to recognize all derivatives as assets or
liabilities in the balance sheet at fair value. For derivatives that are not
designated as hedges, the gain or loss must be recognized in earnings in the
period of change. Management has not yet determined what effect the adoption of
SFAS No. 133 will have on the Company's earnings or financial position.
Management continually tries to manage 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 Company's
asset/liability management strategy.
Results of Operations
- ---------------------
A source of revenue for the Bank is net interest income, which is the
difference between income received on interest-earning assets, such as
investment securities and loans, and interest-bearing sources of funds, such as
deposits and borrowings. The level of net interest income is determined
primarily by the average balances ("volume") of interest-earning assets and the
various rate spreads between the interest-earning assets and the Bank's funding
sources. Changes in net interest income from period to period result from
increases or decreases in volume of interest-earning assets and interest-bearing
liabilities, increases or decreases in the average rates earned and paid on such
assets and liabilities, the ability to manage the interest-earning asset
portfolio (which includes loans) and the availability of particular sources of
funds, such as non-interest bearing deposits.
The Company had interest income of $8.3 million for the six months
ended June 30, 1999 compared to $5.9 million for the six months ended June 30,
1998. The 40.7% increase in interest income is attributable to the increase in
interest-earning assets which is the result of the higher volume of mortgage
loans as well as a higher volume of fee income associated with mortgage loans
which is included in interest income. The Company had closed $1.2 billion of
mortgage loans during the first six months of 1999 compared to $695.7 million
during the first six months of 1998. This increase is attributable to the
startup of the Midwest mortgage operation, which began operating in the fourth
quarter of 1998, in addition to the increased volume in the Northeast mortgage
operation.
The Company had interest income of $4.0 million for the three months
ended June 30, 1999 compared to $3.2 million three months ended June 30, 1998.
The 25% increase in interest income is attributable to the increase in
interest-earning assets which is the result of the higher volume of mortgage
loans as well as a higher volume of fee income associated with mortgage loans
which is included in interest income.
<PAGE>
The Company had interest expense of $4.4 million for the six months
ended June 30, 1999 and $2.5 million for the six months ended June 30, 1998. The
76% increase resulted from a higher level of other borrowings. All mortgage
production through CMS is funded with a warehouse line of credit; therefore the
greater volume in the Northeast and Midwest mortgage operation resulted in a
higher average balance of other borrowings. In the first six months 1999 and
1998, interest expense accounted for 29% and 27% of total expenses,
respectively.
The Company had interest expense of $2.2 million for the three months
ended June 30, 1999 and $1.4 million for the three months ended June 30, 1998.
The increase resulted from a higher level of other borrowings. In the second
quarter 1999 and 1998, interest expense accounted for 29% and 27% of total
expenses, respectively.
Net interest income for the first six months 1999 was $3.9 million
compared to net interest income of $3.3 million for the first six months of
1998. Net interest income for the second quarter 1999 was $1.8 million. The key
performance measure for net interest income is the "net interest margin," or net
interest income divided by average interest-earning assets. The Company's net
interest margin during second quarter 1999 was 4.1%. Interest spread, which
represents the difference between average yields on interest-earning assets and
average rates paid on interest-bearing liabilities, was 3.5%. Net interest
income, interest margin and net interest spread for the second quarter 1998 were
$1.8 million, 6.0%, and 5.5%, respectively. The decrease in net interest margin
and interest spread is indicative of the relatively flat yield curve during 1999
as well as the interest rate-conscious and highly competitive market in which
the Bank operates. A flat yield curve is created as the yield on short term and
long-term investments narrows.
The Company made a provision to the allowance for loan losses of
$150,000 in the first six months of 1999. The Company made provisions to the
allowance for loan losses in the amount of $73,000 in first six months of 1998.
During the first six months of 1999, the Bank charged-off, net of recoveries,
$13,128 of loans to the allowance for loan losses. During the first six months
of 1998, the Bank charged-off, net of recoveries, $983 of loans to the allowance
for loan losses. The Company made a provision to the allowance for loan losses
of $90,000 in the second quarter 1999. The Company made provisions to the
allowance for loan losses in the amount of $30,000 in second quarter 1998.
Other income was $10 million in the first six months of 1999 compared
to $5.7 million in the first six months 1998. The increase in other income was
related to the increase of gains on the sale of mortgage servicing rights.
During the first six months of 1999, the Company sold servicing rights with
respect to $1.2 billion of mortgage loans for a gain of $7.4 million. During the
first six months of 1998, the Company sold servicing rights with respect to
$691.8 million of mortgage loans for a gain of $3.5 million. The higher level of
gains on the sale of mortgage servicing rights was primarily the result of the
Company's expansion into the Midwest United States as well as relative low
historical mortgage interest rates. The Company currently plans to sell a
portion of the servicing rights retained during 1999, although there can be no
assurance as to the volume of the Bank's loan acquisition or that a premium will
be recognized on the sales. Gestation fee income is generated from the sale of
mortgage loans to securities brokers through a gestation repurchase agreement.
Under the agreement, the Company sells mortgage loans and simultaneously assigns
the related forward sale commitments to a securities broker. The Company
continues to receive fee income from the securities broker until the loan is
delivered into the forward commitment. Other income was $4.7 million in the
second quarter of 1999 compared to $2.9 million in the second quarter of 1998.
Other operating expenses increased to $10.6 million in the first six
months of 1999 from $6.8 million in the first six months of 1998. The increase
in other operating expenses was related to the expansion of the mortgage
operation to the Midwest United States, the startup of the Bank's Loan
Production Office in Canton, Georgia, as well as the higher level of mortgage
production. The increase in other operating expenses were primarily due to
increases in salaries and benefits and third party mortgage outsourcing expense.
Other operating expenses increased to $5.3 million in the second quarter 1999
from $3.8 million in the second quarter 1998.
The Company had net income of $2.0 million for the first six months of
1999, which was primarily related to the continued improvement in net interest
income, mortgage banking operations and the related gains on the sale of
servicing rights. Income tax as a percentage of pretax net income was 36% and
40% for both the first six months of 1999 and 1998, respectively.
<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
The Year 2000 Issue and Year 2000 Readiness
- -------------------------------------------
The Year 2000 issue is the result of potential problems with computer
systems or any equipment with computer chips that use dates that have been
sorted as two digits rather than four (e.g., "99" for 1999). On January 1, 2000,
any clock or date recording mechanism, including date sensitive software, which
uses only two digits to represent the year may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices or perform similar
tasks.
The Company has assessed the Year 2000 with respect to the computer
software and hardware operating and data processing systems used by the Company,
the Bank and CMS to provide banking, loan servicing and other services to
customers and to process internal operations. As used in this section entitled
"The Year 2000 Issue," the term "Company" means the Company, the Bank and CMS,
collectively.
In 1997, the Company established a Year 2000 Project Team to address
the Year 2000 compliance and readiness for the Company's computerized systems.
The Year 2000 Project Team has developed a Year 2000 Compliance Plan that
consists of:
(i) the Analysis Phase, during which the Company's Year 2000 Compliance
Teams identify those computerized systems of the Company that have Year
2000 issues and then determines the steps necessary to ensure that such
systems become Year 2000 compliant in a timely manner;
(ii) the Remediation Phase, during which the Company's Year 2000 Compliance
Team modifies, or retires and replaces, as necessary, those
computerized systems of the Company that have a Year 2000 issue;
(iii) the Testing Phase, during which the Company's Year 2000 Compliance Team
performs testing procedures to ensure that the computerized systems of
the Company, including those that have been modified and those that
have replaced retired systems, will properly handle the Year 2000 date
change; and
(iv) the Compliance Phase, during which the Company's Year 2000 Compliance
Team re-assesses all of the computerized systems of the Company to
ensure that all such systems will properly handle the Year 2000 date
change and to develop procedures to regularly monitor the systems' Year
2000 compliance.
As of December 31, 1998, the Company's Year 2000 Project Team had
substantially completed the Analysis and the Remediation Phases. In addition,
the Year 2000 Project Team was approximately 100% complete with the Testing
Phase and approximately 85% complete with the Compliance Phase. The Company
presently expects that the Year 2000 Compliance Team will have substantially
completed all Phases of their Year 2000 Compliance Plan by August 15, 1999.
<PAGE>
As of June 30, 1999, the Year 2000 Project Team had identified 35% of
the computerized systems of the Company that had Year 2000 issues, and the
Company had spent $125,000 to address the Year 2000 issue and to modify and/or
replace those computerized systems that had Year 2000 issues. In addition, the
Company expects to spend approximately $6,000 during 1999 to address the Year
2000 issue and to substantially complete its Year 2000 Compliance Plan. The
Company presently estimates that the total cost of completing its Year 2000
Compliance Plan will not exceed $6,000.
The Company's Year 2000 Compliance Team is also discussing the Year
2000 issue with the Company's significant suppliers and third party vendors to
determine the extent to which the Company is vulnerable to those third parties'
failures to remediate their own Year 2000 issues. The Year 2000 Compliance Team
is not yet certain the extent to which the computer software and business
systems of the Company's suppliers and third party vendors are, or will become,
Year 2000 compliant. If systems of third parties on which the Company's systems
rely are not timely converted or if such conversions are incompatible with the
Company's systems, or if the Year 2000 Project Team fails to timely complete the
remaining modifications to the Company's own systems, the Year 2000 issue could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Although the Company's Year 2000 Compliance Plan is directed at
reducing the Company's Year 2000 exposure, there can be no assurance that these
efforts will fully mitigate the effect of Year 2000 issues. In the event the
Company experiences a Year 2000 problem, there could be complete disruptions in
normal business operations, which could have a material adverse effect on the
Company's results of operations, liquidity and financial condition. In addition,
there can be no assurance that the Company's suppliers and third party vendors
will adequately address their Year 2000 issues. Further, there may be certain
services provided by third parties, such as governmental agencies, utilities,
telecommunication companies, financial services and other computer service
vendors, and other service providers, for which the Company will be unable to
identify suitable alternatives should they experience Year 2000 issues.
In addition to the foregoing, the Company is subject to (i) credit
risks to the event that the Company's borrowers fail to adequately address the
Year 2000 issue, (ii) fiduciary risks to the extent that fiduciary assets fail
to adequately address the Year 2000 issues, and (iii) liquidity risks, to the
extent that the Company's customers are unable to complete banking transactions
or are unable to make loan payments in a timely manner due to Year 2000 issues.
The Company designates each of the statements made by it herein as a
Year 2000 Readiness Disclosure. Such statements are made pursuant to the Year
2000 Information and Readiness Disclosure Act.
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company. Incorporated by reference
from Exhibit 3.1 to the Company's Registration Statement on Form S-4
dated January 27, 1992, File No. 33-45254 (the "Form S-4")
3.2 Bylaws of the Company. Incorporated by reference from Exhibit 3.2 to
the Form S-4.
10.4 Employment Agreement between the Bank and Mr. Robert C. KenKnight
dated as of May 1, 1997 (incorporated by reference to Exhibit 10.4 to
the December 31, 1997 Form 10K-SB).
27. Financial Data Schedule
(b) Reports on Form 8-K - The Company filed a current report on Form 8-K on
July 2, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRESCENT BANKING COMPANY
------------------------
(Registrant)
Date: August 12, 1999 /s/ J. Donald Boggus, Jr.
------------------- -------------------------
J. Donald Boggus, Jr.
President, Chief Executive Officer and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000883476
<NAME> CRESCENT BANKING COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
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