<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 September 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, 1,757,508 shares issued and
outstanding as of November 9, 1999, 6,668 shares are held as treasury stock.
<PAGE>
CRESCENT BANKING COMPANY
INDEX
Part 1. Financial Information Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
Part II.Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
<PAGE>
PART I - FINANCIAL INFORMATION
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
---------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 4,572,105 $ 4,382,047
Federal funds sold 11,890,000 7,510,000
Interest bearing deposits in other banks 7,903,871 733,183
Securities available for sale 11,357,518 4,104,772
Mortgage loans held for sale 68,912,985 128,409,669
Loans 52,020,183 41,328,423
Less allowance for loan losses (866,570) (699,020)
---------------------------------
Loans, net 51,153,613 40,629,403
Premises and equipment, net 6,064,747 3,369,209
Other real estate owned 108,420 263,249
Purchased mortgage servicing rights 3,627,861 4,004,146
Accounts receivable-brokers and escrow agents 7,075,297 4,804,208
Other assets 4,809,171 1,034,575
---------------------------------
Total Assets $177,475,588 $199,244,461
=================================
Liabilities
Deposits
Noninterest -bearing demand deposits $ 23,488,425 $ 23,361,371
Interest -bearing demand 28,097,791 20,857,970
Savings 3,208,226 1,861,355
Time, $100,000 and over 13,583,058 16,345,339
Other time 50,006,635 38,175,754
---------------------------------
Total deposits 118,384,135 100,601,789
Drafts payable 5,648,620 4,984,145
Deferred taxes payable 1,013,547 1,526,757
Accrued interest and other liabilities 1,424,494 3,246,863
Other borrowings 35,885,574 74,756,311
---------------------------------
Total liabilities 162,356,370 185,115,865
Shareholders' equity
Common stock, par value $1.00; 10,000,000 shares authorized;
1,757,508 and 1,726,708 issued and outstanding, 1,757,508 1,726,708
respectively
Surplus 7,876,694 7,724,224
Retained earnings 6,297,266 4,721,440
Less cost of 6,668 shares acquired for the treasury (36,091) (36,091)
Accumulated other comprehensive income (776,159) (7,685)
---------------------------------
Total stockholders' equity 15,119,218 14,128,596
---------------------------------
Total liabilities and stockholders' equity $177,475,588 $199,244,461
=================================
</TABLE>
See notes to Consolidated Financial Statements.
3
<PAGE>
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1999 1998 1999 1998
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans 1,275,867 1,039,999 3,506,541 3,082,342
Interest and fees on mortgage loans held for sale 1,970,807 1,776,989 7,639,932 5,008,776
Interest on securities:
Taxable 195,593 41,118 372,598 120,316
Nontaxable 34,051 3,838 41,727 13,775
Interest on deposits in other banks 86,098 31,921 182,620 95,729
Interest on Federal funds sold 60,565 25,491 144,202 95,301
---------------------------- -----------------------------
3,622,981 2,919,356 11,887,620 8,416,239
Interest expense
Interest on deposits 1,417,006 931,319 3,525,696 2,621,388
interest on other borrowings 692,188 541,060 2,986,449 1,356,384
---------------------------- -----------------------------
2,109,194 1,472,379 6,512,145 3,977,772
Net interest income 1,513,787 1,446,977 5,375,475 4,438,467
Provision for loan losses 30,000 30,000 180,000 103,000
---------------------------- -----------------------------
Net interest income after provision for loan losses 1,483,787 1,416,977 5,195,475 4,335,467
Other income
Service charges on deposit 79,332 43,468 209,137 141,512
accounts
Mortgage servicing fee income 323,127 211,238 964,323 705,615
Gestation fee income 752,504 790,871 2,187,556 1,556,894
Gains on sale of mortgage servicing rights 1,392,963 2,867,179 8,757,245 6,941,134
Other 144,674 176,695 578,902 395,954
---------------------------- -----------------------------
2,692,600 4,089,451 12,697,163 9,741,109
Other expenses
Salaries and employee benefits 2,234,291 2,131,896 7,842,792 5,411,564
Net occupancy and equipment expense 357,176 195,146 832,738 514,196
Supplies, postage, and telephone 401,630 295,367 1,259,205 773,786
Advertising 104,873 175,591 355,171 408,171
Insurance expense 11,353 29,085 88,078 78,490
Depreciation and amortization 402,438 420,918 1,151,504 972,932
Legal, professional, outside services 511,282 599,180 2,169,279 1,454,304
Director fees 21,225 32,825 99,575 112,225
Mortgage subservicing expense 81,195 66,491 297,284 225,437
Other 278,473 268,743 886,246 697,345
---------------------------- -----------------------------
4,403,936 4,215,242 14,981,872 10,648,450
Income before income taxes (227,549) 1,291,186 2,910,766 3,428,126
Applicable income taxes (112,073) 541,261 1,048,634 1,444,109
---------------------------- -----------------------------
Net income (115,476) 749,925 1,862,132 1,984,017
---------------------------- -----------------------------
Other comprehensive income, net of tax
Unrealized gains/(losses) on securities available
for sale arising during period (762,532) 19,926 (768,474) 13,984
---------------------------- ----------------------------
Comprehensive income (878,008) 769,851 1,093,658 1,998,001
============================ ============================
Basic earnings per common share ($0.07) $0.44 $1.09 $1.20
Diluted earnings per common share ($0.06) $0.42 $1.02 $1.17
Cash dividends per share of common stock $0.060 $0.043 $0.165 $0.120
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
CRESCENT BANKING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1999 1998
------------------------------------
<S> <C> <C>
Operating Activities
Net Income 1,862,132 1,984,017
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan loss 180,000 103,000
Depreciation and amortization 1,151,504 972,932
Provision for deferred taxes (513,210) 606,409
Gains on sales of mortgage servicing rights (8,757,245) (6,119,068)
Increase in mortgage loans held for sale 59,496,684 (34,079,050)
Increase in interest receivable (595,617) (358,180)
Decrease in accounts receivable (2,271,089) 480,498
Increase in drafts payable 664,475 15,746,717
Increase (decrease) in interest payable (43,227) (38,289)
Increase in other assets and liabilities, net (4,958,122) 1,148,736
-----------------------------------
Net cash used in operating activities 46,216,285 (19,552,278)
Investing Activities
Net (increase) decrease in interest-bearing deposits
in other banks (7,170,688) 343,120
Proceeds from sale of securities available for sale -- 512,500
Acquisition of securities available for sale (8,021,220) (956,232)
Acquisition of purchased mortgage servicing rights (19,200,877) (10,007,462)
Proceeds from sales of purchased mortgage
servicing rights 27,755,307 15,897,352
Increase in Federal funds sold, net (4,380,000) (15,350,000)
Net increase in loans (10,549,381) (3,949,626)
Purchase of premises and equipment (3,267,942) (893,485)
-----------------------------------
Net cash provided by (used in) investing activities (24,834,801) (14,403,833)
Financing Activities
Net increase in deposits 17,782,346 8,296,773
Net increase in other borrowings (38,870,737) 22,009,104
Proceeds form the issuance of common stock -- 2,139,762
Proceeds from exercise of stock options 183,270 22,400
Dividends paid (286,305) (195,919)
-----------------------------------
Net cash provided by financing activities (21,191,426) 32,272,120
Net increase in cash and cash equivalents 190,058 (1,683,991)
Cash and cash equivalents at beginning of year 4,382,047 3,319,054
-----------------------------------
Cash and cash equivalents at end of year 4,572,105 1,635,063
===================================
Supplemental Disclosure of Cash Flow Information
Cash paid during period for interest 6,555,372 4,016,061
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September
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 September 30, 1999, the Company had purchased loans for which it
provides servicing with principal balances totaling $415.3 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.
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
<PAGE>
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)
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):
Nine Months Ended September 30, 1999
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------------------------------------
Basic EPS $1,862,132 $1,708,284 $1.09
Effect of Dilutive securities
Stock options ---- $ 109,886
Diluted EPS $1,862,132 $1,818,170 $1.02
Nine Months Ended September 30, 1998
Net Weighted-Average
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------------------------------------
Basic EPS $1,984,017 $1,654,636 $1.20
Effect of Dilutive Securities
Stock Options ---- 42,939
Diluted EPS $1,984,017 $1,697,575 $1.17
<PAGE>
Three Months Ended September 30, 1999
Net Weighted-Average
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------------------------------------
Basic EPS $(115,476) $1,719,906 $(0.07)
Effect of Dilutive securities
Stock options ---- $ 113,993
Diluted EPS $(115,476) $1,833,899 $(0.06)
Three Months Ended September 30, 1998
Net Weighted-Average
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------------------------------------
Basic EPS $749,925 $1,725,508 $.44
Effect of Dilutive Securities
Stock Options ---- 55,928
Diluted EPS $749,925 $1,781,436 $.42
<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," "plan," "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, Canton, 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 August 2, 1999, the Bank received
approval to expand the Canton, Georgia loan production office to a full service
Bank branch. The Branch, located at 170 Riverstone Parkway, Canton, Georgia
began business on September 1, 1999.
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
<PAGE>
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.
The Company incurred a net loss for the quarter ended September 30,
1999 of $115,476 compared to net income of $749,925 for the quarter ended
September 30, 1998. The Company's net income for the nine months ended September
30, 1999 was $1.9 million compared to net income of $2.0 million for the nine
months ended September 30, 1998. The decrease in earnings during the third
quarter 1999 was primarily the result of earning pressures on the mortgage
banking operation. The loss of income in the third quarter by the Company's
mortgage operation was largely due to the volatility of and increase in,
interest rates. Mortgage production in the third quarter of 1999 totaled $397
million, a 32% decrease from the second quarter production of $590 million. In
addition, the Company's spread on the sale of purchased mortgage servicing
rights decreased from 71 basis points in the second quarter 1999 to 43 basis
points in the third quarter 1999, a 39% decline. Management does not anticipate
a significant change in mortgage production volume in the next two quarters,
however, management's judgment is based upon a number of assumptions about
future events and interest rates, which may or may not prove valid.
The Company's commercial banking operation continued to grow and
remain profitable. Commercial banking loans increased 10.1% during the third
quarter to total $52 million at September 30, 1999. The Bank's purchase of the
Towne Lake branch in June 1999 and the conversion of its loan production office
in Canton, Georgia in August 1999 to a full service branch is part of the
Company's strategic plan is to attempt to grow the commercial banking operation
to create an improved balance between the commercial and mortgage banking
divisions.
Financial Condition
- -------------------
The Company's assets decreased 10.9% during the first nine months of
1999 from $199.2 million as of December 31, 1998 to $177.5 million as of
September 30, 1999. The decrease in total assets in the first nine months of
1999 was the result of the decrease in mortgage production and the related
mortgages held for sale. Mortgages held for sale totaled $68.9 million at
September 30, 1999 compared to $128.4 million at December 31, 1998. The decrease
in assets resulted in a corresponding decrease in other borrowings of $35.9
million or 48%. 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 decrease in
mortgage volume in the third quarter 1999 resulted in a lower average balance of
other borrowings. The decrease in residential mortgage banking production and
related mortgage loans held for sale during the third quarter 1999 was the
result of higher interest rates. Rates on 30-year mortgages have increased 137
basis points from mid-second quarter 1999 resulting in a much lower level of
refinance mortgage production.
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 $152.2 million, or 85.8%, of
total assets at September 30, 1999. This represents a 16% decrease from December
31, 1998 when earning assets totaled $181.4 million, or 91.1%, of total assets.
The decrease in earning assets resulted primarily from the decrease in mortgage
loans held for sale. Mortgage loans held for sale at September 30, 1999 totaled
$68.9 million compared to December 31, 1998 of $128.4 million.
During the first nine months of 1999, average commercial banking loans
were $45.8 million. Such loans constituted 25.8% of average earning assets and
23.4% 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 15.1% 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.
<PAGE>
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 $866,570, or 1.67%, of total commercial banking loans at
September 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 nine
months of 1999 was the result of the provision for loan loss of $180,000. The
determination of the reserve level rests upon management's judgment about
factors affecting loan quality and assumptions about the economy and guidance
provided by the Company's and the Bank's primary regulators. The adequacy of the
allowance for loan losses is evaluated periodically based on a review of all
significant loans, with a particular emphasis on past due and other loans that
management believes require attention. Management considers the allowance
appropriate and adequate to cover possible losses in the loan portfolio;
however, management's judgment is based upon a number of assumptions about
future events which are believed to be reasonable but which may or may not prove
valid. Thus, there is no assurance that charge offs in future periods will not
exceed the allowance for loan losses or that additional increases in the
allowance for loan losses will not be required. The Bank does not maintain a
reserve with respect to its mortgage loans held for sale due to the relatively
low credit risk associated with the loans during the Bank's holding period.
The Bank's policy is to discontinue the accrual of interest on loans
which are 90 days past due unless they are well secured and in the process of
collection. Interest on these non-accrual loans will be recognized only when
received. As of September 30, 1999, the Bank had $37,011 loans accounted for on
a non-accrual basis, $1,354,528 contractually past due more than 90 days and no
loans considered to be troubled debt restructurings. In October 1999, loans
totaling $693,950, which were 90 days past due at September 30, 1999, were paid
in full. 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 $108,420
with non-performing loans results in non-performing assets of $145,431 at
September 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 $2.3 million of potential problem loans at September 30, 1999, one
relationship totaling $693,950 was paid in full during October 1999.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
--------------------------------------
<S> <C> <C>
Non-performing loans (1) $ 37,011 $ 772
Foreclosed properties 108,420 263,249
---------- ----------
Total non-performing assets 145,431 264,021
========== ==========
Loans 90 days or more past due on
accrual status $1,354,528 $ 457,120
Potential problem loans (2) 2,291,909 2,445,318
Potential problem loans/total loans 4.42% 5.92%
Non-performing assets/total loans
and foreclosed properties 0.28% 0.63%
Non-performing assets and loans 90 days
or more past due on accrual
status/total loans and
foreclosed properties 2.80% 1.74%
</TABLE>
<PAGE>
- -----------------
(1) Defined as non-accrual loans and renegotiated loans.
(2) Loans identified by management as potential problem loans (classified and
criticized loans) but still accounted for on an accrual basis.
The Bank invests its excess funds in U.S. Government agency
obligations, corporate securities, federal funds sold, and interest-bearing
deposits with other banks. The Bank's investments are managed in relation to
loan demand and deposit growth, and are generally used to provide for the
investment of funds not needed to make loans, while providing liquidity to fund
increases in loan demand or to offset fluctuations in deposits. Thus, investment
securities are used to manage the Bank's exposure to interest rate risk.
Investment securities and interest-bearing deposits with other banks totaled
$19.3 million at September 30, 1999 compared to $4.8 million at December 31,
1998. The increase in investment securities was the result of greater liquidity
as the result of the purchase of deposits with the Towne Lake branch and the
decrease in mortgage production in the third quarter. Federal funds sold totaled
$11.9 million at September 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 nine months of 1999, the Mortgage Division acquired
$1.6 billion of mortgage loans with $1.7 billion being resold in the secondary
market. At September 30, 1999, $68.9 million were carried as mortgage loans held
for sale on the balance sheet pending sale of such loans. Mortgage production in
the third quarter totaled $397 million, a 32% decrease from the second quarter
production of $590 million.
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 (5.55% as of September 30, 1999). All mortgage production
generated by CMS is funded through warehouse lines of credit from Home Federal,
priced at prime (8.25% at September 30, 1999) and Paine Webber, priced at LIBOR
plus 80 basis points (6.86% at September 30, 1999).
At September 30, 1999, capitalized costs of $3.6 million related to
the purchase of mortgage servicing rights were carried on the balance sheet as
purchased mortgage servicing rights. At September 30, 1999, the Company held
servicing rights with respect to loans with unpaid principal balances totaling
$415.3 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 nine
<PAGE>
months of 1999, the Company sold servicing rights with respect to $1.6 billion
of mortgage loans carried on its balance sheet at a cost of $18.3 million for a
net gain of $8.8 million. The Company's spread on the sale of purchased mortgage
servicing rights decreased from 71 basis points in the second quarter 1999 to 43
basis points in the third quarter 1999, a 39% decline. The Company's sale of
purchased mortgage servicing rights is proportional to the Company's mortgage
production. As noted above, mortgage production declined 32% in the third
quarter 1999. 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.
The Company had fixed assets, consisting of land, building and
improvements, and furniture and equipment of $6.1 million at September 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 $118.4 million at September 30,1999
compared to $100.6 million at December 31, 1998. Deposits averaged $110.7
million for the nine months ended September 30, 1999 compared to $84.4 million
for the year ended December 31, 1998. Interest bearing deposits as a percentage
of total deposits was 80% and 77% at September 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 67% at September 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 September 30, 1999 the Bank's leverage ratio was
9.68%. 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 (7.75%) 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
from The Bankers Bank 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.
At September 30, 1999 the Company's total shareholders' equity was
$15.1 million or 8.51% 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 nine months of 1999 was primarily the result of the
Company's net income and a 10.9% decline in total assets. At September 30, 1999,
total capital to risk-adjusted assets was 14.10%, with 13.36% consisting
<PAGE>
of tangible common shareholders' equity. The Company paid $286,305 of dividends
during the first nine months of 1999 or $.0.165 per share. The Company has
declared a dividend of $.065 to be paid November 15, 1999 to shareholders of
record on October 29, 1999.
During the first nine months of 1999, 30,800 shares of Common Stock
were issued pursuant to stock option exercises for an aggregate of $183,270. 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
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 $73.5 million for the nine months ended September 30,
1999, representing 66.4% 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 41.4% of average deposits for the
nine months ended September 30, 1999. Average non-mortgage loans were 46% of
average deposits for the year 1998. Average deposits were 62% of average
interest-earning assets for the nine months ended September 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 nine 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 $3.4
million at September 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
<PAGE>
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.
The following table shows the interest sensitivity gaps for four
different time intervals as of September 30, 1999.
Interest Rate Sensitivity Gaps
As of September 30, 1999
Amounts Repricing In
-------------------------------------------------
0-90 Days 91-365 Days 1-5 Years Over 5 Years
--------- ----------- --------- ------------
(Millions of dollars)
Interest-earning
assets $112.9 $ 11.9 $21.1 $5.3
Interest-bearing
liabilities 79.7 30.5 18.3 2.3
-------------------------------------------------
Interest sensitivity
gap $ 33.2 $(18.6) $ 2.8 $3.0
=================================================
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 September 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 $20.4 million, or
11.5% of total assets.
At September 30, 1999, the Company's commitments to purchase mortgage
loans (the "Pipeline") totaled approximately $303.4 million. This is a decline
of 30% from the second quarter when the pipeline totaled $439.7 million. Of the
Pipeline, the Company had, as of September 30, 1999, approximately $118.1
million for which the Company had interest rate risk. The remaining $185.3
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.
<PAGE>
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 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
September 30, 1999, the Company had in place purchase commitment agreements
terminating between October and December of 1999 with respect to an aggregate of
approximately $84.1 million to hedge the mortgage pipeline of $118.1 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 $11.9 million for the nine months
ended September 30, 1999 compared to $8.4 million for the nine months ended
September 30, 1998. The 41.6% increase in interest income is attributable to the
increase in interest-earning assets, which is the result of the increase in
commercial banking loans and a higher average volume of mortgage loans. During
the first nine months of 1999, average commercial banking loans were $45.8
million compared to 1998 when average commercial banking loans were $38.2
million. Although the Company experienced a decline in mortgage production in
the third quarter, the Company had closed $1.6 billion of mortgage loans during
the first nine months of 1999 compared to $1.2 billion during the first nine
months of 1998. This increase is attributable to the startup of the Midwest
mortgage operation, which began operating in the fourth quarter of 1998,
<PAGE>
in addition to the increased volume in the Northeast mortgage operation. In
conjunction to the interest income associated with the mortgage production, the
Company experienced the fee income associated with mortgage loans, which is
included in interest income.
The Company had interest income of $3.6 million for the three months
ended September 30, 1999 compared to $2.9 million three months ended September
30, 1998. The increase in interest income is attributable to the increase in
interest-earning assets, which is the result of the higher volume commercial
banking loans and a higher level of investment securities.
The Company had interest expense of $6.5 million for the nine months
ended September 30, 1999 and $4.0 million for the nine months ended September
30, 1998. The 62% 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, for the first nine months of 1999, in the
Northeast and Midwest mortgage operation resulted in a higher average balance of
other borrowings. In the first nine months 1999 and 1998, interest expense
accounted for 30% and 27% of total expenses, respectively.
The Company had interest expense of $2.1 million for the three months
ended September 30, 1999 and $1.5 million for the three months ended September
30, 1998. The increase resulted from a higher level of interest bearing
deposits. Deposits averaged $115.4 million for the third quarter 1999 compared
to $80.5 million for the third quarter 1998. In the third quarter 1999 and 1998,
interest expense accounted for 32% and 25% of total expenses, respectively.
Net interest income for the first nine months 1999 was $5.4 million
compared to net interest income of $4.4 million for the first nine months of
1998. Net interest income for the third quarter 1999 was $1.5 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 third 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 4.6%. Net interest
income, interest margin and net interest spread for the third quarter 1998 were
$1.5 million, 6.1%, and 5.6%, respectively. The decrease in net interest margin
and interest spread is indicative of the increasing rate environment during the
third quarter 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
$180,000 in the first nine months of 1999. The Company made provisions to the
allowance for loan losses in the amount of $103,000 in first nine months of
1998. During the first nine months of 1999, the Bank charged-off, net of
recoveries, $14,450 of loans to the allowance for loan losses. During the first
nine months of 1998, the Bank charged-off, net of recoveries, $33,456 of loans
to the allowance for loan losses. The Company made a provision to the allowance
for loan losses of $30,000 in the third quarter 1999 and 1998.
Other income was $12.7 million in the first nine months of 1999
compared to $9.7 million in the first nine months 1998. The increase in other
income was related to the increase of gains on the sale of mortgage servicing
rights. During the first nine months of 1999, the Company sold servicing rights
with respect to $1.6 billion of mortgage loans for a gain of $8.8 million.
During the first nine months of 1998, the Company sold servicing rights with
respect to $1.1 billion of mortgage loans for a gain of $6.9 million. The higher
level of gains on the sale of mortgage servicing rights was due to the increase
in mortgage production which primarily was 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. As noted in the above, mortgage production as well as the mortgage
pipeline declined in the third quarter 1999. Management does not anticipate a
significant change in mortgage production volume in the next two quarters,
however, management's judgment is based upon a number of assumptions about
future events and interest rates, which may or may not prove valid. 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
<PAGE>
securities broker until the loan is delivered into the forward commitment. Other
income was $2.7 million in the third quarter of 1999 compared to $2.9 million in
the third quarter of 1998. The decrease in other income for the third quarter
1999 was the result of the lower gain on the sale of mortgage servicing rights.
Other operating expenses increased to $15.0 million in the first nine
months of 1999 from $10.6 million in the first nine 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 branches in
Canton, Georgia and Woodstock, Georgia. 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 $4.4 million
in the third quarter 1999 from $4.2 million in the third quarter 1998. While
other operating expenses increase from the third quarter 1998 to the third
quarter 1999, Management attempted to reduce overhead expenses in response to
the decrease in mortgage production. In this effort, CMS closed its office,
which primarily processed FHA and VA loans. These products continue to be
offered through the Company's office which processes Southeast conventional
loans located in Atlanta, Georgia. In total, the Company has reduced mortgage
staff by 21%. While most of the overhead reduction was completed late third
quarter, the Company did reduce other expenses 17% from the second quarter 1999
when other expenses totaled $5.3 million.
The Company had net income of $1.9 million for the first nine months
of 1999, which was primarily related to the 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 42% for both the first nine months of 1999 and
1998, respectively.
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:
<PAGE>
(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 99% complete with the Compliance Phase.
As of September 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 $131,000 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 $5,000 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 $5,000.
The Company's Year 2000 Compliance Team continues to discuss 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
has found the Company's significant suppliers and third party vendors have
become, Year 2000 compliant. To a large degree, the Year 2000 Compliance Team
has relied on the suppliers and third party vendors testing and analysis of
their Year 2000 compliance. 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 directly or indirectly, 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 - None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRESCENT BANKING COMPANY
------------------------
(Registrant)
Date: November 10, 1999 /s/ J. Donald Boggus, Jr.
----------------- -------------------------
J. Donald Boggus, Jr.
President, Chief Executive Officer and
Chief Financial Officer
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<NAME> CRESCENT BANKING COMPANY
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